M&S: Simply Wrong? Court of Appeal overturns controversial break clause ruling

Article

Posted by on

Summary: The Court of Appeal yesterday handed down judgment in the case of Marks & Spencer v BNP Paribas overturning last year’s controversial High Court decision that required the landlord to repay circa £1million of rent “overpaid” by Marks & Spencer following the operation of a break clause in their leases.

The Court of Appeal yesterday handed down judgment in the case of Marks & Spencer v BNP Paribas overturning last year’s controversial High Court decision that required the landlord to repay circa £1million of rent “overpaid” by Marks & Spencer following the operation of a break clause in their leases.

It has long been accepted that, for a tenant to operate a break clause which is conditional upon payment of rent, a tenant must pay all the rent that has fallen due for payment before the break date, even when that means paying rent for the period after the break.  The High Court decision gave tenants hope that any overpayment would be returned, but these hopes now appear dashed.

M&S had argued that, as they were paying a substantial break penalty to the landlord to break their lease, rent paid in advance for the period beyond the break date should be returned.  Although he found against M&S on all but one point, Morgan J in the High Court agreed with M&S and held that there was an implied term in the lease that the overpaid rent would be repaid, following the operation of the break.

The Court of Appeal has roundly rejected this argument.  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 agreement was entered into including the understanding of the law at the time.  In the light of the full contextual background, the court must then assess whether the agreement would be reasonably understood to include the implied term.

The Court held that the understanding of the law, at the time of the grant of the lease, was clear that rent payable in advance could not be apportioned under the Apportionment Act 1870 and therefore, the term requiring reimbursement of the overpaid rent could not be properly implied into the lease.

The decision is important as tenants will now find it very hard to find legal arguments for the reimbursement of “overpaid” rent.

Whilst the decision is welcome from the point of view of clarifying the law, tenants will find this cold comfort when paying out substantial sums of rent to operate a break, knowing that they will not see any of that money again, even if they only intend to occupy the property for a matter of days before their break.

It remains to be seen whether M&S will seek to take this case to the Supreme Court, but what is clear that, unless and until the issue of the operation of the Apportionment Act and rent payable in advance and the old authorities surrounding it are brought under the scrutiny of the Supreme Court, the law in this area does appear settled and tenants must make provision for the “loss” of overpaid rent when operating their break clauses.

In the future, it is likely that tenants will seek to place their break dates (whether in negotiation or actual operation) as close to the quarter day as possible, so that at least they get the benefit of occupation of the property, in return for the rent they have to pay.

Stay informed

Sign up to receive email alerts from our award winning Expert Insights team

Sign up now

See more insights by category

This site uses cookies to help us improve our services and your browsing experience. For further information about cookies, including about how to change your browser settings to no longer accept cookies, please view our privacy policy.