Break notices in leases

The Supreme Court has dismissed the tenant’s appeal from the Court of Appeal’s decision in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited & Anr [2015] UKSC 72.

Their Lordships confirmed the long established principle that rent payable in advance is not apportioned unless the lease provides so expressly. Further where a lease is silent as to the apportionment of rent when a break date falls in the middle of a rent quarter, a term should not normally be implied requiring repayment of rent paid in advance for the period following the break date. Terms will only be implied into contracts where it is “necessary” to do so to give the contract business efficacy and it is unlikely that the court will imply terms which do not fit easily with express terms.

However, if a lease includes a provision that the rent is payable “…proportionately for any part of a year” and all the pre-conditions for the validity of the break have already been satisfied by the final rent payment date, so that it is certain that the lease will end on the break date, then the final rent payment can be apportioned.

The tenant, Marks and Spencer, held four leases in an office block in Paddington, which were on identical terms. They contained a break clause that allowed for the leases to be determined on 24 January 2012, provided that six months’ prior written notice was given and that a break premium and all rent due up to the break date were paid on or before the break date. The leases contained the standard requirement that rent was payable quarterly in advance on the usual quarter days, so that there was a rent payment date on 25 December 2011.

The tenant complied with the notice requirement, paid the final quarter’s rent shortly before the 25 December 2011 in full to avoid any chance of the break being invalidated, and then paid the break premium, on 18 January 2012. The break duly took effect on 24 January 2012 and the tenant subsequently claimed a refund from the landlord of all of that part of the final quarter’s rent that related to the period after 24 January 2012. The landlord refused to pay and court proceedings ensued.

The tenant argued that a term should be implied into the leases whereby the proportion of rent paid in advance of the break date that related to the period after the break date should be refunded and, at first instance, Mr Justice Morgan agreed with the tenant. However, on appeal, the Court of Appeal held that it was not necessary to imply the term into the leases to make them work commercially. It would have been obvious to the parties, when they negotiated the leases, that there was a possibility that the rent would have to be paid in full in respect of the last quarter day before the break date. The parties could have addressed this, but they did not.

The terms “instalments” and “proportionally for any part of a year” could not be used to justify the implied term where, as in this case, there were other break conditions to be complied with and the tenant could not be certain, when paying the final quarter’s rent before the break date, that the break would take effect on the break date. However, although she declined to decide the issue, Lady Justice Arden did indicate that, had all the conditions to the break been fulfilled prior to the due date for payment of the final quarter’s rent, then on the wording of the lease it might have been open to the tenant to have paid an apportioned rent just up to the break date, as it would have been certain that the break would be effective.

On the tenant’s appeal to the Supreme Court, Lord Neuberger, giving the lead and unanimous judgment, agreed with the Court of Appeal and dismissed the appeal. He confirmed that rent payable in advance is not apportioned unless the lease provides so expressly and that it was not “necessary” to imply a term for repayment to make the leases work. He also agreed with Lady Justice Arden’s view that had the tenant paid the break premium prior to the final rent payment date, so that it was certain that the lease would end on the break date, then the December quarter’s rent could have been apportioned.

• When operating a break clause that requires rent due up to the break date to be paid and the break falls in the middle of a quarter, tenants should pay the rent for that whole quarter in full to ensure that the break is effective, unless there is a very express wording to the contrary.
• When negotiating a lease, tenants should ensure that any intended refunds of apportioned amounts of rent, service charge, insurance premium and any other applicable charge under the lease are specifically and clearly provided for – there is very little scope for relying on implied terms.
• When a conventional break clause is exercised, landlords will usually only need to refund rent paid by a tenant as a condition of the break right in respect of a period after the break date if the lease expressly provides for such a refund.