UK: Breaks And Apportionment Of Rent; A Ray Of Light For Tenants?

Introduction and background

There has recently been a line of cases, most recently PCE Investors Ltd v Cancer Research UK [2012] 2 P&CR 71 and Canonical UK Ltd v TST Millbank LLC [2012] EWHC 3710 (Ch) which have held that, whilst dependent on the precise wording of the lease and the key provisions in question, to be able to comply with a condition in a break clause requiring payment of rent, if the break date falls between rent payment dates, the whole quarter's rent is due and no subsequent apportionment is permitted.

However, Mr Justice Morgan's decision in the case of Marks and Spencer PLC v (1) BNP Paribas Securities Services Trust Company (Jersey) Limited and (2) BNP Paribas Securities Services Trust Company Limited [2013] EWHC 1279 (Ch) is a welcome illustration of both the approach that should be taken by tenants when complying with break conditions as well as the circumstances in which either payments of rent (and other sums) can only be paid up to the break date or overpayments can be recovered after the break has been validly exercised.

The facts

Marks & Spencer Plc ("M&S") was the tenant and the defendants, both BNP Paribas companies, ("BNP Paribas"), were the landlord of four floors of an office building in Paddington, London, known as "The Point".

M&S' occupation was regulated by four leases with each lease having been granted on identical terms (at least as regards the issues in dispute). For the purposes of his judgment, Morgan J considered only the lease in respect of the 3rd floor premises but treated his analysis and conclusions as applying equally to all the leases. Accordingly, this summary focuses only on the implications for the 3rd floor.

The 3rd floor lease was granted from 25 January 2006 to 2 February 2018. M&S however had the benefit of an option to determine the lease on 24 January 2012 (and again on 24 January 2016), and which was constructed in the following principal terms:

"8 OPTION TO DETERMINE

For so long as the Tenant is Marks and Spencer p.l.c. or a Group Company thereof the Tenant may determine this Lease on the First Break Date [i.e. 24 January 2012] by serving on the Landlord written notice on or prior to the First Break Notice Date. This lease shall only determine as a result of notice served by the Tenant under [Clause 8.1] if on the break date there are no arrears of Basic Rent or VAT on Basic Rent; and This Lease shall only determine as a result of notice served by the Tenant under Clause 8.1 if on or prior to the First Break Date the tenant pays to the landlord the sum of £919,800 plus VAT.

The Landlord may in its absolute discretion waive compliance with all or any of the conditions or obligations set out in Clause 8.3.

If the provisions of this clause are complied with then on the Break Date this Lease shall determine but without prejudice to the rights of either party in respect of any previous breach by the other".

On 7 July 2011 (i.e. before the First Break Notice Date), M&S served notice on BNP Paribas to terminate the lease on 24 January 2012. In accordance with the above, the lease would then determine if there were no arrears of Basic Rent (in effect the rent in accordance with the lease) or VAT on the Basic Rent as at 24 January 2012, and if M&S, on or prior to 24 January 2012, had paid the sum of £919,800 plus VAT to BNP Paribas.

On 8 December 2011, BNP Paribas invoiced M&S in relation to the "Basic Rent" (plus other sums due under the lease) for the period 25 December 2011 to 24 January 2012. Instead of paying this apportioned amount, M&S paid the sums that, but for the break, it would otherwise have had to pay in respect of the whole quarter. M&S later paid the premium of £919,800 plus VAT. M&S also paid in full a number of other items including a car park licence fee, insurance premiums and service charge.

The result of M&S' actions was that it had complied with the conditions in the break clause (this was not disputed by BNP Paribas).

M&S then sought to recover all of the sums it had paid in respect of the period after the termination of the lease on 24 January 2012. BNP Paribas refused and the issue was then litigated to Trial.

In his judgment, Morgan J considered two key issues:

• The amount that M&S needed to pay on 25 December 2011 in order to ensure that the lease terminated in accordance with the break clause; and
• Whether M&S was entitled to recover any sums paid in respect of time after the break date.

Compliance with the break conditions

The lease provided that the rent will be paid 'yearly and proportionately for any part of a year by equal quarterly instalments in advance on the Quarter days'.

Disregarding the existence of the break clause, if the lease were to end part way through a rent quarter by the passing of time, only an apportionment of rent would need to be paid on the last quarter date. This is because of the wording 'proportionately for any part of a year' in the reservation of rent clause. In any event, the same outcome would have been reached if the lease had not included this wording following the judgment of York v Casey [1998] 2 EGLR 25.

Taking into account the break notice served by M&S, was M&S required to pay the whole quarter's rent or only an apportionment of it on 25 December 2011? The answer is the full quarter's rent, notwithstanding the reservation of rent only required a proportion of rent to be paid for any part of a year.

Morgan J's reasoning for this (and this point was not in dispute between the parties in any event) was that it was not certain at 25 December 2011 that the lease would end on 24 January 2012. The break clause was conditional, and the conditions were not satisfied by 25 December 2011.

Therefore, in a case where (i) the break date is on or after a rent payment day and (ii) it is not possible to confirm conclusively as at the last rent payment date before the break date that the lease will end on the break date, the full quarter's (or other contractual period's) rent is due. This conclusion is consistent with the PCE Investors and Canonical UK Ltd judgments.

