Breaking Bad: episode 2: the next chapter in conditional break options

Breaking Bad: episode 2: the next chapter in conditional break options

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Author: Kate Barry

In Marks & Spencer PLC v BNP Paribas Securities Services Trust Company (Jersey) Limited, the Court of Appeal has given its judgment in the last of a series of significant break option cases.

At first instance, the High Court held that a clause should be implied into a lease allowing the tenant, M&S, to recover payments of rent and other sums relating to the period after a lease had been broken. Click here to read our article about that decision.

On the landlord's appeal, the Court of Appeal has reversed the earlier decision. This outcome, with the recent Siemens appeal, appears on first glance to dial back to a less tenant-friendly position. However, that is not necessarily the case and this case is unlikely to be the last word on conditional options. Click here to read our article about the Siemens case.

M&S' argument at appeal focused closely on the parties' earlier agreement that some element of service charges were refundable. This was on the basis that the relevant services were not carried out prior to the break date. The Court of Appeal considered whether this could lead one to deduce that there was an implied term that principal rent paid for the period after the break should be recoverable.

Key findings:

  • In her leading judgment, Arden LJ highlighted that it would have been 'obvious to the parties before they signed up to the lease that there was a possibility that rent would have to be paid on the last quarter day in full for a period that went beyond the break date.' The parties included provisions for the return of documents after the break date and for the survival of outstanding claims following the break, which evidenced that there was some discussion about what would happen after the break date. The parties could easily have added a clause concerning repayment of rent or any other charges.
  • The Court of Appeal considered the state of case law at the time of the grant of the lease and in light of which the lease is in part interpreted. LJ Arden held that it 'makes it all the more likely that a reasonable person, having knowledge of this background, would conclude that if the parties had really intended there to be an implied term for repayment they would have made express provision for it.' She reiterated the existing principle that the words "proportionately for any part of a year" in the reddendum of a lease should only be applied to the beginning and the end of the term certain and are not applicable in the context of a break option.
  • The Court of Appeal decided that it was open to the parties to agree that the full payment of one quarter's rent might be part of the compensation to the landlord. It rejected the assumption that the break premium was intended to constitute a "totality of the agreed compensation".

Finding nothing else to support the High Court's judgment, the Court of Appeal reversed the decision. The lesson is clear: if you want to secure an apportionment, make this an express term of your break option. Anything less than an express term is likely to fail.

It is worth noting that the Court of Appeal did not decide the point on whether or not a tenant is entitled to apportion a final payment of rent up to a break date, but only whether or not the tenant can subsequently recover an overpayment in the absence of an express provision to that effect.

Arden LJ commented that it would seem to be correct that a tenant might make a proportionate payment of rent on the last quarter day prior to a break date if, by the quarter date, it had paid the break premium. As the point was not fully argued, she made no determination.

This all goes to suggest that where a tenant has complied with all break conditions before the last payment of rent before the break date falls due (and where the break date falls between two due dates), then - because the parties can be certain that the term will come to an end - the tenant may apportion the rent to the break date.

This sits comfortably with the High Court's judgments in PCE Investors Limited v Cancer Research UK and Canonical UK Limited v TST Millbank LLC (both 2012). Will any tenants be brave enough to test this? Who knows. But, when the first plucky tenant does apportion its rent, will its landlord be brave enough to challenge?

About the author

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Richard Willcox

Associate

03700 868481

Richard is an associate in our specialist property litigation team. His experience includes rent arrears, forfeiture, lease renewals and break notices. He acts for a wide range of clients including commercial and residential developers, national retailers, public and private companies and educational establishments

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