No break with tradition: M&S v. BNP Paribas

Summary

It has long been established that a tenant cannot recover rent paid in advance that covers a period beyond an effective break in the lease, unless there is an express apportionment provision in the lease. That position has been affirmed in today’s long awaited Supreme Court judgment in Marks and Spencer plc. v BNP Paribas Securities Services Trust Company (Jersey) Limited, which has UK-wide implications.

The specific issue before the Court was whether it is an implied term of a lease that a tenant who makes quarterly rent payments in advance is entitled to repayment, upon termination of the lease under a break clause, of rents attributable to the period after the break date.

Facts

Marks and Spencer plc entered into four commercial leases with BNP Paribas which contained break clauses allowing M&S to terminate the leases on certain, specified break dates. The break options were conditional upon (a) there being no arrears at the relevant break date of any "Basic Rent" (payable quarterly in advance); and (b) M&S paying a "Break Premium" equivalent to one year's rent to the landlord. Alongside “Basic Rent”, the leases also identified three other forms of rent, namely a car park licence fee (payable quarterly in advance), insurance (payable on demand) and service charge (payable quarterly in advance).

M&S served a valid break notice on 7 July 2011 and paid the relevant Break Premium on 18 January 2012. In advance of the break date, M&S also paid £1,665,889.20 to BNP Paribas in Basic Rent, car park licence fees, insurance and service charges. The pre-conditions to break were satisfied and the leases were therefore validly determined on 24 January 2012.

On 20 April 2012, M&S commenced proceedings to recover £1,147,696.25 in alleged “overpaid” rents for the period following the break date. BNP Paribas initially denied any liability but eventually conceded that they were obliged to reimburse M&S for £204,972.29 in service charge in accordance with the terms of the lease. However, they maintained that there was no basis for any further reimbursement.

At first instance, the High Court found in favour of M&S and said that, in accordance with Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10, it was both reasonable and necessary to give business efficacy to the leases by implying a term that M&S could recover the post-break date rent. In particular, the Court considered that the break premium compensated BNP Paribas for loss of income after the break date and this meant it was unlikely that the parties intended that the landlord would also retain rent in respect of the broken period.

The decision was overturned in the Court of Appeal, where it was held that the test for implying a term into the lease had not been satisfied. The Court held that (i) the parties would have included additional wording in the leases that required the landlord to reimburse sums relating to the break date if this was what was intended and (ii) it would have been obvious to M&S that there was a possibility they would be liable to pay a full quarter’s rent if they exercised a break option midway through the rent period. The appeal court therefore restated the established view that a tenant is not entitled to recover rents paid for the period after a break date unless there is express provision in the lease.

M&S obtained permission to appeal to the Supreme Court.

Supreme Court

In the Supreme Court, M&S argued that:

• each quarter’s rent paid in advance under the leases was referable to their use and enjoyment of the demised premises for the forthcoming quarter and therefore it would be unfairly prejudicial to M&S, and an outright windfall for BNP Paribas, if the landlord were able to retain the apportioned sum beyond the break date where no enjoyment of the demised premises was present;
• the origins of the two break dates in the leases (being 24 January 2012 and 2016) arose because of the date of grant of an earlier lease and that date was dependent upon the date the head-landlord gave its consent to the grant of the earlier lease. The parties had agreed the terms of the break clause not knowing whether the break dates would fall between two quarter days. M&S argued that this displaced the Court of Appeal’s finding that they should have known there would be no refund; and
• the Basic Rent stipulated in the leases was to be “paid yearly and proportionately for any part of a year” by equal quarterly instalments in advance An implied term was therefore required in the interests of commercial common sense so that the tenant was not disadvantaged, regardless of whether they opted (as they were entitled under the lease) to pay the Basic Rent before or after 25 December 2011. Furthermore, they argued that the fact that Basic Rent was to paid “yearly and proportionately” meant that an implied apportionment term was, in itself, warranted.

The Supreme Court rejected M&S’ arguments and reaffirmed the position as stated by the Court of Appeal.

Comment

The traditional position has therefore been maintained and it is unlikely that a tenant will be entitled to recover rent paid for a period after the break date unless there is an express apportionment provision in the lease.

The decision further highlights the need for landlords and tenants to consider the position regarding the payment of rent when including break rights in leases and, in particular, clarifies the need for tenants to include express apportionment provisions if they wish to recover rent paid for periods falling beyond the break date in the lease.