'Pragmatic' dismissal of break clause appeal restores certainty to landlords, says expert

Out-Law News | 02 Dec 2015 | 2:03 pm | 3 min. read

Marks and Spencer (M&S) is not entitled to recover rent and other charges covering the period after it exercised a break clause in the lease for its former head office, the UK's highest court has confirmed.

Property law expert Ian Whitehead of Pinsent Masons, the law firm behind Out-Law.com, said that landlords would be welcoming the certainty brought about by   the Supreme Court's unanimous judgment. By dismissing the retailer's claim, the court had "reaffirmed that terms will not be implied into commercial agreements lightly", he said.

"The court refused M&S's invitation to overturn the 1900 case of Ellis v Rowbotham, which clearly established that the 1870 Apportionment Act does not apply to rent payable in advance," he said. "The threshold for implying terms into contracts is a high one and it will only be appropriate for the court to do so where the test of business necessity has been satisfied or where the term is so obvious that it goes without saying."

"In this case, the landlord and tenant contracted against the established legal background that a term would not be implied by statute or common law which would entitle the tenant to a refund of rent. The original decision in the High Court seemed to open the door for tenants to claim back 'overpayments' of rent, and some occupiers may be disappointed that this door has now firmly been closed," Whitehead said.

The dispute arose when M&S took advantage of a conditional break clause to bring its lease of four floors of an office building in Paddington, central London to an end on 24 January 2012 rather than continuing its tenancy until February 2018. However this date fell in the middle of its quarterly rent period, and it had already paid rent, insurance, a car park licence fee and a service charge in relation to the full quarter to its landlord, BNP Paribas, in advance of the break date.

In 2013 a High Court judge agreed with M&S that although the leases did not expressly provide that sums relating to the period after the break should be repaid after the break clause was exercised, such a term should be implied since a reasonable person would infer this from the lease. This was overturned last year by the Court of Appeal. Five Supreme Court judges have now unanimously backed the Court of Appeal's reasoning, and confirmed that terms can only be implied into commercial leases when it is "necessary" and not merely "reasonable" to do so.

In his leading judgment, Lord Neuberger said that previous judgments on implied terms had been "clear, consistent and principled". Similarly, laws governing the "apportionability" of rent payable in advance had "long been well established", he said.

"The fact that the lease was negotiated against the background of a clear, general (and correct) understanding that rent payable in advance was not apportionable in time, raises a real problem for the argument that a term can be implied into the lease that it should be effectively apportionable if the lease is prematurely determined in accordance with its terms." .

"Save in a very clear case indeed, it would be wrong to attribute to a landlord and a tenant, particularly when they have entered into a full and professionally drafted lease, an intention that the tenant should receive an apportioned part of the rent payable and paid in advance, when the non-apportionability of such rent has been so long and clearly established. Given that it is so clear that the effect of the case-law is that rent payable and paid in advance can be retained by the landlord, save in very exceptional circumstances (e.g. where the contract could not work or would lead to an absurdity) express words would be needed before it would be right to imply a term to the contrary," he said.

"The court's decision is pragmatic and landlords will be breathing a sigh of relief," said property law expert Ian Whitehead. "They are now unlikely to face a barrage of claims from those tenants who have been watching M&S's claim progress with interest: as this case illustrates, the sums at stake in break clauses can be significant, particularly where central London property is concerned."

"In all cases, the starting point for determining whether the tenant has any right to recover rent will be the lease. We would always recommend that tenants entering into new leases discuss overpayments with their landlords so that the lease can cater for either a repayment or for a final, proportionate payment up to the break date to be made," he said.