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Apportionment of Rent and Break Clauses: Court of Appeal of England and Wales reverses first instance decision in BNP Paribas Securities Services Trust Company (Jersey) Limited (and Another) v Marks and Spencer Plc

14 May 2014

This morning the Court of Appeal handed down its much-anticipated decision in the case of BNP Paribas Securities Services Trust Company (Jersey) Limited (and Another) v Marks and Spencer Plc.

Allen & Overy's Real Estate Litigation team, headed by Jane Fox-Edwards, acted for BNP Paribas, the landlord. The Court of Appeal has unanimously upheld the landlord’s appeal and reversed Morgan J’s first instance decision. On the facts of the case and the wording of the lease in question, no term was to be implied entitling the tenant to be reimbursed for the portion of rent relating to the period following the break date.

What happened?

M&S was the tenant of four floors of office premises in Paddington, on separate but similar leases. The court focused on one of them. Under that lease, basic rent was payable in advance on the usual quarter days “proportionately for any part of the year” together with additional payments for insurance, service charge and a car parking licence fee. The lease was due to expire on 2 February 2018 but was subject to a tenant’s right to break on 24 January 2012 (the break date), such right being conditional on (1) there being no arrears of basic rent and VAT and (2) payment of a premium of £919,800 (the break premium). Perhaps unusually, it was not a condition of operating the break that vacant possession be given up. M&S served a valid break notice in July 2011, paid the December quarter’s rent in full and paid the break premium on 18 January 2012. Having validly exercised the break, M&S then demanded repayment of the rent paid for the period from 25 January 2012 to 24 March 2012 (the broken period). BNP refused and M&S issued proceedings.

What was the first instance decision?

At trial, M&S argued for reimbursement on the basis of (i) the express lease terms, (ii) restitution, (iii) a failure of consideration and (iv) an implied term. Morgan J rejected M&S’ claim on all of these grounds except that of the implied term, which he said met the relevant test as set out in the Privy Council case in A.G. of Belize v Belize Telecom Ltd [2009] 1 WLR 1988: would the provision contended for spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean? In Morgan J’s view, the lease would, read as a whole against the relevant background, be reasonably understood to mean that any amounts paid in advance for the broken period should be repaid. This was for two main reasons. First, had the tenant paid the break premium in advance of the December quarter day it would have become an unconditional break. In that event, the break date was akin to the lease end and the December rent could have been apportioned. A reasonable person would consider that a tenant paying the break premium after the December quarter and just prior to the break date (as in this case) should be in the same position as a tenant who had paid the break premium prior to the December quarter day. Second, the size of the break premium (a year’s rent) meant the parties could reasonably be assumed to have intended the break premium to be the landlord’s full compensation for the broken lease (and not expect any rent for the broken period by way of additional compensation).

What did the Court of Appeal decide?

The Court of Appeal unanimously overturned Morgan J’s first instance judgment. Although Morgan J had applied the correct test itself for an implied term (essentially that the implied term must “go without saying”), the way in which it had been applied in this case was wrong. On the basis of the words of the lease in question and the relevant circumstances, the Court of Appeal concluded that the parties had intended the loss from a payment of rent for the broken period to “lie where it fell”. Accordingly, if the rent was paid to cover the period from the break date until the following quarter date, no term for repayment for that period should be implied. There was no general principle that a lessee should only pay for what it receives. Further, it could not be said that the break premium was intended to be full compensation for the lease being broken. Nor was a tenant who had paid the break premium on the last quarter date “on all fours” with a tenant who paid the break premium by the break date such that they deserved equal treatment: the lack of certainty up to the break date was a difference for which the parties could have intended the landlord to be compensated.

What are the implications?

The law relating to break clauses has historically been harsh on tenants. Whilst every case of course turns on its facts, the first instance decision gave a ray of hope to tenants caught out by conditional break clauses operable shortly after a rent day. Its reversal is therefore likely to dampen tenants’ spirits, particularly as the decision comes hot on the heels of another break clause appeal that was also decided in favour of the landlord (Siemens Hearing Instruments Limited v Friends Life Limited [2014] EWCA Civ 382). The decision does, however, bring with it some welcome certainty. In essence, the lease means what it says. Where breaks are conditional on payment of rent, well-advised tenants will continue to pay the full rent due where a break date falls between rent payment dates with no expectation that they will be reimbursed after the event. As for new leases, great care should (continue to) be taken when drafting break clauses to ensure that a one-off right to break does not become unexpectedly expensive by electing (or allowing) the break date to fall on or shortly after a rent payment date.