Eleanor Cornthwaite, solicitor in the commercial property team at Woodcocks Haworth and Nuttall, explores a landmark Supreme Court ruling which has thrown into question what happens with advance rent payments when a break clause is exercised.
The decision will likely come as unwelcome news for some tenants. It certainly did for Marks and Spencer (M&S).
M&S v BNP Paribas Securities Services Trust Company
In the recent case of Marks and Spencer v BNP Paribas Securities Services Trust Company (BNP), the Supreme Court considered whether M&S should be entitled to a refund of advance rent on exercise of a break clause, when its break date fell in the middle of a rental period. Its decision has wider application to the implication of terms into contracts.
In July 2011, M&S exercised a break option to terminate its lease of office space in Paddington, London, ending the lease in January 2012. The lease stated that for the break notice to be effective, six months prior written notice must be provided, there must be no arrears of rent and a premium must be paid.
M&S properly exercised the break option. M&S paid in full the rent due in December up until 24 March 2012, together with a premium of £919,800.
M&S then brought a claim for the return of the rent already paid for the time after it departed the premises. The former tenant argued that a term should be implied into the lease entitling it to a refund. In 2013 the High Court found in favour of M&S and awarded a refund, but the decision was later reversed by the Court of Appeal. M&S then appealed this decision but lost its case on the 2nd December 2015.
The decision may be unwelcome for those favouring flexibility arguably in the interests of achieving justice.
The Supreme Court held that it would be incorrect, except in the very clearest of cases, to imply an intention that a tenant should receive back an apportioned part of rent paid in advance. The court noted that it has been long established that rent is not apportionable in time. In light of this clear, express, wording would be required before it would imply a term to the contrary.
Wider business implications
The decision may not be well received by some as it favours certainty at great commercial expense for the tenant in this case. The countervailing opinion however, is that contracting parties and advisers now have the certainty of knowing that the courts are going to uphold the terms of their carefully negotiated contracts.
The case highlights the dangers of relying on implied terms and the importance of obtaining specialist legal advice before entering into any commercial contract or exercising an option to break. It also emphasises the need for clear and consistent language in all commercial contracts, particularly leases.
It is advisable that all commercial tenants review their terms of contract to ensure that any advance payment of rent can be legally recovered on exercise of a break option.
For more information on this, please contact Eleanor Cornthwaite on 0161 761 4611 or Oliver Bagnall on 01254 272 640
