Marks & Spencer's finest break clauseBy: Michelle Di Gioia

On 14 May, the Court of Appeal made a significant ruling for landlords concerning break clauses when it ordered retailer Marks and Spencer (M&S) to repay over £1 million to the landlord of its former head office, BNP Parabis Securities Trust Company Limited.

The Court decided that the retailer was not entitled to reclaim rent and other charges covering the period after it exercised a break clause. This decision not only puts landlords in a much stronger position when a tenant tries to bring a commercial lease to an end earlier than the agreed lease date, but it allows for landlords to keep overpayments of rent if a tenant decides to have a break date in the middle of a quarterly payment.

The dispute between M&S and BNP Parabis arose on 7 July 2011 when M&S served a break clause on their lease to come to an end on 24 January 2012. As with many commercial leases M&S paid rent quarterly, which meant that M&S had to pay full rent until the end of the quarter on 25 March 2012 for the break clause to be effective and in accordance with the terms of the lease. Both parties accepted this, but once the lease had expired on 24 January 2012, M&S applied for a refund of the rent and insurance paid between 24 January 2012 and 24 March 2014. BNP Parabis rejected this suggestion and refused to refund M&S for the overpaid rent.

Following a High Court case, the court found in favour of M&S and BNP Parabis was ordered to refund the overpayment of rent to M&S. This decision allowed the court to insert an implied term into the contract at the break clause, which would allow for the tenant to recover any overpayment of rent following the use of a break clause within their lease. The High Court felt the need to allow a refund on the basis that an implied term was necessary to give business efficacy to commercial leases that would benefit both landlord and tenant.

Many landlords would disagree with giving such flexibility to tenants through an implied term as it gives landlords no security or certainty over their rental income. It allows tenants to leave properties earlier than agreed and receive a refund for a period when the landlord had expected rent, leaving many landlords gravely concerned over the risk of sudden empty properties and no revenue from rent.

In a significant change from the High Court Decision, the Court of Appeal looked at the lease as a whole - rather than looking at the break clause as a separate clause of the lease - and the circumstances under which the break clause was used. The Court of Appeal specifically looked at whether implied terms should be added to the lease. In a crucial turning point, if a tenant wished to assert that an implied term was included in the break clause then the tenant would need to show that the term would be part of the lease; it was not sufficient enough to show that an implied term could form part of the lease.

In short when looking at the lease as a whole it was not reasonable to say that BNP Parabis would have had an implied obligation to refund any overpayment of rent, therefore the test for an implied term in the lease was not met by M&S.

Landlords may be able to sleep easy for a while regarding this debate, as the Court of Appeal did not allow permission for M&S to appeal to the Supreme Court. However, M&S can still ask the Supreme Court directly for this opportunity and until the time for appeal to the Supreme Court has passed landlords should continue to resist repaying sums as a refund for any time period after a break date has taken effect.

A break clause is always conditional so for a tenant to invoke a break clause successfully, the strict break clause conditions must be met. In a standard lease a break clause condition will require the tenant to make a payment of all rent that is due even if a break clause falls within a quarterly payment of rent. So, landlords should also ensure that a tenant pays a full quarter of rent (if required) and any outstanding arrears under the lease before the tenant is allowed to use the break clause.

Any re-negotiations or new leases should be reviewed skeptically but landlords may wish to ensure that any break clause specifically states that no overpayment of rent will be refunded. Alternatively, negotiate for a break date that will fall at the end of a quarter so that no dispute will arise regarding overpayments of rent by the tenant.

Overall, this court of appeal decision should give landlords the confidence to negotiate conditions over break clauses that, while fair, work in their favour and does not leave them open to potential financial loss.  

About the author

Michelle Di Gioia, Partner in the Dispute Resolution Team at Gardner Leader solicitors.

Main photo (top of page): Marks & Spencer Stratford City Café