Break options and rent payments: Court of Appeal gives judgment in the Marks and Spencer case
Until 2012, it was settled law that where a tenant invoked a break option in its lease of commercial premises, unless the lease expressly stated otherwise the tenant had to pay a full quarter's rent up front on the rent payment date, even if the tenant's lease would, by virtue of the break notice, end midway through the quarter for which the rent was paid. In other words, it meant that, unless the break date was the same as the expiry date of a rent payment period, a tenant could neither make a pro rata payment of rent up to the break date; nor was it entitled to a pro rata refund of rent paid in respect of any period falling after the break date.
For example, a lease is granted for a term of five years, commencing 1 January 2010 and ending 31 December 2014. The rent is due by quarterly instalments on the usual quarter days. The tenant has a break option at the end of year three, allowing it to break the lease on six months' prior written notice. The break date would be 31 December 2012. The rent falls due for payment on 24 December 2012. Even though the break date is 31 December 2012, the tenant must pay the full quarter's rent and is not entitled to a refund for the period 1 January 2013 to 23 March 2013.
However, in 2012, the High Court reached a controversial decision (Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another  EWHC 1279 (Ch)) reversing that convention. The High Court ruled that a tenant was only obliged to pay the rent pro rata up to and including the break date, whenever during the rent quarter that break date fell. This was a victory for tenants but a blow to landlords who had up until then used the opportunity either to keep the remainder of the quarter's rent payment and/or to argue that a break notice was invalid because the tenant had not complied with all conditions attached to the break option in the lease, including the requirement that the tenant must pay the full quarter's rent.
Marks & Spencer: The Facts
The background to the case was that M&S was a tenant of four floors in a building. Each floor had a separate lease on identical terms. Rent was to be paid by equal quarterly instalments in advance on the usual quarter days. M&S had a right to break the leases on 24 January 2012 as long as there were no arrears and subject to payment of a break premium. M&S paid the break premium plus rent up to 24 March 2012 and the breaks were operated. M&S then sought a refund of the payment of rent, insurance, service charges and parking charges (equating to £1.1 million) which related to the period from 25 January 2012 (the day after the break date) to 24 March 2012 (the end of that quarter). M&S argued that a term should be implied into the lease that, upon the break taking effect, the rent for the period after the break date should be returnable. The parties had expressly so provided in relation to service charges and so M&S said that it could be implied that this provision applied to rent, insurance and parking charges. The High Court agreed, finding that it was an implied term in each lease that M&S was entitled to a refund.
However, on appeal, the Court of Appeal overturned the High Court's finding. The Court accepted the landlord's submission that no such term could be implied into the leases. The Court found that, when considering whether an implied term can be introduced into an agreement, it is necessary to consider the relevant background at the time the lease was entered into, including an understanding of the law at that time, and that it was only in the light of this full background that the court should assess whether the lease would be reasonably understood to include the implied term.
Consequences of the Court of Appeal's ruling
The Court of Appeal's judgment has restored the widely accepted view that, in the absence of an express provision, a tenant should not be entitled to a refund of any rent paid for that quarter which relates to the period after a break date.
The decision also has the following practical implications:
1. tenants need to ensure that their leases contain an express provision covering refunds of sums paid in advance.
2. when negotiating the terms of a break clause, tenants' lawyers should seek to negotiate either that the break date is the last day of a rent period (or as close to the last day of a rent period as possible) or alternatively that there is an apportionment clause, so that as much as a full quarter's rent is not needlessly lost.
3. It will be important for landlords (1) to check that the full quarter's rent has been paid irrespective of when the break date falls. If the break option in the lease attaches a condition to the operability of the break that the rent must be paid in full and the tenant tries to pay a pro rata sum up to and including the break date (but not in respect of any period after it), the break notice may be rendered invalid (2) not to refund any payment of rent for any period between the break date and the end of the quarter because this would not be properly refundable absent an express provision in the lease to that effect.
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.