In a previous article, I looked at break clauses and whether they had been validly exercised when rent was apportioned from the rent payment date to the break date. The recent decision in Marks & Spencer v BNP Paribas (2013) was mentioned briefly which brought up the issue of whether a tenant is entitled to the reimbursement of any overpaid rent when a break option has been validly exercised. This had not been an issue for the courts to consider previously as tenants had not managed to break the lease in the first place
The Marks & Spencer case represents a departure from the court’s view set out in PCE Investors v Cancer Research UK (2012). Here, the court was asked whether M&S were entitled to a refund of the rent and other payments it had made for the period after the break date. M&S was the tenant of four leases of offices at The Point building in Paddington, which were at an annual rent of £3.18m and would later increase to £4.6m. Within each lease, the break option was conditional on:
- there being no rental arrears; and
- that a penalty premium was paid on or before the break date.
Subsequently, each break notice was served and all payments made to exercise validly the break option. Once the leases had ended, M&S requested a refund of the overpaid rent from the break date to (what would have been) the next rent payment date. The Landlord refused to pay arguing that the terms of the lease did not require them to do so.
At the High Court, M&S claimed it was entitled to repayment of the rent on three grounds. They succeeded in their second argument that the lease contained an implied term, specifically that a reasonable party to the lease would understand that the lease was providing for them to pay rent for the period from the December rent payment date to the break date.
The influencing factors in the court's decision were the fact that:
- a penalty payment had to be made to the Landlord – this payment could be viewed as being compensation for the Landlord, having been left with vacant premises after the break date (it is unlikely that the parties would have intended that the Landlord would be entitled to keep the full quarter's rent as well); and
- the parties had entered into a settlement agreement, under which, the Landlord accepted a further sum from M&S which released them from claims by the Landlord.
The Court concluded that if the break had been conditional only on there being no arrears of rent, M&S would only have had to pay the rent for the period up to the break date (not the full quarter) in order to satisfy the condition – this view seems to allow the apportioning of rent when exercising a break. However, we have yet to see a court uphold this view, and BNP Paribas may well wish to appeal the decision of this case.
What does this mean?
The above case is great news for many tenants, however each case will fall upon its own facts (remember the payment of a penalty was an influential factor in the decision of this case) and tenants should, as was advised in our previous article, play it safe and pay the full quarter's rent and possibly seek a refund soon after.
The result of this case however may mean that we see landlords agreeing to accept apportioned payments as full payments for break purposes so as to avoid having to deal with refunds after the lease has come to an end.
Julie White is a Director and Head of the Commercial Property Department at BHW Solicitors in Leicester. Julie has over 25 years’ experience of commercial real estate transactions and regularly writes on commercial property issues. Julie can be contacted on 0116 281 6228 or by email at email@example.com.
Categorised in: Commercial Property, NewsTags: Commercial Property, Leases