UK: Break Options: Landlord Ordered To Repay Apportioned Rent After Break Date

Last Updated: 14 July 2013
Article by Robin Biela

Summary and implications

In a recent High Court case, a landlord was ordered to repay an apportioned amount of rent and other sums paid by a tenant in advance under a pre-condition to a break option.1 The tenant had served a break notice, to bring the lease to an end mid-quarter.

There was no express clause in the lease requiring the landlord to return the money. However, the court implied a term into the lease obliging the landlord to refund apportioned sums paid in advance, but which related to the period after the break date.

Implications for landlords and tenants

The M&S decision is a departure from a recent line of case law in which the court has found in a landlord's favour when interpreting apportionment wording following service of a break notice.2

This case is, therefore, a significant and tenant-friendly landmark:

  • Tenants will confidently demand refunds from landlords for sums paid in advance following determination of a lease under a break option.
  • By implying a repayment obligation, and pending any appeal, the decision shifts the burden to the landlord to distinguish this case and prove that sums paid in advance may be retained.
  • To avoid uncertainty, parties to a lease should specifically agree how rent and other payments made in advance should be treated after the exercise of a break option.
  • This case does not overrule current authority that a tenant must pay the full quarter's rent to successfully operate a break option if the option requires payment of all sums due "up to" the break date. However, the case does open the door to a further court challenge on the point.

The M&S lease contained two pre-conditions regarding payment of money to the landlord

M&S served a notice to determine its lease on 24 January 2012. Determination of the lease was subject to two important pre-conditions:

  1. There were no arrears of rent on 24 January 2012.
  2. The tenant had paid to the landlord the sum of £919,800 plus VAT on or before 24 January 2012.

M&S complied with these pre-conditions, paying the full December quarter's rent and the additional sum of £919,800 plus VAT. Accordingly, the lease determined on the break date.

Following determination of the lease, M&S sought a repayment from the landlord in respect of sums paid for the period following the break date.

The landlord would not return the funds and M&S applied to court seeking repayment on three grounds:

  1. an express lease term; and/or
  2. an implied term; and/or
  3. in restitution due to a failure of consideration.

The court disagreed with M&S on grounds (1) and (3) but upheld ground (2)

The court rejected ground (1). Rent under the lease was payable "proportionately for any part of a year". However, because it was not certain on the December quarter day that the lease would end on the break date the court held that a full quarter's rent was payable on the December quarter day.

The court also rejected ground (3), holding that consideration (being the December quarter's rent had not totally failed.

The court did uphold ground (2), and implied a term into the lease requiring the landlord to repay an apportioned sum for the period from the break date.3

The court considered that the correct approach was to discover what was intended by the lease. In doing so, the court was conscious that it was not entitled to introduce terms simply to make the lease fairer or more reasonable.

In deciding whether to imply the term sought, the court gave significant weight to the penalty payment which M&S paid as a pre-condition to the break, stating that it would be unlikely that the parties would have intended that the landlord should be entitled to retain the balance of the quarter's rent in addition to the penalty payment.

Disputing the return of apportioned rent

The decision will encourage tenants to confidently demand the return of rent following early lease determination under a break clause. In reply, landlords will wish to distinguish the facts of their case from this case. In doing so, the following lease provisions should be carefully considered:

  • Any apportionment wording in the lease.
  • Rent payment dates.
  • Any penalty payment which the tenant must make as a pre-condition to the break.
  • Any other indication of the parties' intentions regarding rent following successful operation of a break clause.

Click here for a summary of the PCE Investors case.

Footnotes

1. Marks and Spencer PLC v BNP Paribas Securities Services Trust Company (Jersey) Ltd and another [2013] EWHC 1279 (Ch)

2. Including PCE Investors Ltd v Cancer Research UK and Canonical UK Ltd v TST Milbank LLC

3. Mr Justice Morgan adopted Lord Hoffman's approach in A.G. of Belize v Belize Telecom Ltd [2009] 1 WLR 1988

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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