Property Litigation

Tenant Awarded Rent Refund Post Break Date

The law requires strict compliance with the terms of a break clause. The Courts have a long history of upholding this position and a failure to get it right will have serious consequences.

It is, therefore, of particular importance to landlords and tenants and their advisors that the law relating to the operation of break clauses is clear and certain.

In the current financial climate this area of law has come in for close scrutiny by the Courts in a number of recently reported cases but until now it has remained largely undisturbed.

Break clauses in most modern leases are often conditional on one or more specific events. Frequently there are provisions that require a tenant to have complied with its covenants up to the break date. Where such a condition arises a tenant should always be concerned about making sure all payments of rent and other sums due under the lease are paid in full and on time. As the Avocet Industrial Estates LLP v Merol Ltd [2011] EWHC 3422 case demonstrated, even the non-payment of a few hundred pounds of late payment interest can be fatal.

Sometimes a break date occurs midway through a rent payment period. If the rent is payable ‘in advance’ this opens up a number of issues, including calculating how much a tenant should pay when the rent falls due. Also, if the tenant pays for a full period, is it entitled to be reimbursed for any amounts which, when an apportionment is made, relate to the period after the lease has ended?

These issues were faced head on by Morgan J in Marks and Spencer Plc v BNP Paribas Securities Services Trust Company (Jersey) Limited [2013] EWHC 1279. The leases in this case stipulated that for the break notice to be effective there were to be no arrears of the basic rent on the break date of 24 January 2012. It was also a condition of the break clause that the tenant paid the landlord a premium of one year’s rent on or before the break date. On 25 December 2011 the tenant paid the landlord a full quarter’s rent, service charge and car park licence fee, even though the landlord had only invoiced the tenant for a lesser amount calculated by reference to the break date. The premium was also paid.

As a result the tenant, Marks and Spencer Plc, was successful in terminating the leases on the break date. It then sought to recover the sums it had “overpaid” in relation to the period after the break date. In the first decision of its kind Morgan J held that although the leases did not contain an express term allowing the tenant to recover those parts of the payment it was sufficiently clear, in the context of the leases read as a whole, that was what the parties would reasonably have understood the leases to mean. Accordingly, he would imply a term into the leases to that effect so that the tenant could recover amounts paid to a landlord, which on an apportioned basis, related to the period after a lease had determined, despite the lease not expressly stating as such.

So is this a classic victory for tenants and judicial common sense or does it in fact still make life tricky for tenants in an area which is already loaded with traps for the unwary?

Practically, in many if not all situations, the case still leaves a tenant in the invidious position of having to work out what amounts are due to be paid to the landlord before a break date and ensuring those amounts are paid in full, in cleared funds and in good time. This will be so unless the tenant is fortunate to be able to say, with certainty, on the payment date, that the lease term will end on the break date such that it is only required to make an apportioned final payment.

In the Marks and Spencer case the premium had not been paid by the December quarter day and so it could not have been known at that time if the break notice would be effective, even if the correct amounts had been paid in respect of the other final payments. Even where the break clause is only conditional on one final payment being made, so that the tenant believes it is a certainty that the break will be exercised correctly, the cautious approach would still be to pay all of the sums due in full.

To put the tenant into a position where it could recover the sums paid Morgan J decided that the terms of the actual leases he was concerned with were such that he was able to imply a term into them under the established principles that allow a Court to do so. To some observers this may seem a slightly surprising result.

Implying terms into a commercial lease or contract is an aid to the Court to assist them in interpreting what the document means and what the intention of the parties might have been in circumstances where the document does not expressly cater for the event that is placed in front of them. The Court is only concerned with ascertaining what a document means. It is not able to introduce terms to make it fairer or more reasonable. It is, however, permitted to apply to a document the meaning the Court considers it would reasonably be understood to have if read as a whole, against the relevant background.

As such, given that the parties are two substantial commercial entities who took professional advice on the leases and the operation of their break clauses it may have been thought unlikely that the Court would find it necessary to have to imply a term into the lease to enable it to interpret the terms of their contract.

In reaching his decision, Morgan J, seems to have placed some weight on the fact that the tenant was paying the landlord a premium of one year’s rent to effect the break and this showed the parties had applied their minds to the compensation the landlord would receive for giving up its income stream. This will not be a feature of all cases.

This does not mean that all leases should now be read with a similar implied term as each lease has to be read and considered in its own context. However, the fact that one Court has now been persuaded to do so introduces a degree of uncertainty into similar situations that previously did not exist.

The decision also does not get around the practical consequences that a tenant still has to pay its landlord money that ultimately is repayable to it. In addition, the tenant may be put to the trouble and expense of commencing proceedings to obtain repayment if a landlord disagrees as to the correct interpretation of the particular lease in question. It would also seem that the tenant runs the risk of the landlord going insolvent between the payment and the tenant recovering it.

It is not yet known if the case is going to be considered by the Court of Appeal. Appeals in two of the recent cases, considered by Morgan J in his judgment, have been compromised so for the time being, at least, landlords and tenants and their advisors have to take account of this case in deciding how to break a lease on notice that is conditional on payments of rent or other sums due under the lease.

From a practical perspective the right course may well still be for a tenant to continue to seek to pay in full all the sums due under a lease on the last payment date where the break date falls between two payment days and take the risk of recovering any “overpaid” sums afterwards.

For further information, please contact Simon Freeman or Kelly Chiffers.