Guy Fetherstonhaugh QC and Kester Lees offer their views on the impact of Marks & Spencer’s much-discussed Supreme Court case
“Not just another property case,” said some of the headlines – accurately, but perhaps not entirely flatteringly for those of us who practice in the field.
The Supreme Court decision in Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd and another [2015] UKSC 72; [2015] PLSCS 341 (“M&S”) is set to be the leading authority for some time to come on: (i) the law of implied terms; (ii) the operation of break clauses; and (iii) apportionment of rent payable in advance. It is imperative that practitioners and lay clients alike understand the decision and absorb its impact in their own practices.
As Allyson Colby explained in her Legal Note last week (EG, 9 January 2016, p61), the appeal concerned a tenant’s break clause in four identical commercial leases.
The leases had been granted for a fixed term expiring on 2 February 2018, and the rent was payable in advance on the usual quarter days. The tenant, M&S, exercised its right under the break clause to determine the lease on 24 January 2012, after it had paid the full quarter’s rent due on 25 December 2011. The break clause contained only two preconditions: (i) the payment of a break premium equivalent to one year’s rent; and (ii) “on the break date there were no arrears of basic rent”. The key issue before the Supreme Court was whether the tenant could recover from the landlord the apportioned rent in respect of the period after the break date – ie from 24 January to 24 March 2012.
If it’s not in writing it’s wishful thinking…
At first glance, the lessons in M&S on implied terms are merely rehearsals of previously understood practices.
It is trite law that such a term will only be implied where it is necessary to give effect to business efficacy. However, the difficulties with that test are: what does “necessary” really mean (ie necessary for what?) and how does one assess “business efficacy”?
Following the decision of the Privy Council in Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10; [2009] 1 WLR 1988, many practitioners had considered there to be a relaxation of the test for implied terms. The requirement for necessity remained, but there was at last a clearer answer than “business efficacy” to the question “necessary for what?” That answer was “necessary to give effect to the reasonable expectations of the parties”.
That approach synthesised the principles of construction and implication and was seen as more akin to the original test espoused in The Moorcock (1889) 14 PD 64: “To give such business efficacy to the transaction as must have been intended at all events by both parties who are business men.”
Following Belize there was a divergence of judicial treatment of implied term cases – some more generous, others equally stringent.
In M&S the Supreme Court rejected the dilution of the strict test of necessity for an implied term. Belize has been relegated to the status of an “inspired discussion rather than authoritative guidance on the law of implied terms”. The test remains that of strict necessity for business efficacy. The court also confirmed that the process of implication is distinct from the process of construction and that the former can only arise after the latter has been considered.
However, while clothed in confirmatory language, there is no mistaking the shift in emphasis from the Supreme Court. Their Lordships reasoned that such a term could not be implied as it was not necessary to make the contract “workable” or for its “commercial or practical coherence”.
Implied terms are often pleaded. Very few contracts are unworkable. Most, if not all, will be sufficiently internally coherent to be workable.
The decision represents a step-change. The test for implied terms will be even more strictly applied in practice in the years to come.
That point was emphasised by the result in M&S. The court accepted that it was a curious outcome that the landlord could retain such a large amount of rent for a period in which the tenant was not in possession of the property.
The court was largely unpersuaded by the landlord’s argument that such a sum reflected further compensation, given the agreement for the payment of a break premium.
However, the tenant could not overcome three facets of the leases in particular:
- the leases were between commercial parties who were both legally represented – the court would expect that such a term would therefore have been expressed if intended;
- the leases made provision for the repayment of rent by the landlord in circumstances where the tenant had not exercised the break – and therefore such an implied term would “sit uneasily” with this express provision; and
- the law in relation to apportionment upon forfeiture is the same as in relation to apportionment upon the exercise of a break – and the reasonable man is taken to know the law when reading the lease (or asking the lessees) at the date of grant.
The first and second facets confirm that it is never enough that the parties would have agreed to it had it been suggested to them. That is a necessary but insufficient ground for implying a term.
The third is a particularly harsh application of the principle, given that there had been no decision in relation to break clauses prior to the leases being granted in 2006 (the first being later that year in Re A Company [2007] BPIR 1).
Diligent conveyancers in 2006 would have found no reference to apportionment in the break condition section of Woodfall: The Law of Landlord and Tenant at the date of grant; and yet according to their Lordships, the reasonable man would have had this principle in mind when reading the lease.
Therefore, the lesson to be learned on the implication of terms is surely that, in commercial contracts at least, if it is not in writing then it is wishful thinking.
Implied terms were never easy, and they just got a lot harder.
Rent in advance is not apportionable
Perhaps less surprisingly, the Supreme Court approved the decision in Ellis v Rowbotham [1900] 1 QB 740, in which the Court of Appeal held that the Apportionment Act 1870 did not apply to rent payable in advance.
Therefore, rent payable in advance can only ever be apportionable as a result of a clear and unambiguous clause in the contract; it is difficult to conceive of a case where an implied term will be appropriate now.
Apportionment when break is certain?
Despite the Supreme Court’s rejection of the implied term and retention of Ellis, a glimmer of hope was offered to tenants where the break is certain.
Of great interest to practitioners in this field will be the court’s treatment of the question of whether a tenant with a break date that does not coincide with the end of a quarter may safely pay an apportioned rent where there are no conditions precedent to be satisfied at the rent payment date.
In M&S Lord Neuberger surmises that had the break premium (the only other condition precedent) been paid before the December quarter day, the tenant would have been entitled to apportion the final rental payment, as its payment was all that remained to satisfy the break conditions.
Of course, those comments were strictly obiter and his judgment does not finally settle the question, which is ultimately one of construction of the terms of the break clause and lease in any given case.
In M&S the wording of the rent condition in the break was that “on the break date there were no arrears of basic rent”. This could have the somewhat capricious result that where the premium is paid before the break date the rent can be apportioned, but where, as in M&S, it was paid afterwards it could not. The Supreme Court accepted that curious distinction, on the basis that the remedy lay in the tenant’s hands.
Of course, even if Lord Neuberger’s comments are taken at their highest, they will only assist in cases where there are no further break conditions as at the final rent quarter day. As is common in many commercial leases, where there is a vacant possession condition, there could never be apportionment (without clear express terms) given it would remain uncertain whether that condition would be satisfied on the break date.
That said, in the light of the decision in M&S, it would be a brave tenant who would risk the continuation of the lease and non-operation of the break based solely on these obiter comments. But tenants now know that if they do not take the risk, then they must take the hit on the additional rent. There will be little scope now for recovery via an implied term.
Acting on the ruling
Conveyancers acting for tenants will no doubt continue to seek to include express apportionment provisions and/or clauses for the repayment of any overpaid rent upon the exercise of a break.
M&S serves to confirm that such a cautious approach is warranted, and it is noticeable that many more precedents now include such a provision in their sample break clauses.
The other lessons from M&S have a wider impact. Implied terms will not be so easily achieved (and perhaps even so readily pleaded). Rent paid in advance is not apportionable; save perhaps in limited circumstances.
One thing remains clear: despite the Supreme Court’s attempts to provide certainty in this area, questions remain unanswered and it is doubtful that this is the last we will hear of litigation in relation to either break clauses or implied terms for some time to come.
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Guy Fetherstonhaugh QC and Kester Lees are barristers at Falcon Chambers
