No Refunds Given – M&S loses break clause case

In January 2013, Marks & Spencer won a landmark case in the High Court to allow the tenant an apportionment of rent paid following the exercise of a break right. The Court of Appeal has now overturned that decision, which is good news for landlords, but also provides clarity for tenants when exercising a break right subject to conditions.

21st May 2014

In order to correctly exercise a break right in a lease, a tenant must comply strictly with any conditions imposed as part of that right. Commonly, break conditions will include payment of all rent due up to the break date. If the rent is payable quarterly in advance, the entire rent quarter must be paid, even if the break date falls in the middle of a rental quarter, and will not be refunded unless expressly provided for in the lease. This Court of Appeal decision reaffirms this position.

M&S had entered into four materially identical leases of The Point, Paddington, each for 12 years from 2006 to 2018. The annual rent of the lease in consideration was £919,800 plus VAT per annum payable quarterly in advance. The lease included a break right on 24 January 2012 on six months’ notice, conditional on there being no arrears of rent on the break date. The break clause also required payment of a break penalty equal to a year's rent on or prior to the break date.

Despite M&S being issued with an invoice for the rent, service charge, and a car park licence fee for the period from the December 2011 quarter day to the break date only, M&S paid the entire quarter’s rents, to ensure compliance with the break conditions, and subsequently paid the break penalty. After the break date M&S subsequently issued a claim for the 'overpaid' rent, plus insurance which had been paid previously.  The landlord argued that the invoice had been incorrectly issued, and the tenant was not entitled to a refund.

At the break date, M&S had to satisfy two conditions for the break to be effective. Since the break penalty had not been paid prior to 25 December 2011, it had not been certain that the lease would end on 24 January 2012.  If this break condition had not been satisfied on the break date, the lease would have continued beyond that point. Therefore the landlord was entitled to a full quarter's rent on 25 December 2011.

The Court of Appeal disagreed with the High Court’s judgment that a term could reasonably be implied into a lease to apportion the rent following a break date.  The Court of Appeal considered that the lease, read as a whole against the relevant background, would not reasonably be understood to include such a term.

A court may imply a term into a contract if it is necessary to achieve the parties’ express agreement. The test is an objective one, and in this case the Court of Appeal found that there was little evidence of communication to that effect.

The result of the case is that instead of the £1.1m apportionment M&S received following the High Court decision, it could retain only £204,972 and is to repay the remaining £986,647, including interest to the landlord. The Court of Appeal confirmed the view that the tenant was entitled to repayment of any advance service charges it had paid which had not been spent by the landlord before the break date.

This decision has reaffirmed the view that a tenant should only be entitled to a refund of any rent paid for the period after a break date if the lease contains an express provision to that effect.  If a break date is not going to be the last day of a rent period, tenants’ lawyers should seek to negotiate an apportionment clause and both parties would be well advised to include a statement on this in the heads of terms for any new lease. This is particularly important in cases where a break right is conditional on the tenant paying a full quarter's rent.

The Shepherd and Wedderburn property team have wide experience in dealing with service, acceptance and interpretation of break provisions in leases.

Please contact Katie Logan on +44 (0)207 429 4683 or katie.logan@shepwedd.co.uk for further information.

Author acknowledgement: Richard Roberts