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Recent case emphasises need for careful drafting of lease break options

22nd July 2014

Both landlords and tenants should ensure clarity in drafting break clauses to avoid recourse to litigation further down the line.

The case of Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another [2014] saw the Court of Appeal overturn the ‘Tenant friendly’ first instance decision and hand down a traditionally  ‘Landlord friendly’ judgement.

Facts of the case

M&S had four separate sub-leases of four floors in an office block known as the Point.  Rent was paid ‘yearly and proportionately for any part of a year by equal quarterly instalments on the usual quarter days’.  The sub-leases had a break clause which permitted a break on 24 January 2012, provided (1) 6 months’ notice was given; (2) a premium of £919,800 + VAT was paid; and (3) there was no arrears of rent. 

M&S satisfied all of the criteria in exercising the break clause, but in doing so paid rent in advance for the 25 December – 24 March.  Accordingly they sought to recover from the Landlord rent paid for the period between the Break Date and the end of the Quarter, despite the fact that there was no express term allowing for the rent refund. 

The decision

At first instance, Morgan J implied a term into the lease that provided that the Landlord was required to repay the rent and other sums due that fell between the break date and the next quarter date. 

The Court of Appeal disagreed with the High Court on this issue, and held that when considering the lease in its commercial context, it would not be reasonable to imply a rent refund clause as this was something that should have been provided for with an express term. 

The Court of Appeal did not go so far as to alter the test for implying terms into leases, but rather decided that the test had been applied incorrectly at first instance. 

What have we learnt?

This case served as a timely reminder to both landlords and tenants to ensure clarity when drafting commercial leases, so as to ensure that all eventualities are provided for, as the Courts are unwilling to imply terms into commercial agreements on matters that should be provided for expressly. 

From a tenant’s perspective it is essential to ensure that the lease provides for the return of any overpayments following a break date.  As a general point, Landlords can be relieved that the law has once again returned to their favour. 

For further information about drafting break clauses please contact James Condie on 01932 590 500 or email james.condie@mundays.co.uk or another member of the commercial property team.

 

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