BREAK CLAUSES: OVERPAID RENT

17 Jun 2014


The Court of Appeal has brought welcome clarification to the previous uncertainty caused by the High Court decision in Marks and Spencer v BNP Paribas Securities Services.  In this case, Marks and Spencer were Tenants of four floors in the building under four Leases all on the same terms.  The leases included break clauses and notices were served by Marks and Spencer pursuant to these clauses.  The break clauses were conditional upon there being no arrears of basic rent or VAT and on payment of a lump sum of just under £1,000,000. This lump sum reflected exactly 1 years rent under the leases.

The break date fell in the middle of a quarter.  On the quarter day prior to the break date, Marks and Spencer paid the full quarters rent and service charge.  Insurance rent had been paid approximately 6 months earlier. 

Marks and Spencer left the premises and brought a claim for reimbursement of the sums paid for the period after the break date. 

High Court

The High Court decided a term should be implied into the leases requiring the Landlord to reimburse Marks and Spencer for the overpaid rent.  The test for implying a term into a contract was whether it would be regarded as obvious by anyone acquainted with the transaction that it goes without saying such a term should be included.  This is known as the officious bystander test.  The High Court concluded that a term allowing for the reimbursement of rent paid for the period after the break date should be implied. 

Court of Appeal

On appeal the Court of Appeal said that there was no general principle that a Tenant should only pay for what it receives.  The Court held the purpose of the break clause was to enable the Tenant to end the lease if it satisfied the conditions as to payment of rent and the break premium.  The break clauses expressed no indication of what should happen about the rent for the period after the lease had come to end. 

The Court commented that it would have been obvious to the parties before they signed the lease that there was a possibility that rent would have to be paid on the quarter day before the break date and they would have therefore made some provision for reimbursement if that was in fact the intention. 

Accordingly the Court of Appeal overturned the High Court decision and held that Marks and Spencer were not entitled to any reimbursement of the rent for the period past the break date. 

Comment

This acts as an important reminder to parties entering into leases with break clauses.  If it is the intention of the parties to allow the Tenant to obtain reimbursement of rent paid for any period past the break date, it should be clearly recorded within the lease itself.

The preparation and service of break notices, and compliance with the terms is a complex area.  Should you need any assistance please do not hesitate to contact Ellisons’ Property Litigation Department. 

Lee Pearce
Ellisons,
Headgate Court, Head Street,
Colchester, Essex CO1 1NP.
01206 719669
lee.pearce@ellisonssolicitors.com

June 2014