To Pay or Not to Pay - Exercising a Break Clause

Published bySteven Docherty

3rd December 2015

The UK Supreme Court has issued an important decision, clarifying the rights of Landlords and Tenants if a Tenant exercises a break clause.

In Marks & Spencer plc v BNP Paribas, M&S were tenant of a 4-storey office block in London.  They had the right to exercise a break clause with effect from 24 January 2012 so long as (a) they were not in arrears of rent at that date, and (b) they paid the Landlord a break premium on or before the break date.  M&S served the requisite notice that they intended to exercise the break, and in what can only be described as an abundance of caution, they proceeded to pay the full quarter’s rent which fell due on 25 December 2011 and also the break premium.  The lease then came to an end on the break date of 24 January 2012, but M&S sued the landlord for return of the excess rent apportioned from that date until the next quarter date.

The Issue

Because the lease was silent on the question of repayment, the case had to be argued by M&S on the basis of a term which they said should be implied into the contract – so the issue for the court was, did the lease contain an implied term to the effect that the tenant was entitled to insist on the landlord paying back a proportion of the rent if the break clause was exercised?

The Decision

The Supreme Court (which is the UK’s highest court and whose decisions, in English cases such as this one, are nevertheless highly persuasive in Scotland) decided that there was no such implied term – the landlord was entitled to keep the quarter’s rent, even though the actual period of the tenancy ended up being only a month because of the exercise of the break clause.

The court discussed the legal test for when terms can be implied into contracts when the parties have not stated them expressly.  That test, broadly, looks at a number of questions, which all have to be answered in the affirmative - Is the term reasonable and equitable?  Is it necessary in order to give “business efficacy” to the contract? Is the term so obvious that it “goes without saying” that the parties would have included it if they had given the matter a moment of thought? Would the term contradict an existing express term of the contract?

The Supreme Court took the opportunity to clarify that test, by also highlighting that a term should not be implied into a detailed commercial contract such as a lease merely because it appears fair.  Further, the court confirmed that there is a long-established rule that rent, whether it is payable in arrears or in advance, is not apportionable as a matter of law - the parties would have to expressly provide for that, or else such a provision would have to be implied into the lease, but that it would need to be “a very clear case indeed” for such a term to be implied.

M&S therefore lost, and the landlord got to keep the money.

Discussion

Practice points from the M&S case include:-

• When entering into a lease where the rent is payable in advance, a tenant should try to ensure that any break option is timed to coincide with a rent payment date – the problem in the M&S case was caused when M&S had to pay a full quarter even though there would be only a month of occupancy.
• If a break option falls outside a normal rent payment date, the question of apportionment should be specifically provided for when negotiating the terms of the lease – is the tenant to be given the right to only have to pay the apportioned amount if the break is exercised?
• If there is no opportunity for these points to be negotiated, then the tenant should engage their landlord at an early point if they intend to exercise the break, to seek to negotiate what will have to be paid for the period up to the break date.
• Most break clauses provide that the break can only be exercised if there are no arrears of rent outstanding.  Separately, the rule is clear that, where rent is payable in advance, it is the whole amount which falls due on the payment date.  The tenant therefore takes a risk if he only pays the apportioned amount up to the break date, without having agreed that with his landlord in advance. 

More information on this case, and what it might mean for you, is available from Steven Docherty or Colin Brass.