Breaking up is hard to do

The Courts have always construed tenant break rights strictly and in favour of the landlord. Where a tenant successfully exercises a break right, there has been no direct authority for the proposition that the tenant should be entitled to a refund of sums paid in advance which relate to a period after a break date, unless there is an express right in the lease. In a rare show of sympathy for tenants, the High Court has held that, on the facts of this case, the tenant was entitled to reimbursement.

The tenant, Marks and Spencer, had leases of four floors of a large office building in Paddington, London. For the purposes of the case, the leases were on the same terms and the tenant had a right to break on 24 January 2012. There were two conditions to the break right: no arrears of basic rent (or VAT on the basic rent) at the break date and payment on or before the break date of £919,800 plus VAT (reflecting one year’s basic rent). The tenant gave the requisite break notice and proceeded cautiously, paying the basic rent, service charge and car parking licence fee in full for the December 2011 quarter, despite having received an invoice in respect only of sums up to the break date, and making the break payment on time. Both conditions were satisfied and the lease came to an end on the break date.

The tenant wrote to the landlord in February 2012 asking for repayment of the sums which it had paid in advance but which related to the period after the break date. The landlord refused.

Morgan J found no express provision in the lease entitling the tenant to recover any overpayment of basic rent but, surprisingly, agreed with the tenant’s argument that there was an implied term. He said that a reasonable person reading the lease would expect that if the break right was effective on 24 January 2012 then no rent would be payable for the period after that date. As the lease ended mid-quarter, the landlord would be obliged to pay back to the tenant the part of the rent paid in advance which related to the period after the break date.

However, in coming to this conclusion, it was relevant that the break right was only effective if the break payment was paid on time. This showed that the parties had thought about the compensation the landlord should receive if the break right were exercised. It made it unlikely that the parties intended the landlord would also be entitled to retain the full amount of the quarter’s rent paid in advance. The implied term was “necessary to give business efficacy to the lease” and was “obviously what the parties meant”. Morgan J said that a similar term would not be implied if the lease were determined by forfeiture because there is established contrary case law and there would be no penalty payment due.

In addition the tenant was entitled to reimbursement of advance payments of insurance rent relating to the period after the break date, because the lease only required the landlord to insure, and the tenant to reimburse the cost of insurance, during the term.

The justification for the decision will not apply to every case so it may be that its application is limited. The Court presumably had some sympathy for the tenant who had taken the cautious approach of paying all sums in full for the quarter in which the break date fell. The prudent approach for tenants is to continue to request an express right in the lease to reimbursement of sums paid in advance and, to do as Marks and Spencer did, and comply with all conditions including (where appropriate) payment of all sums in full to ensure that the break right will be effective.

Marks and Spencer Plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another [2013] EWHC 1279 (Ch)