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M&S's Break Clause Dispute: broader contract implications


Twelve months ago I wrote about Marks & Spencer having been given permission to appeal to the Supreme Court https://jpaulsykes.com/2015/01/06/supreme-court-gives-ms-permission-to-appeal/ in a long running dispute regarding commercial lease “break clauses”. In what should be the final instalment in the saga, The Supreme Court has unanimously dismissed the appeal by M&S.

Importance

The case is likely to have wider influence in view of differing legal interpretations on the importance of "necessity" in relation to terms that should be implied into a contract. This extends beyond Landlord and Tenant law, and may touch any commercial or other contract. The Supreme Court (formerly the House of Lords) deals only with cases which:

"raise an arguable point of law of general public importance which ought to be considered by the Supreme Court at that time, bearing in mind that the matter will already have been the subject of judicial decision and may have already been reviewed on appeal"

Background

M&S had argued that after successfully satisfying the break clause in their lease contract by settling all rent and giving 6 months’ notice to the Landlord, M&S should be entitled to a refund for the rent they had paid up until March 2012 because their lease had been determined on 24 January 2012. They applied to the High Court, which held that M&S were entitled to the refund. The Court of Appeal disagreed – it allowed the Landlord’s appeal against that decision.

Facts

In May 2014 the Court of Appeal held that M&S had no express right to a refund on the exercise of the break clause: any such intention should have been set out in express terms. No right could be implied into the contract without express provisions. M&S lost out on their claim for a refund of rent, insurance and car parking charges for the period after the break date. Before M&S could activate the break clause, they were obliged to pay the full quarter's rent in advance.

Issue

The Court of Appeal followed the previous leading case, Attorney General of Belize v. Belize Telecom [2009] UKPC 10. The Privy Council found the test to decide whether a term should be implied as a fact (as opposed to law) into a contract was broadly:

“Is that what the instrument, read as a whole against the relevant background, reasonably be understood to mean?”

So, in order to be implied, a term must be necessary to achieve the express intention of the parties in the context of the admissible background. The importance of the decision in early 2009 is clear from the fact that it was cited in eight other cases that year.

Supreme Court Decision

In delivering the leading judgment, Lord Neuberger stated that it is well-established that rent, whether payable in arrears or advance, is not apportionable in time in common law.

http://www.bailii.org/uk/cases/UKSC/2015/72.html [i]

The court stated that the test on the implication of contractual terms represents a clear, consistent and principled approach:

  • A term will only be implied if it satisfies the test of “business necessity” or it is so obvious that it goes without saying;
  • it will be a rare case where only one of those two requirements are met.
  • The implication of a term is not critically dependent on proof of the actual intention of the parties.
  • The question shouldn’t be - what the parties would have agreed. That would produce a hypothetical answer of notional reasonable people in the position of the parties at the time they were contracting.
  • It is a necessary but not sufficient condition for implying a term that it appears fair or that one considers that the parties would have agreed it if it had been suggested to them.

Reasons

Lord Neuberger held that the judgment of Lord Hoffmann in Attorney General of Belize v BelizeTelecom [2009] 1 WLR 1988 did not dilute the test for the implication of contractual terms.

The Apportionment Act 1870, s 2, provides that all rents and other periodical payments should be considered as accruing from day to day and be apportionable in respect of time accordingly. There is no doubt that s 2 applies to rent payable in arrear. Lord Neuberger stated that the conclusion of the Court of Appeal in Ellis v Rowbotham [1900] 1 QB 740 that the 1870 Act did not apply to rent payable in advance, is correct.

He therefore concluded that given the clear, general understanding that neither the common law nor statute apportion rent payable in advance on a time basis, it would be wrong, save in a very clear case, to attribute to a landlord and a tenant, particularly where they have entered into a full and professionally drafted lease, an intention that the tenant should receive back an apportioned part of rent payable and paid in advance.

Any anomaly in the working of the lease does not establish that the contract is unworkable or that the result is commercially or otherwise absurd.

Conclusions

Tenants may be disappointed by the outcome - there had seemed to be a reasonable argument for the implied term. M&S argued that it would be fair, and without it the break right would operate capriciously. On the other hand, the lease was a full and carefully considered contract.

The Supreme Court held that, except in a very clear case, 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 was so clear that the effect of the case law was that rent payable and paid in advance can be retained by the landlord, except in very exceptional circumstances (such as 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.

Implications

  • Tenants may view this decision as unfair and producing anomalies. However, the express lease wording combined with the clear legal background when the lease was entered into, meant that there was no scope to imply a refund obligation. The lease remained workable and the result was not absurd.
  • Tenants should ensure that a tenant’s break right, (especially one containing a pre-condition in relation to the payment of rent where the termination date is not on the last day of the relevant quarter), includes an express landlord’s obligation to refund.

This is also a timely reminder that, so as to avoid uncertainty and ambiguity, parties should

  • Expressly set out their commercial intentions in the written contract
  • Consider the likely outcome of events that are described in the contract or are otherwise predictable, and whether these are sufficiently provided for in the contract

Obviously, leaving matters to chance and calling on the Court to intervene and imply terms much later leads to uncertainty and avoidable expense.

Paul Sykes is a Director in our Disputes Management department. For further information regarding contract disputes contact Paul.Sykes@lf-dt.com



[i] Marks & Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd & Anor [2015] UKSC 72

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.


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