Supreme Court upholds Court of Appeal break clause decision against M&S

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Yesterday, the Supreme Court handed down its judgment in the case of Marks and Spencer plc v BNP Paribas Services Trust Company (Jersey) Ltd & another. Having exercised its right to break several leases on 24 January 2012, M&S claimed a refund from its landlord of part of the December 2011 quarter’s rent and other outgoings that were attributable to the period after the break date.  There was no express provision in the leases entitling M&S to a refund in those circumstances. M&S therefore had to persuade the court that there should be implied into the leases a provision entitling it to reclaim these sums from the landlord.

The Supreme Court found in favour of BNP.

Why is this decision significant?

It is common for tenants to pay all rents due as a condition of exercising a break option.  It has been uncertain up to now whether a tenant can recover an apportioned amount where the break date falls between quarter days. The Apportionment Act 1870 remedied the common law position that rent is not apportionable. In Ellis v Rowbotham [1900] 1QB 740, the Court of Appeal construed the 1870 Act as applying only to sums payable in arrears.  A feature of 20th and 21st century leases is that rent is payable in advance. So, the 1870 Act does not help tenants seeking to apportion rent in the circumstances of a lease break exercised between rent days.

In giving M&S permission to appeal,  the Supreme Court directed that the parties should consider whether to argue that the decision in Ellis v Rowbotham should be overruled. Counsel for M&S argued that the 1870 Act could (and should) be interpreted to apply to sums payable both in arrears and in advance – a substantial departure from the established authorities, which the Supreme Court rejected.

Facts

M&S held leases of four separate floors of an office block in Paddington. The leases were granted for a term of 12 years, expiring on 2 February 2018. Each lease contained a break provision, enabling the tenant to terminate the lease on six months’ notice, on 24 January 2012. The break clauses were subject to a number of conditions, including payment by the tenant of a substantial premium (a sum equivalent to one year’s rent for one floor) on or before the break date.

M&S was obliged to pay a “Basic Rent” yearly and proportionately for any part of the year, by equal quarterly payments, in advance on the usual quarter days. This meant that M&S was allowed to pay an apportioned part of the quarter’s rent at the beginning and end of the term. In the event that M&S exercised the break, the lease did not expressly provide for the repayment of any rent and other outgoings paid in respect of the period beyond the break date.

On 7 July 2011, the tenant gave just over six months’ notice to break all four leases on 24 January 2012. On 19 July 2011, the landlord invoiced the tenant for insurance rent for the year ending 30 June 2012, which M&S paid. M&S paid the full December quarter’s rent, car parking licence fees and service charges. It paid the break premium on 18 January 2012. It was common ground that M&S was obliged to pay the full quarter’s rent on 25 December 2011 because, on that date, it was not certain whether the break would be exercised and the leases would end, as there were conditions that remained to be performed in order to exercise the break. Subsequently, M&S sought to recover £1,147,696.25 from the landlord, comprising sums which it claimed were attributable to the period after the break date. M&S based its claim on an express term of the leases, alternatively pursuant to a term to this effect to be implied into the leases or, in the further alternative, in restitution on the ground that the consideration for the quarter’s rent failed for the period after the break date.

M&S succeeded at first instance on the basis of its argument for an implied term. The landlord successfully appealed. M&S then sought permission to appeal to the Supreme Court.

M&S’s main arguments:

  • M&S’s Counsel argued that a repayment provision should be implied into the leases, because it was contrary to the parties’ reasonable expectation that, at the end of the lease term (as a consequence of exercising the break), the tenant should have to pay a whole quarter’s rent, even though it would only occupy for a month after the December quarter day.
  • Ellis v Rowbotham  should have applied the Apportionment Act 1870 to rent payable both in arrears and in advance.
  • A repayment term should be implied because the lease only required M&S to pay rent and outgoings up to the termination date (at the end of the term).  This should also be the position when M&S terminated the leases by exercising the break, regardless of when the break premium was paid.
  • The “overpaid rents” referable to the period after the break date were not intended as compensation. M&S already had to pay a substantial premium as a condition of exercising the break.

BNP argued the following:

  • It must be clear and obvious for a term to be implied into a lease.
  • The leases imposed two express preconditions for the exercise of the break: (1) there must be no arrears of basic rent on the break date, and (2) a break premium must be paid before the break date. The implied term contended for by M&S involves the proposition that, having provided for the tenant to pay a sum (the full quarter’s rent) in order to terminate the term, the lease is to be understood as meaning that, upon the happening of the very event that the sum was paid to secure (the break), the landlord would be under an immediate obligation to pay back part of that sum (referable to the post-break date period). It cannot be said to be so obvious that, after going to the trouble of making it part of the precondition that the rent for the December quarter must be paid in full, they then intended that part of that rent payment should go straight back to the tenant.
  • The “admissible background” to the interpretation of the lease provision was the legal understanding that rent payable in advance cannot be apportioned.

Supreme Court Decision

The Supreme Court upheld the Court of Appeal’s decision.  Whilst there was an argument that the break clause could be said to work unfairly and capriciously without the implied term, the leases were full and carefully considered documents which included express obligations in relation to the exercise of the break that would not sit “easily” with the implied term.  There was also the clear and consistent line of judicial decisions regarding the non-apportionability of rent payable in advance (and Ellis v Rowbotham was correctly decided) that formed the backdrop against which the leases were entered into. The refusal to imply a term did not result in the leases being unworkable, or produce a commercially or otherwise absurd result, particularly as it was entirely up to M&S to decide when to pay the break premium.  If M&S had paid the premium before the December quarter day, it would have been certain that the leases would have ended on 24 January, and so the obligation only to pay up to the lease termination would have prevailed.

There was much discussion about the test for implying a term into a lease.  It was common ground that the decision of the Privy Council in A.G of Belize v Belize Telecom Ltd [2009] 1 WRL 1988 identifies the principles to be applied when considering whether a term can be implied into a lease. The test for implying a term into a lease remains whether it is necessary to give business efficacy to the contract and whether, without the implied term, the contract would lack commercial or practical coherence. Further, the implied term must sit easily with the express terms of the contract.

Implication

The position on apportionment of rent payable in advance is now confirmed. Tenants entering into new leases should ensure that, if a break date is likely to fall between rent days, unless there is an express term for a refund of the rent referable to the broken period, the landlord will be entitled to retain the full quarter’s rent.

Tenants who are considering exercising a break that falls between rent days should, in the absence of an express contrary lease  provision, budget for the full quarter’s rent, in addition to any break premium.  Landlords in these circumstances can rest assured that they will be entitled to retain the full quarter’s rent that has been paid in advance of a break date, although some may, and do, choose to make a voluntary repayment.

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