However, as was confirmed by Morgan J in his judgment, if it had been certain as at 25 December 2011 that the lease would end on 24 January 2012, for instance if there were no conditions attached to the break, then only an apportionment of the rent would be due. M&S was therefore correct to pay the full quarter's rent for the period 25 December 2011 to 24 March 2012.

Recovery of the overpaid sums

M&S' argument as to whether or not it was entitled to recover what it said were overpaid sums, was that its right to such recovery arose either (i) as a result of the express terms of the lease; or (ii) pursuant to a term to that effect to be implied into the lease; or (iii) as a restitutionary right on the ground that the consideration for the quarter's rent failed for the period after the break date.

BNP Paribas, on the other hand, contended that (i) there was no express provision in the lease that entitled M&S to recover the sums paid in respect of the time after the break date or that required BNP Paribas to make payment; (ii) no such right or obligation was to be implied into the lease; and (iii) the established principles of the law of restitution did not permit M&S to recover the sums sought.

Morgan J decided that, whilst the lease did not contain an express provision allowing M&S to recover part of the overpaid sums from BNP Paribas, the lease did contain an implied term to this effect (at least in respect of the rent, insurance premiums and car park licence fee).

He further decided that a reasonable person reading the lease would expect that, in a case where the break clause operated to take effect on 24 January 2012, the rent (and other sums highlighted above) would be payable up until 24 January 2012, but not for any period after that date. This is in line with the fact that if the lease ended part way through a rental period by effluxion of time, only a proportion of the rent would be due.

In reaching this decision, Morgan J placed significant reliance on the fact that the break clause provided that a premium of £919,800 plus VAT needed to be paid. Accordingly, in his view, the parties clearly applied their minds prior to the grant of the lease to the compensation BNP Paribas would receive if M&S were to exercise the break on 24 January 2012. This fact therefore made it unlikely that the parties would have intended BNP Paribas to retain the full quarter's rent in addition to the compensation for being left with vacant possession in the place of an income stream.

It was also important that the payment of rent on the quarter days refers to payment of 'instalments' of rent. Morgan J held that the obligation to pay by instalments should not produce the result that the payer pays more than the full amount which is due. Finally, whilst the decision on this issue did not affect the ultimate conclusion (i.e. because Morgan J had already found in M&S' favour on the implied term issue), Morgan J did go on to decide the restitution point.

In doing so, Morgan J summarised the law of restitution on this point and confirmed that, where money is paid under a transaction which is, or becomes, ineffective then the payer may be able to recover the sum paid, provided that the consideration for the payment has totally failed.

Further, whilst in cases where the consideration is whole and indivisible the failure must be total, Morgan J acknowledged that there are those cases where payments for a right which is to endure for a period of time can be divided up between different parts of that period of time so that, where the payer had only enjoyed the benefits for part of that period of time, there has been a total failure of consideration in relation to that part of the period.

However, taking into account a number of authorities (including Baltic SS Co v Dillon (1993) amongst others), Morgan J concluded that it is not normally appropriate to divide up a single consideration on a time apportionment basis and that, therefore, it was not possible to say that the consideration for the quarter's rent due on the last quarter day before the break date totally failed for the period from 24 January 2012 to 24 March 2012.

This approach was of course in line with that taken in the PCE Investors decision. In the light of all of the above, it was therefore held that BNP Paribas was required to repay the part of the rent and other sums which exceeded the full amount that was due (the service charge was dealt with separately). It was held that this implied term was necessary to give business efficacy to the lease and the suggested term was obviously what the parties meant. Further, the suggested term could be clearly and easily expressed and did not contradict any express term of the lease.

Conclusion

This decision is a very useful and interesting indication of the Court's current stance in respect of paying rent as a condition to the valid exercise of a break. It also represents something of a chink of light for tenants in what was previously a very landlord friendly arena.

Whilst much still depends on the exact wording of the lease, the approach of the Court appears to be that if the lease contains wording akin to "proportionately for any part of a year" and/or refers to the rent payments as being "instalments", and the lease ends by the passing of time, only an apportionment of the last quarter's rent needs to be paid if the lease ends part way through a quarter. Also, if after service of a break notice it is clear the lease will end on the break date, only an apportionment of rent will be due.

However, if the break is conditional on the payment of rent and/or other recurring sums, and it cannot be said with certainty that the lease will end on the break date, the full quarter's payments need to be paid.

The tenant is then left in the position of attempting to recover such overpaid sums from the landlord.

When it comes to attempting to recover those sums, the decision in this case is a helpful (and some may say daring) indication of the Court's willingness to imply a term into the lease providing for such recovery. However, it is unclear how much of an impact the premium paid by M&S to BNP Paribas had in this regard and no doubt in the future the importance of a premium will be tested.

Indeed, tenants may take this decision as a green light to recovery of "overpayments" (whether past or present) and we may now see an increase in these sorts of challenges. We also wait to see whether or not this decision will be appealed. Nearly all of the major break right cases of the last couple of years have been appealed, initially at least, and this decision certainly ranks amongst the most remarkable.

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.