No rent apportionment on exercise of break option

• Real estate
• Real estate dispute resolution
• Real estate sector

15-05-2014

Lawbite: No rent apportionment on exercise of break option

Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd and another [2014] EWCA Civ 603

The Court of Appeal has restored the orthodox understanding of how rent payment obligations interact with the operation of break options. If a break operates on the last day of a rental period, there can be no question of any rent being payable in respect of any period after the break date. But if the break date is any other day, this raises the question whether the tenant is obliged to pay for a full rental period, when it will have no right to occupy the premises for all of that time.

For example, if a break were to operate on 1 July, should the tenant’s payment for the rent due on 24 June be for the entire June quarter, or just the 7 days’ occupation which it will have during that quarter?

The courts have been consistent in holding that the tenant must pay for the full quarter, unless there is specific express provision for an apportionment in the lease. The High Court decision here also followed this line, but struck new ground in going on to hold that although the tenant was required to pay in full, a term could be implied into the lease requiring the landlord to refund the ‘over-payment’.

The implied term has now been rejected by the Court of Appeal, allowing the landlord’s appeal. The test for implication of a term is whether, even though the parties did not expressly include that term in their agreement, that is what their agreement means. It has to be shown “not simply that the term could be a part of the agreement but that the term would be part of the agreement”. In the Court’s view, given the orthodox understanding of the law, and other terms in the lease dealing with the consequences of exercising the break, had the parties intended there to be a refund, they would have provided so expressly. The “correct inference to draw is that the parties proceeded on the basis that the loss ... should lie where it fell.”

It may be true that the orthodox legal position is well-established. Nevertheless, tenants continue to be caught out by this point, and they are unlikely to see the fairness in having to pay rent for a period when they have no right to occupy the premises.

The decision underlines the necessity for tenants to negotiate an express, specific right to an apportionment where a break operates part way through a rent period.