Supreme Court ruling good news for landlords

Feb 12 | 2016

When Marks & Spencer chose to take advantage of a break date in its lease it expected to recover the portion of the rent paid that related to the period after the break date. In a recent case - Marks & Spencer v BNP Paribas - the Supreme Court disagreed. Edward Cooper, from Taylor Wessing Professional Services explains.

After years of uncertainty, the Supreme Court has now provided substantive guidance concerning the apportionment of rent paid by a tenant in advance for a period after a break date. M&S, the former tenant under the relevant leases, was unsuccessful in its appeal. Consequently, its former landlord, BNP Paribas, will now be entitled to keep all of the rent paid to it by M&S, including the sums it was paid in advance in respect of the period after M&S’s break date.  

Previous decisions 

When this case originally came before the High Court, the Judge held that M&S was entitled to a refund of apportioned rent, on the basis that a term should be implied into the leases to allow M&S to recover the ‘overpayments’. Many leases provide for breaks midway through a rental period and the Judgment suggested that the Court would be sympathetic to tenants who were otherwise obliged to pay rent for no occupational benefit. However, the Court of Appeal overturned that decision, holding that tenants breaking leases partway through a rental period would not be entitled to a refund unless the lease contained express wording providing for this. The Court stressed that it would be important to maintain a high level of loyalty to the parties’ agreement, read against the admissible background.  

The Supreme Court’s Judgment 

The Supreme Court upheld the Court of Appeal’s decision and decided that an implied term to allow M&S to recover the rent should not be included in the leases. It based its conclusions on the following findings:  

  • The parties were both ‘substantial and experienced’ and had been professionally advised by solicitors. Nevertheless, there was no term in the relevant leases that would enable any apportionment of rent to be effective, even though such a term would have been effective if it had been expressly included. 

  • The leases also contained detailed provisions concerning the payment of money, both as rent and pursuant to the break options. This suggested that the parties’ intentions were clearly documented in the leases. 

  • The Court confirmed that rent paid in advance was not apportionable, approving historic case law on the point, dating back to 1900. 

  • While the effect of the decision could ‘lead to potential unfairness’, the result could not be said to be commercially absurd, particularly as it was up to the tenant to decide whether to exercise the break. There was no justification to argue that the contract was ‘unworkable". 

  • On a separate point, the Court approved the finding that service charges paid in advance should be apportioned, as these constituted payments for services rather than rent. 

The decision is good news for landlords and disappointing news for tenants. Either way, it provides professionals with a useful clarification of a highly contentious area of real estate law. It also highlights the importance of negotiating break options properly at the outset, and ensuring that they are documented clearly.  

Tips for landlords 

Following this Judgement, you should resist any request for a refund for sums paid for periods after a break date. Similarly, if your tenant fails to pay a full quarter’s rent where there is a pre-condition requiring that there be no arrears, this might prevent the tenant from exercising the break option.  

Tips for tenants 

Only agree a break option that provides for a refund, or where the break date is on the last day of a quarter.  

If this has not been done, and you are looking to exercise a break option that has a pre-condition to pay rent, ensure that the full sums are paid so that the break is not invalidated. An overpayment of a part quarter’s rent will still be substantially less than rent to the end of the contractual term. Early legal advice should be sought prior to attempting to exercise a break option.