The Supreme Court has confirmed that a landlord is not required to repay sums paid by a tenant relating to a period after a break date
In its much anticipated judgment given this morning, the Supreme Court has confirmed and clarified the law dealing with the apportionment of rent and other sums relating to a period after a break date.
A tenant exercising a break option mid-way through a rental period is not able to reclaim sums from the landlord relating to any period after the break date unless the lease makes specific provision for this.
Background to the dispute
The case has its origins in 2012 when Marks and Spencer PLC (M&S) exercised break options to terminate four leases of its former head office premises at The Point, Paddington.
Under the leases, rent fell due on the usual quarter days. M&S served break notices which brought their leases to an end on 24 January 2012. Following service of the notices, M&S paid the rent that had fallen due on 25 December 2011 in full, even though the leases were to terminate only a month later. It also paid a break premium of £919,800, which was a condition of operating the break options. The leases came to an end on 24 January 2012.
Following this, M&S claimed that it was entitled to a refund of sums paid which related to the period between 24 January 2012 and 24 March 2012. That additional money amounted to approximately £1.1 million.
In the High Court two years ago, Mr Justice Morgan ruled that a term should be implied into the leases to allow M&S to recover these sums. He found that such a term was necessary to give business efficacy to the leases. But in May 2014, the Court of Appeal overturned that High Court decision and found in favour of the landlord. M&S then appealed to the Supreme Court.
The Supreme Court has reconfirmed that a term will only be implied into a contract if it satisfies the test of business necessity or if it is so obvious that it goes without saying. It will be unusual for these requirements to be met.
Rent which is paid in advance (as is the common practice in commercial and residential leases) is not apportionable. Therefore, if parties who have signed up to a professionally drafted lease had intended there to be a refund, they should have made express provision for this.
This judgment puts to bed this long running saga and reinforces the fact that careful consideration should be given to the specific terms and timing of break options.
Landlords and tenants should carefully consider the true value attached to a break condition and whether, in addition to any break premium payable, a landlord will be obtaining a further windfall by virtue of when in the rental cycle the break date falls. Given this decision, tenants are now undoubtedly likely to try and agree break dates that coincide with the last date of the rental period.
For more information please contact Mark Reading or Jonathan Warren.
Law Society Gazette