UK: Tough Break For Tenants

Last Updated: 24 July 2014
Article by Tim Foley

It is common where commercial leases contain rights to break in favour of the tenant, that the terms of the lease will make those rights conditional. One such common condition is the tenant has to ensure that all rents due under the lease have been paid in full by the break date.

Where the break date falls part way through a quarter, it has long been settled law that on the quarterday immediately prior to the break date, the full quarter's rent is payable and there is no right to apportion and pay only the rent for the period prior to the break date either under Common Law or under the Apportionment Act 1870. This is galling for tenants who find themselves paying for premises beyond a point in time when the lease has come to an end, and it appears to be something of a windfall for landlords. Unsurprisingly therefore, tenants have sought to argue in favour of rights to recover overpaid rent after the lease has come to an end by virtue of the operation of the break clause.

The latest such effort on the part of a tenant has been seen in the High Court in Marks & Spencer PLC v BNP Paribas, where the tenant successfully argued that there was an implied contract term giving rise to a right to recover overpaid rents following the exercise of the break clause. That approach has now been roundly rejected by the Court of Appeal.

Over the years courts have grappled with various tests for the implication of contract terms. However, in Attorney General of Belize v Belize Telecom Limited, Lord Hoffmann explained that the implication of contractual terms was part of the larger issue of interpreting the contract. He said "There is only one question: is that what the instrument, read as a whole against the relevant background, ought reasonably be understood to mean?" Generally parties to contracts elucidate what they mean on the printed page, however, if they intended a contractual term to arise, which they did not produce in writing, then as part of the construction of the contract, the Court may imply a term to give effect to that intention. So far so good.

At first instance in Marks & Spencer PLC v BNP Paribas, M&S's arguments in favour of an implied right to recover overpayments found favour for Mr Justice Morgan, and he agreed that on the wording of the lease it was appropriate to imply such a term. He relied upon the following:

1. Clause 2 of the lease concerned payment of rent and used the words "proportionally for any part of a year". The Judge held that this apportionment clause applied not just to the first day and the final day of the lease (both of which fell part way through quarters) but also to the advance payment of rent that post-dated the break date. The Court of Appeal called this "the apportionment conclusion".

2. A year's rent was payable as a break premium and a right to recover overpaid rent ought to be implied because a reasonable person would consider that the tenant should be in the same position as a tenant who had paid the break premium on the last quarter day. The Court of Appeal called this the "same position conclusion".

3. Since the break premium amounted to a full year's rent, at GBP 919,800 plus VAT, the parties must have intended for that premium to be the full amount of compensation that the landlord would receive if the tenant exercised its right to break. Therefore, it could not have been intended for the landlord to retain overpaid rent on top of the break premium, in excess of GBP 150,000. The Court of Appeal called this "the full compensation conclusion".

The Court of Appeal unanimously allowed an appeal by the landlord and rejected the suggestion that the right to recover overpaid rent should be implied into the lease. The Court observed that the break clause itself simply provided for early termination of the lease provided that the conditions on that right were satisfied. It said nothing about the treatment of overpaid rent following the exercise of the break clause. Furthermore, the lease contained clauses that dealt with the consequences of a successful break which were entirely silent on the question of overpaid rent. The Court considered that the parties must have realised that the break clause fell part way through a quarter and, having been aware of that possibility, would have expressly provided in the lease for a right to recover overpaid rent if that was the intention, since the parties had clearly considered post-termination issues.

As for the "same position conclusion" the Court considered that the landlord would be in a position of some uncertainty where a tenant has invoked the break by service of a notice, because until the break premium is paid then the landlord would not know for certain whether the lease would be broken. The Court could not see in principle why the landlord ought not to be compensated for that uncertainty, such compensation taking the form of the overpaid rent. Similarly, with the "full compensation conclusion" the Court did not agree that the payment of a break premium necessarily meant that the parties intended no further compensation to be paid to the landlord. In fact the absence of an express right to recover overpaid rent could be thought to be evidence that the parties did intend the over payment of rent to form part of the landlord's compensation.

This case is a classic example of how difficult it can be to predict the outcome of cases that turn on the construction of documents, since words strike each reader differently. Each lease is construed strictly upon its own terms and since two leases are rarely identical, the decision is not a binding authority applicable to all leases on different terms. There may be leases in existence where it is possible to imply a right to recover based on the terms of those particular leases. However, it is likely that these kinds of arguments will start to die out. Now that tenants are alive to these issues it is standard practice for an express right to recover overpaid rent to be specifically included in break clauses. However, for those older leases where such drafting does not presently appear, then this Court of Appeal decision (albeit of persuasive value only) is no bad thing. The decision promotes certainty and certainty deters dispute. Better that everybody knows where they stand and there is less scope for argument. The overpayment of rent is simply another financial factor to be weighed in the balance when deciding whether or not to invoke a break clause.

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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