Triumphant Tenants

Here we review a recent successful case where a tenant obtained reimbursement of advance paid rent relating to the period after a break date, and advises best practice for incorporating break clauses within commercial leases.

The case used is Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and BNP Paribas Securities Services Trust Company Limited [2013] EQHC 1279 (Ch)

Ordinarily, a tenant that exercises a break clause in their contract before the end of the term of the lease is not automatically entitled to a refund of any monies paid in advance to the landlord and relating to a period after the break date.  That is, unless the lease contains a specific clause requiring the landlord to refund the tenant.

In the case we are discussing for the purpose of this article, taking into account all of the circumstances, the Court found that there was an implied term in favour of repayment in order to give ‘business efficacy’ to the lease i.e. without the implied term, the lease simply did not make good business sense.

What are the facts?

In this case, the tenant had a lease in relation to four floors of an office building in London, known as ‘The Point’.  The lease had a start date of 25 January 2006 and the end of the term was 2 February 2018.  A break option was included which entitled the tenant to bring the lease to an end on either 24 January 2012 or 24 January 2016 provided that:

1)     there must be no arrears of basic rent or VAT on basic rent

2)     the tenant must have paid a break penalty of £919,800 plus VAT (equivalent to one year’s rent)

Notice to determine the lease was served on 7 July 2011, with the determination date being 24 January 2012.  On 8 December 2011 the landlord rendered an invoice for rent, fees and service charge which fell due on 25 December 2011.  The invoice stated that the sums due were calculated up until the break date of 24 January 2012.  However, to ensure there were no arrears and to avoid breach of the break clause, the tenant made payment for the full quarter up to 24 March 2012.

The lease ended on 24 January 2012 and the tenant sought a repayment of the fees paid for the period beyond the break date.  The landlord refused reimbursement and the tenant issued proceedings to recover the sums.

What was the Court asked to consider and what did they decide?

After considering whether there was an express or implied provision in the lease entitling the tenant to repayment, the Court found in favour of the tenant and ordered the landlord to repay the monies.

Whilst the Court found that the lease did not contain an express provision requiring repayment, the monies were repayable to the tenant for the following reasons:

1)     At the time payment was made by the tenant, it was not certain that the lease would determine on the break date because the conditions for invoking the break clause had not yet been met.  The amount payable by the tenant was therefore a full quarter’s rent.

2)     In considering whether there was an implied term in the lease, it was found that a reasonable person reading the lease would expect that, where a break clause had been operated, rent would be payable leading up to the break date but not for any period beyond.

3)     The break clause could only operate if pre-conditions were met.  As there was a pre-condition requiring the tenant to pay a year’s rent if it exercised the break option, effectively the landlord was compensated for early termination.  That made it unlikely that there was any intention that the landlord would also be entitled to be a full quarter’s rent.

4)     An implied term was necessary to give business efficacy to the lease.

What can be learnt from this case?

This case is a further example of how important it is for both tenants and landlords to fully understand a break clause and the importance of compliance with any pre-conditions.

To avoid the time and expense of later litigation, we would always recommend that parties take early advice and ensure they fully comply with all conditions of the lease.

For a tenant considering taking a new lease, we would strongly advise that an express covenant is sought requiring repayment of overpaid rents or to ensure that any break date falls at the end of a payment period.

If you have any queries concerning break clauses in commercial property contracts, you can contact the Commercial Team on 02380 717717. 

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.