Break clauses, implied contractual terms and apportionment of rent
In December 2015 the Supreme Court gave a judgment in the matter of Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2015] UKSC 72. This case is important as it raises a number of issues about how break clauses work in commercial leases, and the courts’ approach to implying terms into a contract more generally. This judgment has important implications for how leases ought to be interpreted, whether commercial or residential.
Case Summary
This case arose out of a dispute between Marks and Spencer plc (“M&S”) and the landlord of a four storey building at Paddington Basin, London. M&S were granted leases of the four storeys from 25 January 2006 to 2 February 2018. The eye-watering ‘basic rent’ of £919,800 plus VAT was payable under the lease “yearly and proportionately for any part of the year by equal quarterly instalments in advance” and these payments were due on the customary quarter days (25 March, 24 June, 29 September and 25 December).
A break clause allowed M&S to end the lease on 24 January 2012 by giving written notice six months in advance. However, the contract stated that M&S were only entitled to use that break clause if they were fully up to date on the basic rent and they made an additional payment of £919,800 plus VAT to the landlord. M&S complied with these requirements and the lease was terminated.
One result of this arrangement was that M&S had paid rent in advance for the period 25 January to 24 March 2012 during which they were not using the property, and they made a claim for this sum to be repaid to them on an apportioned basis.
The question for the Supreme Court to determine was whether it ought to be implied into the lease that the Landlord should only be entitled to an appropriate portion of the rent for the period in which the lease ended. The lease was silent on this matter and M&S argued that apportioning the rent was commercial common sense. The law on apportionment currently does not permit rent paid in advance to be apportioned as the Apportionment Act 1870 only applies to rent payable in arrears (see Ellis v Rowbotham [1900] 1 QB 740). Therefore, M&S had to rely on a term in the contract which in this case they were asserting was implied.
The Supreme Court was not convinced by this argument. The lease was the product of professional drafting and negotiation between sophisticated parties. A term could only be implied into the lease where it satisfies the high bar of business necessity, or it is so obvious that it goes without saying. An implied term is not necessary merely because it was a sensible clause that the parties would have agreed to – it must be necessary.
In his judgement Lord Neuberger stresses that a judge should only go on to consider whether to imply a term after interpreting the express terms the parties have agreed to. Implied terms are a matter of filling in the gaps after this. Following this decision, it is likely that litigants will find courts reluctant to imply terms where this can be avoided.
Rent in Break Clauses
Tenants must be careful to avoid tripping up on any of their obligations in relation to break clauses as any assumption that they can be a few days late and pay only the apportioned rent for those extra days is incorrect. If a break clause requires the terms of a tenancy to be obeyed as a condition of the break clause then the tenant must comply with all the terms of the tenancy including all those relating to the payment of rent even if that means that the rent is being paid after the broken tenancy.
This contrasts with the position in residential contexts. Section 21C of the Housing Act 1988 as amended by the Deregulation Act 2015 tinkers further with the common law position. Rent paid in advance by an assured shorthold tenant will be repayable where service of a section 21 notice ends a tenancy in the middle of a rental period and the tenant ends their occupation with one or more whole days of the rental period remaining.
However, forfeiture of the lease or the tenant exercising a break clause in either a residential or commercial context gives the Landlord the right to retain fully payments of rent in advance.
Implications for drafting leases
The Supreme Court’s decision stresses the need for precision in the drafting of commercial leases, and they favoured an interpretation that stuck to the literal effect of the terms of the lease, despite the arguably unfair result that produced.
Such an approach to drafting clauses in residential tenancies will produced very different results when the courts are resolving disputes. The Consumer Rights Act 2015 requires the courts to consider the fairness of terms in consumer contracts. Unfair terms will not be binding on the consumer under section 62(1) of that Act. In contrast to Lord Neuberger’s approach of trying to avoid interfering with the literal wording of the lease agreed between the parties, the courts can be expected to make more frequent interventions where there is a consumer contract.
When drafting commercial leases, more than ever solicitors need to consider whether the lease really does contain all of the relevant terms – and avoid relying on terms they expect that the courts will impose. By contrast, drafters of residential tenancies now need to consider what their tenancy will look like after unfair clauses are removed – and consider what terms the courts might imply to fill the gaps.