Key point
- Landlords can retain rent paid in advance on the premature determination of a lease, unless the parties have agreed an express term to the contrary
The dangers of conditional break clauses have been clearly exposed in recent years. If rent is payable in advance, tenants must pay a full quarter’s rent on the rent payment day immediately before the break date, even though their lease will end midway through the next quarter. This is because, if the break right is subject to conditions that remain to be satisfied, the parties cannot be certain whether the lease will continue or terminate.
Claims in restitution for repayment of an apportioned part of the rent after a lease has ended have received short shrift. A line of authorities dating back to William Clun’s case [1613] confirm that rent falls due on rent payment days and cannot be apportioned. The Apportionment Act 1870 remedies this, but only if rent is payable in arrear: Ellis v Rowbotham [1900] 1 QB 740. Consequently, the courts have rejected suggestions that tenants can recover post-break date overpayments.
This means that claims for reimbursement will depend on the terms agreed by the parties. Can the court imply a contractual term for repayment in the absence of an express provision entitling a tenant to a refund? Each case will turn on its own facts. Nonetheless, all eyes turned to the Supreme Court in Marks & Spencer plc v BNP Paribas Security Services Trust Co (Jersey) Ltd [2015] UKSC 72; [2015] PLSCS 341 for guidance as to the position.
Break conditions
The tenant had the right to terminate its lease on 24 January 2012, which it exercised. Its break right was conditional on there being no arrears of rent and on the payment of a substantial premium to compensate the landlord for the loss of its income stream. Unusually, there were no other conditions that needed to be satisfied before the lease was broken.
The tenant complied with the conditions; it paid a full quarter’s rent on the December quarter day and the premium on 18 January 2012. As a result, the lease ended on 24 January 2012, leaving the tenant £1.1m “out of pocket” in relation to the rest of the quarter. Consequently, the tenant issued proceedings to recover the sums pre-paid in advance in respect of the period after the break date.
Implied term
The Supreme Court noted that the question of whether a term should be implied into a contract almost inevitably arises after a crisis. However, the answer to this question must be assessed by reference to the date on which the contract was made – and not with the benefit of hindsight. The term that the tenant was seeking to imply appeared to be both reasonable and equitable, but the court will not imply a term into a detailed commercial contract simply because it appears fair or because the parties would have agreed to it, had it been suggested to them.
Several conditions must be satisfied before implying a term into a contract. The term must be necessary to give business efficacy to the contract, and/or so obvious that “it goes without saying”. The court will not imply a term if the contract is effective without it. The test suggested by Lord Sumption was whether, without the term, the contract would lack commercial or practical coherence. The term must also be reasonable and equitable, as well as being capable of clear expression, and must not contradict or sit uneasily with terms expressly agreed by the parties.
Rent
The tenant’s rent was payable “proportionately for any part of a year”. Therefore, the tenant would have been entitled to apportion the instalment of rent payable immediately before the expiry of the term because the parties would have known that the lease was about to expire. However, this was not the case in December 2011; the date on which the lease would end was still uncertain because the tenant had not then paid the premium required to determine the lease. Had it done so, Lord Neuberger suggested that the tenant might then have been entitled to apportion the December payment.
The parties had also agreed that the tenant would receive £150,000 if it did not exercise its right to break. This showed how carefully the parties had considered their rights against each other and made it difficult for the court to interfere. In addition, it would be odd to imply a term requiring the landlord to make a payment to the tenant at the same time as the tenant was due to make a payment to the landlord. The express and implied terms would sit uneasily alongside each other.
The parties had signed a full and professionally drafted lease, negotiated against the background of a clear, consistent – and, importantly, correct – line of authority concerning the apportionability of rent. This made it difficult for the tenant to argue that the court could imply a term to the contrary, and it was not needed to give business efficacy to the contract.
Other payments
The court applied the same reasoning to the tenant’s parking fees and to its contribution to the cost of insurance. The latter payment was specifically reserved as rent and was payable once a year, with no provision for apportionment.
By contrast, the service charge was apportionable, thanks to provisions in the lease requiring the landlord to give credit for any overpayment in any service charge year by carrying the amount forward to the next financial year. The court considered that this obligation plainly extended to giving effect to the credit, through payment, after the lease ended.
