Recovering money paid under protest is not as straightforward as it may seem
A common problem in property law is where a successful exercise of a break clause is made conditional on the payment of outstanding rent and the break date falls on a quarter day.
Elementary fairness suggests that the tenant should be liable for only one day’s rent, rather than the whole quarter. However, the drafting of the lease is often so opaque that it does not provide a certain answer.
Given the likely amount at stake, and assuming that there is insufficient time to argue the point in advance of the break date, the prudent advice will usually be to pay the whole quarter’s rent and argue for repayment of the balance of the quarter once the lease has safely terminated.
Common sense suggests that if the tenant wins the argument as to whether the whole quarter was properly due, it should have no difficulty in recovering the balance of the remaining quarter.
The sting
Prudent parties should be aware that formidable difficulties lie in the way of those who have paid money in such circumstances “to be on the safe side”, assuming that the law will side with them when they try to recover it.
The law of restitution of money paid under a mistake is in the process of change, but the following reflects its current state. In order for the payer of such money to establish that it is entitled to restitution, it must bring itself within one of the established categories – most obviously by proving that the money was paid by mistake, as the House of Lords recognised in a series of cases culminating in Deutsche Morgan Grenfell Group plc v Inland Revenue Commissioners [2006] UKHL 49 [2007] 1 AC 558.
However, if the payer takes the view that the payee is not entitled to the money (but paid anyway, in order to break the lease, and then argued about entitlement to the money afterwards), it is arguably not under any mistake, and the law will not allow recovery.
This produces the surprising result that those who misconstrue the lease and take the view that they are liable to pay when they are not, and who therefore pay under a mistake, are in a better position than those who construe the lease correctly and pay out of an abundance of caution. Those in the first category may recover because of the mistake they made those in the second are unlikely to gain any reward for their competence and prudence because they were not under a mistake in the first place.
This was the outcome in Marine Trade SA v Pioneer Freight Futures Co Ltd BVI [2009] EWHC 2656 (Comm). The claimant had paid the defendant $5m in order to avoid the risk of liability in the event of the early termination of an agreement. Although the claimant was confident that it would succeed in establishing that it was not liable to pay any sums to the defendant, the damage to its reputation of a designation of early termination, even if not justified, would have been severe.
The payment was made under protest and on the express basis that the sum was not due. The claimant stated that it would seek to recover the sum in proceedings, which it then instituted. It succeeded in establishing that the payment had not been due, but it failed to prove that it was entitled to restitution of the sum because it had made the payment in the belief that it was not liable to pay. Having reviewedthe relevant authorities, Flaux J concluded that this could not properly be described as a case of mistake.
Other solutions
Parties that pay money that is not due can usually recover it provided that they sue in time and have some other cause of action, such as failure of consideration. However, to categorise the deliberate payment of a quarter’s rent, most of which is not due, in order to be sure of breaking a lease sits uneasily with the concept of failure of consideration.
The only other solution is not to pay the amount under protest (thereby signalling that the payer rejects liability), but to pay in response to a demand for the money. Better still, the tenant should consider writing to its landlord before the break date asking for confirmation that the whole quarter is due, and pay following an affirmative response. It will then be free to argue after the event that it paid what it was told was due, and now considers that it was wrong to do so.
Thin arguments for hard cases? Perhaps.
Guy Fetherstonhaugh QC is barrister at Falcon Chambers
