Break options and rent apportionment

• Real estate dispute resolution

21-05-2013

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

A number of recent cases have confirmed what has been widely accepted as the applicable law where a break option operates to terminate a lease mid-quarter: the tenant must pay the full final quarter, with no apportionment, unless there is a specific express provision for apportionment.

Now, the High Court has found a way of circumventing, if not modifying, that rule.  In this case it was held that the lease contained an implied term to the effect that once the break had operated, the tenant was entitled to be refunded the ‘overpayment’.

Note, the tenant must still pay the full amount initially. This result is reconciled to other recent cases on the simple basis that in those cases no-one had argued that a term to this effect should be implied.

The decision raises a number of issues.

• The ability of the court to imply any provisions into a lease is governed by a comprehensive legal test which does depend heavily upon the express terms of the contract.  One important factor leading the court to imply the term was that the clause provided for the tenant to pay a break premium of one year’s rent.  That arrangement was to compensate the landlord for the letting void, and it was therefore unlikely in the court’s view that the parties would have intended for the landlord to have the additional rental income represented by the ‘overpayment’.  It remains to be explored how important a factor this was; in cases with break provisions not conditional upon payment of such a premium, the case for implying a “refund” term may be weaker.
   
• The decision rested in part on the view that if a lease expires mid-quarter by simple effluxion of time, then only an apportioned amount will be payable in respect of the final quarter, since it will be known for certain on the final rent payment day that the lease will come to an end before the next rent payment day.  That seems to be good sense, but there is authority going the other way; and it is also true that in the case of a business lease it is not always known for certain that the tenancy will terminate on the contractual expiry date.
   
• There are a number of ways in which a lease might come to an end mid-quarter, raising the apportionment issue.  In the case of forfeiture, this decision expressly preserves the rule that there should be no apportionment.  The judgment did not address whether there should be any apportionment upon a surrender of the lease, though it should follow that the existing rule of non-apportionment remains.  The position as regards some of the various methods of termination under the Landlord and Tenant Act 1954 remains open to debate (save in relation to a Section 27(2) termination which expressly provides for apportionment - but thereby implicitly raises doubt as to other types of LTA 1954 termination).
   
• In cases where the break clause is unconditional, or perhaps conditional only upon matters which have been satisfied by the rent payment date - such as payment of a break premium, for example – it might be possible on the basis of this reasoning to go further and argue for an implied term that only an apportioned amount is due (as opposed to a term which requires full payment followed by a refund).
   
• However, in the typical case of a conditional break option, few tenants will be brave enough to rely upon an implied term to reduce their payment, and so endanger the operation of the break.  Equally, few landlords will accept an apportioned payment, given that the break may not in the end operate, if other conditions remain unsatisfied.  The current practice of paying in full and seeking to agree a refund after the break date is not likely to change.
   
• It is not infrequently the case that operation of a break clause is followed by a dilapidations claim, including loss of rent as one of the heads of damage.  This factor may make the issue of apportionment academic in such an instance.
   
• Tenants who have operated break options in the past, and paid an unapportioned amount for the final quarter, may now consider whether it is not too late to claim a refund.  That will involve weighing up the uncertainty and potential costs of litigation as against the sums involved, and also a consideration of a number of other matters.  Such matters would include whether the landlord has an unsettled dilapidations claim which includes a credible loss of rent claim (which may, as stated above, render the apportionment issue and a right to a refund academic) and also whether any claim for a refund has effectively been inadvertently compromised as a part of any dilapidations settlement.

The case illustrates the good sense of providing expressly for the apportionment issue in the drafting of the break option, and not leaving it to the courts to decide on whether there should be an implied term.  It also underlines the importance of careful drafting in preparing settlement agreements – here, the landlord argued that the potential refund claim had been dealt with in a settlement agreement, but the court did not interpret it that way.

The decision is likely to provide some ammunition for tenants requesting a refund, where there is no express provision.  It is always necessary to bear in mind, though, that whether a term is to be implied in a particular case is fact-dependent. We understand that the landlord is seeking leave to appeal.