Landlord and tenant – Break clause – Rent – Lease of commercial premises – Break clause exercisable by respondent tenant on fulfilment of certain conditions including payment to appellant landlord of all rent due up to break date – Respondent paying full quarter’s rent in advance – Whether respondent entitled to repayment of rent for part of quarter falling after break date – Whether entitled to recover insurance and service charge payments on same basis – Appeal allowed
The appellant was the landlord and the respondent was the tenant under four leases demising four floors of an office building in London W2 for terms of 12 years to February 2018; those leases were contracted out of the security of tenure provisions in Part II of the Landlord and Tenant Act 1954. The leases reserved a “basic rent” of £919,800 pa, plus VAT, to be reviewed periodically and paid “yearly and proportionately for any part of a year by equal quarterly instalments in advance on the Quarter days”. The respondent was also liable to pay a car park licence fee, insurance costs, representing a fair proportion of the premiums payable by the appellant for insuring the building, and a service charge. A tenant’s break clause entitled the respondent to terminate the lease in January 2012 or 2016 if certain conditions were satisfied at that date, including the absence of any arrears of basic rent and the payment to the appellant of a further break premium of £919,800 plus VAT. The relevant terms of the lease had been restated in a deed of variation dated January 2010.
In July 2011, the respondent gave notice to the appellant to terminate the lease in January 2012. Thereafter, it paid an amount invoiced by the appellant for insurance for the period from July 2011 to June 2012, a full quarter’s basic rent, car park licence fee and service charge for the quarter starting in December 2011, and the break premium. The conditions for the exercise of the break clause were therefore satisfied and the lease ended on the break date.
The respondent later succeeded in a claim for repayment of the sums that it had paid to the appellant to the extent that they related to the period after termination of the lease. The judge held that a term should be implied into the lease requiring the landlord to repay an apportioned part of those sums for the period after the break date; he held that such a term reflected what the parties must have intended and was consistent with the reference to payment of rent “proportionately for any part of a year”: see [2013] EWHC 1279 (Ch); [2013] PLSCS 108. The appellant appealed. It did not dispute the right to repayment of service charges for services not provided by the break date but it challenged the judge’s conclusions on basic rent, insurance charges and car park fees.
Held: The appeal was allowed.
(1) The test for implying a term was whether the agreement, properly interpreted, had the meaning that such a term would achieve because, even though the parties had not expressly included it, it was none the less what the agreement meant. The implication of terms required a high level of loyalty to the parties’ agreement, read against the admissible background. The party seeking to establish an implied term had to show not only that the term in question could be a part of the agreement but that it would be a part of that agreement. The starting point was that, if there was no express term, none should be included because, if the parties had intended that a particular term should apply to their relationship, they would have included it rather than leaving it to implication. The court would not imply a term unless it was necessary to give effect to the parties’ express agreement, purposively construed against the admissible background. However, a term would not be unnecessary simply because the agreement could work without it; the court sought to find the parties’ common aim and a term could be implied if it was necessary to achieve the parties’ objective in entering into the agreement: Attorney-General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988; Mediterranean Salvage & Towage Ltd v Seamar Trading & Commerce Inc (The Reborn) [2009] EWCA Civ 531 applied.
(2) Although the lease did not provide expressly for the repayment of excess amounts of service charge on termination of the lease, it would, as the parties now agreed, be wrong to infer that no moneys were to be returned if they had not been spent by the break date. However, the position was different with regard to rent. There was no general principle that a lessee under a lease should pay only for what it actually received. Rent was not simply a payment to the lessor for the use and occupation of the premises, but was also used as a yardstick for compensating a party for some loss that it incurred by entering into a lease or by the operation of one of the rights conferred by that lease: Southwark Roman Catholic Diocesan Corporation v Brown’s Operating System Services [2007] EWCA Civ 164; [2007] PLSCS 44 distinguished. It would have been obvious to the parties, before they signed up to the lease, that it was possible that that a quarter’s rent would have to be paid on the last quarter day in full for a period that went beyond the break date. They must have discussed what was to happen on termination of the lease by operation of the break clause and could easily have included words requiring the lessor to repay any rent or other charges paid for the broken period.
Moreover, the admissible background to the interpretation of the lease included the state of the case law at the time when it was entered into. That case law did not establish any precedent for implying a term requiring repayment of rent for the broken period: Ellis v Rowbotham [1900] 1 QB 740, Capital & City Holdings Ltd v Dean Warburg Ltd [1989] 1 EGLR 90; [1989] 25 EG 97 and Re a Company [2007] BPIR 1 (decided after the original leases but before the deed of variation) considered. That made it more likely that a reasonable person, having knowledge of the background, would have concluded that if the parties had intended a term for repayment then they would have made express provision for it.
Accordingly, it was not possible to imply a term that rent for the period after the break date would be returnable. The respondent’s leases, when read against the relevant background, would not reasonably be understood to include such a term; therefore the test for implying a term was not met. In that regard, the words “proportionately for any part of a year” applied only to a payment of rent for a broken period within the original term of the lease and did not apply in a case where, as in the instant case, there was no certainty on the last quarter day that termination would occur on the break date. Those words would not have led the parties to believe that there was a right to recoup a payment of rent already made in so far as it was attributable to the broken period: York v Casey [1998] 2 EGLR 25; [1998] 30 EG 110 distinguished. When all the circumstances were considered, the correct inference was that the parties had proceeded on the understanding that the loss from a payment of rent for the broken period should lie where it fell.
(3) The position regarding the car parking fee and insurance charges was also different from the position in relation to the service charge. The car parking fee was a relatively small amount and the break premium did not include any element for its loss. In the circumstances, there was no basis for implying a term for the return of a time-apportioned or any other part of the fee for the period after the break. Similarly, the break premium took no account of any insurance charges that the lessor might incur during any subsequent void. Moreover, the lessee was not necessarily left at risk of having to make a payment for insurance stretching for a long time into the future, without hope of recoupment, since the conventional period for insurance was not more than one year. if the lessor sought to negotiate insurance for any longer period, the lessee might have other remedies. In all the circumstances, no term could be implied that any part of the insurance charge was repayable.
Nicholas Dowding QC (instructed by Allen & Overy LLP) appeared for the appellant; Guy Featherstonhaugh QC (instructed by SJ Berwin LLP) appeared for the respondent.
Sally Dobson, barrister
