Break Clause: Implied Term for M&S

Break Clause: Implied Term for M&S


Author: Paul Knight

The High Court delivered a controversial judgment on 16 May 2013 in the case of Marks and Spencer Plc v BNP Paribas Security Services Trust Company (Jersey) Limited and Another.

The facts
Marks and Spencer (M&S) was the tenant under four leases of an office building in Paddington. The leases were all in the same form. Briefly the relevant terms were:
. the leases were granted for a term starting on 25 January 2006, expiring 2 February 2018
. rent was payable quarterly in advance on the usual quarter days
. the leases contained break clauses allowing M&S to terminate the leases on 24th January 2012 (the break date)
. the breaks were conditional on there being no arrears of rent or VAT at the break date and the payment of a year's rent (being a substantial sum) on or before the break date

M&S served notice to break the leases and paid the full quarter due in advance on 25 December 2011. M&S also paid the penalty amount of one year's rent and so it satisfied the break conditions.

M&S asked the landlord to repay rent and other sums paid in advance for the period following the break date.

M&S argued:
. that it was entitled to a repayment due to the express terms of the leases
. for an implied term that it be repaid payments for the period following the break date
. that there had been a total failure of the bargain for the rent paid after the break date such that this part of the rent should be refunded

The court considered one lease only but it was accepted that its findings on that lease could be applied to the others.

The judgment
M&S failed on its first argument. The full quarter's rent was payable in advance in December 2011 because it could not be said, with certainty at that time, that the lease would end on the break date. The penalty amount which had to be paid to operate the break option had not been paid. The leases did not expressly provide for M&S to be entitled to recover part of the December's rent.

However, the Court said that if it could have been said with certainty that the lease would end on the break date, then only rent only up to that date would have been payable on the December quarter day.

M&S was successful in its second argument - that there was an implied term entitling them to repayment of the rent for the period after the break date.

Terms will only be implied by the court where it is considered that they give effect to the intention of the parties. The court does not improve or rewrite the agreement, but only spells out in express words what the document would reasonably be understood to mean, when read against the relevant background.

M&S succeeded in persuading the court that an implied term could be implied into the lease to the effect that, when the break had been exercised, rent would only be payable up to the break date. The court considered that this was consistent with its finding that, if it could be said with certainty that the lease would end on the break date, rent would only be paid up to the break date.

It said that as a payment of one year's rent was required in order to operate the break, this demonstrated an intention that the landlord would be compensated for early termination by that payment alone and not receive further rent for the period after the leases had been terminated.

The court considered that as the lease provided for rent to be paid by quarterly 'instalments' this also strengthened M&S' claim for the implied term. The concept of instalments being that only the amount due is paid, not monies over the full amount.

On this formulation, M&S was entitled to repayment of that rent for the period after the break date. The judge held that the implied term was necessary to give business efficacy to the leases, did not contradict the lease's express terms, and was obviously what the parties intended.

As the court had held that there was an implied term for refund of the rent after the break date, it dealt only briefly with third argument put forward by M&S. Repayment would only be ordered if there was a total failure of consideration and the court found that this was not the case. M&S did not succeed on this point.

This case has made headlines because it is the first time that a court has held that a tenant should be entitled to a repayment of rent for any period after a break date - but, the fact that the landlord received a significant payment as a condition of the exercise of the break was an important factor in the court reaching this decision.

In the 2012 case of PCE Investors Limited v Cancer Research UK, rent was payable quarterly in advance and it was held to be payable in full when the break date fell mid-quarter. The judge in the M&S case remarked that the tenant in PCE did not argue for an implied term for repayment, and suggested that its case for such a term may not have been so strong.

To safeguard their position, where a break is expressed to take effect mid-quarter and is conditional on payments of rent, tenants should ensure that all payments are made in compliance with the lease terms. Once it is certain that the break conditions have been satisfied, tenants can consider the strength of their case to seek a repayment.

This case is not binding on other High Court judges who might see matters very differently on different facts.

To put the matter beyond doubt tenants should consider, at lease negotiation stage, expressly incorporating terms that provide for their landlords to repay rents for the period following the exercise of a break.