Today’s Supreme Court decision, rejecting Marks & Spencer’s bid to claw back more than £1m in rent following exercise of a break clause, has been widely welcomed by lawyers for providing certainty in the law, not just relating to break clauses, but contractual interpretation more widely.
Indeed, one other thing is for sure – everybody’s talking about it.
“M&S is not just a property case, “ Owen Talfan Davies, partner in the Real Estate Litigation practice at European law firm Fieldfisher, explained.
“Whilst the case provides a greater degree of certainty in respect of a tenant’s liability to pay rents at the end of a lease, the Supreme Court’s decision has a much wider application as regards what terms the court may imply into a contract as a matter of necessity, and therefore the decision has far greater scope than simply dealing with the law relating to commercial property.”
He added: “This will, of course, be of scant consolation to M&S who, in addition to not receiving a repayment of the rent paid in advance for the period following the termination of leases at their former Paddington Basin offices, will now face a very substantial legal bill”.
Mark Stefanini, partner at Mayer Brown, agreed that the decision will have much wider consequences for all contractual disputes involving implied terms and “will probably have many breathing a sigh of relief because an important legal principle has been clarified”.
He said: “Today’s decision underlines that if a contract is silent on a particular point a term will not be implied solely on the basis that it would be reasonable to do so or because the parties would have agreed it if it had been suggested to them. It is for the person seeking to imply the term to show that its implication is necessary to achieve the parties’ common aim in entering into the contract such that without the term the contract would lack commercial or practical coherence.
Allen & Overy LLP’s real estate litigation specialist Jane Fox-Edwards, who acted for the landlords, commented: “The case law surrounding break clauses has produced some harsh decisions for tenants over the past few years. The tenant here was looking for a way of ameliorating the effects of unfavourable lease terms but the Supreme Court has firmly closed that door.
“In so doing, it introduces some welcome certainty which benefits everyone. But the judgment applies to contract law more widely. In keeping with other judgments this year, the message from the Supreme Court is clear. Where there is a detailed commercial contract the court will respect the bargain struck and veer away from interfering with what the parties have said.”
Giving the main judgment in the case this morning, Lord Neuberger had said: “Save in a very clear case indeed, it would be wrong to attribute to a landlord and a tenant, particularly when they have entered into a full and professionally drafted lease, an intention that the tenant should receive an apportioned part of the rent payable paid in advance, when the non-apportionability of such rent has been so long and clearly established.”
And Ian Whitehead, a solicitor in the property dispute resolution team at Pinsent Masons LLP said that this confirms that the status quo prevails and provides landlords with much needed certainty regarding breaks which fall between rent payment dates.
He said that the “pragmatic” decision means that landlords are now “unlikely to face a barrage of claims from those tenants who have been watching M&S’s claim progress with interest”, because, as this case illustrates, “the sums at stake in break cases can be significant, particularly where central London property is concerned”.
Helen Wheddon, partner at Stevens & Bolton LLP agreed that this is a clear re-statement of the current law on the implication of terms into contracts including leases.
She said: “This remains highly restrictive under established case law and a term will only be implied if it satisfies the ‘business necessity’ test or is otherwise so obvious that it goes without saying. These tests were not satisfied here.
“Although the decision may appear harsh on tenants, landlords will be pleased that the courts will think long and hard before re-writing leases freely negotiated between the parties with the benefit of professional advice. Those advising tenants will now be aware that they should always at least try to negotiate an apportioned repayment of any final rental payment, if this is a condition of a break clause in any new leases.”
Matthew Bonye, head of real estate dispute resolution at Herbert Smith Freehills LLP also commented that landlords can breathe a little easier: “There won’t be speculative claims from old tenants for refunds where a break operated mid-quarter but the whole quarter’s rent was paid. And tenants whose leases were forfeited mid-quarter cannot try to claim a refund for the period following the date of forfeiture.
However, he warned: “Landlords are not exactly ‘home free’: every contract is interpreted on its own provisions and on the surrounding facts known to the parties. A future case might arise where a tenant showed that an implied term should exist. But one point that might have gone in the tenant’s favour has now been ruled out for good – after 115 years, the Supreme Court has confirmed what Queen Victoria’s Court of Appeal said about statutory apportionment, namely that rent payable in advance is indivisible unless parties have actually agreed to the contrary.”
Emma Humphreys partner at Charles Russell Speechlys LLP emphasised that the judgment is set to be the leading authority on the issue of implied terms, as well as on apportioning rent payments.
She said: “The decision provides a cautionary tale for anyone negotiating a lease, as the court has clearly stated that a term will not be implied into a contract merely because it seems fair. A term will only be implied if it satisfies the test of business necessity or is so obvious it goes without saying. You cannot expect the Court to save you from failure to anticipate.”
Ben Barrison, legal director at DLA Piper, welcomed the decision as good news as it “reinforces best practice and confirms established case law”, while Sue Wilson, property litigation partner at Irwin Mitchell, said that it “emphasises the need for tenants to be properly advised on their break options and the importance of ensuring at the outset of lease negotiations that any intended refunds are expressly provided for”. For Clive Chalkley, a partner at Wragge Lawrence Graham & Co LLP, the decision is a “clear statement of the law” that restates fundamental principles of property law in relation to break clauses.
Ryan Diamond, senior solicitor in the real estate dispute resolution team at IBB Solicitors pointed out that the Supreme Court’s decision to hear the appeal had caused uncertainty and “raised the spectre of litigation” as former tenants who broke their leases sought to justify implied terms to clawback “overpaid” rent. He was pleased to see the final decision reaffirm certainty, which is “highly valued when trying to interpret parties’ contractual relationships”.
Nick Levy, real estate litigation partner at Trowers & Hamlins said that M&S successful argument at first instance had “caused excitement and alarm in equal measure in the property industry”, and that some may see the eventual result as a “missed opportunity” to overrule the Court of Appeal’s 1900 decision in Ellis v Rowbotham and hold that the Apportionment Act 1870 applies to rent payable in advance as it does to rent payable in arrears.
However, he went on: “Perhaps that is too radical a departure from a century’s worth of case law and would be at odds with the established position of a landlord on forfeiture whereas Lord Neuberger put it: ‘It is clear that…he is entitled to retain the whole of the rent due on the quarter day immediately before the forfeiture.’”
Belinda Walkinshaw, partner in the property litigation department at SA Law, pointed out that, since the Court of Appeal ruling on this case, tenant’s leases have been “examined in much more detail to ensure they don’t get stung in the same way M&S has”.
And she said that what the decision did not deal with today was unconditional break clauses where the break date does not coincide with the rent payment date, adding: “It remains unclear if a tenant could get away with only paying apportioned rent up to the break date in these circumstances. The answer to this question is expected to be the next stage in this saga of break clauses and the rent which has to be paid on the exercise of the break.”
Feeling festive, Robin Biela, from Nabarro’s real estate dispute resolution team summed things up neatly, saying: “Certainty has prevailed in the Supreme Court, and Santa has delivered M&S an early sack of coal rather than a Christmas cracker.”
