Breaking up is hard to do

As the property group’s sole trainee, I am given tasks from both the commercial and residential sub-groups.  Recently, I was tasked with reviewing and summarising the terms of a tenant break clause for a client who wanted to exercise it to end their lease early.

A key issue was that the lease did not include an express provision for the refund of rent paid in advance of the break date.  The tenant paid on a quarterly basis and the break date fell just after a quarter day.  It is well established law that, for any such refund, there must be an express provision for repayment by apportionment of rent paid in advance. 

At the same time that I was researching this area, the Supreme Court handed down judgment in the long-running case of Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd and another [2015] UKSC 72 (2 December 2015), which confirmed this position.

Background

Marks and Spencer (“M&S”) was the tenant under four identical subleases running from 25 January 2006 to 2 February 2018.  The landlord was BNP Paribas Securities Services Trust Company (“BNP Paribas”).  Rent was payable on a quarterly basis and the leases contained a provision for a tenant’s break clause if M&S gave BNP Paribas 6 months’ prior written notice before the set break dates.  For the break clause to take effect, there had to be no rent arrears and M&S were to pay the landlord one year’s rent.  Crucially, there was no provision in the leases requiring BNP Paribas to refund any overpayment of rent at the break date. 

M&S served a break notice on the landlord to determine the lease on 24 January 2012 and subsequently paid the quarterly rent for the period 25 December 2011 to 24 March 2012 and the one year’s rent, as required.  Consequently the break notice was effective and the lease determined on 24 January 2012. 

M&S then brought a claim against BNP Paribas primarily for the recovery of the overpayment of rent for the period between the effective break date, 24 January 2012, and the next quarter day, 25 March 2012.  M&S was successful at first instance, but the Court of Appeal reversed the decision.  M&S appealed to the Supreme Court.

The Supreme Court Judgment

The Supreme Court upheld the Court of Appeal’s decision.  One of M&S’s main arguments was that such a term was implied by certain wording in the lease.  However, the Supreme Court confirmed that a term should only be implied if required for business efficacy or if it passed the officious bystander test, i.e. the implied term is so obvious that it goes without saying.  

In this case, the parties had carefully and fully considered the content of the leases, including the provisions of the break clause.  Other provisions providing for payments between the parties on the operation of the break clause highlighted this careful consideration and therefore it would be inappropriate for the court to imply any further terms. 

The Lords additionally looked at the apportionment of rent payable in advance and confirmed that, unless there is express provision for this, any overpayment of rent was not repayable except under exceptional circumstances.  The Lords pointed out that this principle had been the same when the leases were entered into by the parties and that the leases were both full and professionally drafted. 

This judgment serves as a reminder of the existing law relating to repayment of rent paid in advance and the importance of providing for this expressly in the lease to ensure that the tenant is able to recover on the operation of a break clause.

Posted by Katherine Yu, trainee in the property practice group.

Katherine started her training contract with B P Collins in May 2015, after joining the firm as a paralegal in April 2015. Katherine graduated from the University of St Andrews with a joint honours degree in International Relations and Modern History. She went on to study the Graduate Diploma in Law at the College of Law and the Legal Practice Course at BPP in Holborn.

The importance of drafting an effective break clause

In today's market, commercial property tenants are continually looking for a better deal to protect their future business interests. A business can change significantly over a small period of time therefore tenants need peace of mind that they have a ‘get out clause’ if ever needed.

What happens when a tenant is tied into a lease for 10 years or more, but their business has changed causing them to move premises or even cease trading? You will often find that a carefully drafted lease will include a break clause, enabling the tenant to bring the lease to an end part way through the agreed term.

When I was asked to draft a break notice for a tenant halfway through the term of the lease, I thought it would be a relatively simple task, taking only a small amount of time. However, when I realised what was at stake for the client, I knew it wasn’t a straightforward task.

The consequences of an invalid break notice can cause the tenant to be tied into the current lease for the remainder of the term, or until the next break date (if there is one of course – there may not be!). This has huge cost implications for the tenant, particularly if they have already agreed to a new lease at different premises. A tenant could face paying rent on two premises for a period of five years plus - not the situation the tenant's lawyer wants to be faced with!

Even when a lease has a break clause, oversight of a minor point can cause the tenant to be tied in for the remainder of the term. For example, a break clause may insist on vacant possession, therefore, if any items are left behind (even a desk), the tenant may still be tied to the lease. Therefore, if you are the tenant or the landlord, a carefully drafted break clause is extremely important. A poorly drafted break clause could break the tenant's business.

The commercial property group at B P Collins LLP can assist commercial tenants and landlords with negotiating, drafting and implementing break clauses. If ever a tenant or landlord finds themselves in the sticky situation where they have a fight on their hands in relation to service of the break notice, the property litigation group has specialist knowledge in this area too and are on hand to advise. 

Posted by Gemma Hunter, trainee in the property practice group.



Gemma started her training contract with the firm in October 2011 having studied Law and Criminolgy LLB at the University of Sheffield and the LPC at the College of Law, Bloomsbury.