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warren_gordon_phIn Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd & Anor [2015] UKSC 72, the Supreme Court has given judgments that will not be welcomed by the tenant community. If a tenant successfully breaks its lease, the landlord will usually not be obliged to refund to the tenant any advance rent paid for the period after the date that the lease terminates, unless the lease expressly requires the landlord to make the refund.

The Marks and Spencer decision is important, because it will change the expectations of many tenants, who, prior to the decision, considered that at least as a matter of fairness (if not of legal entitlement) a landlord would refund advance rent paid by the tenant in respect of a period beyond the termination date, following the tenant’s successful exercise of a break right. The decision makes it clear that, while the impact of applying the relevant legal principles may be unfair prejudice to the tenant or a windfall for the landlord, those outcomes are unlikely to be sufficient to oblige the landlord to make a refund.

Background Facts

The case concerned a tenant’s break right in a lease. Marks & Spencer was the tenant and BNP Paribas and another, its landlords. The break right had pre-conditions to its successful exercise including that there were no rental arrears. The rent under the lease was payable yearly and proportionately for any part of a year by equal quarterly instalments in advance on the usual quarter days.

The tenant exercised its right under the break clause to terminate the lease on 24 January 2012, having previously paid the full quarter’s rent due on 25 December 2011. The tenant’s break was successful and the lease terminated on 24 January 2012.

The issue was whether the tenant could recover from the landlords the apportioned rent in respect of the period beyond expiry of the lease from 24 January to 24 March 2012. There was no express lease obligation for the landlords to refund the apportioned rent.

The High Court decided that the tenant was entitled to a refund. The Court of Appeal allowed the landlords’ appeal.

Supreme Court Decision and Analysis

The Supreme Court affirmed the Court of Appeal’s decision.

The tenant argued that there should be implied into the lease a term obliging the landlord to refund the apportioned rent, so that even in the absence of an explicit obligation, the tenant would still be reimbursed for the period beyond lease termination.

To address this argument, the Supreme Court considered the principles by reference to which a term is to be implied into a contract. The importance of the Court’s comments extends well beyond landlord and tenant law.

The approach to implying a term

A key element is that a term will only be implied if it satisfies the test of business necessity or is so obvious that it goes without saying (and it will be a rare case which satisfies only one of these two requirements).

There has been a clear, consistent and principled approach to implying a term.

  • If reference is made to the question of what the parties would have agreed, one is not strictly concerned with the hypothetical answer of the actual parties, but with that of notional reasonable people in the position of the parties at the time they were contracting.
  • A term should not be implied into a detailed commercial contract, merely because it appears fair or one considers that the parties would have agreed it if it had been suggested to them. Those are necessary but not sufficient grounds for including a term.
  • A term can only be implied if, without the term, the contract would lack commercial or practical coherence.

The Supreme Court analysed in detail Lord Hoffmann’s influential comments in Attorney General of Belize v Belize Telecom Ltd [2009] WLR 1988, where he suggested that the process of implying terms into a contract was part of the exercise of the construction, or interpretation, of the contract. Lord Neuberger cast doubt on those comments treating them as a “characteristically inspired discussion rather than authoritative guidance” on the law of implied terms.

Lord Neuberger’s key point was that the express terms of a contract must be interpreted before one can consider any question of implication. It is only after the process of construing the express words is complete that the issue of an implied term falls to be considered. Until one has decided what the parties have expressly agreed, it is difficult to see how one can set about deciding whether a term should be implied and if so what term.

Lord Carnwath was more sympathetic to Lord Hoffmann’s position. While it had stimulated more than usual academic controversy, Lord Carnwath would not regard that as a sufficient reason to question its continuing authority. On the contrary, properly understood, he saw it as a valuable and illuminating synthesis of the factors which should guide the court.

Despite this difference of approach, the key point remained that it must be necessary to imply the relevant term and it is not sufficient that it would be reasonable to do so.

Marks’ lease

Marks & Spencer presented a number of points that made out a powerful case that it was necessary for business efficacy that the refund obligation should be implied into the lease. The opposing arguments on the landlords’ part included that the implied term would lie uneasily with the express lease terms. The express provisions highlighted that the parties had directed their minds to the specific question of what payments were to be made if the tenant’s break was or was not implemented. There was a forceful argument that this made it inappropriate for the court to step in and fill in what was no more than an arguable gap.

Legal background

An important factor for the Supreme Court was the established legal background against which the lease was entered into, particularly, in relation to the apportionment of rent payable in advance. It has long been well established that rent, whether payable in arrear or advance, is not apportionable in time in common law. While the Apportionment Act 1870 allows for rent payable in arrear to be apportionable (based on a day to day accrual), the famous case of Ellis v Rowbotham [1900] 1 QB 740 held that the Act does not apply to rent payable in advance. The Court rejected the argument that Ellis should be overruled.

The fact that the lease was negotiated against the background of a clear, general and correct understanding that rent payable in advance was not apportionable in time (whether under common law or statute), raised a real problem for the argument that a term can be implied into the lease that the rent should be effectively apportionable if the lease is broken.

Conclusions

There appeared to be a strong case for the implied term, not only because it would be fair, but also without it the break right would operate capriciously. However, set against that was the fact that the lease was a very full and carefully considered contract, which included express obligations of the same nature as the proposed implied term and that term would lie somewhat uneasily with those provisions.

Except in a very clear case, it would be wrong to attribute to a landlord and a tenant, particularly when they have entered into a full and professionally drafted lease, an intention that the tenant should receive an apportioned part of the rent payable and paid in advance, when the non-apportionability of such rent has been so long and clearly established. Given that it was so clear that the effect of the case law was that rent payable and paid in advance can be retained by the landlord, except in very exceptional circumstances (such as where the contract could not work or would lead to an absurdity), express words would be needed before it would be right to imply a term to the contrary.

Action Points

As a result of the Supreme Court decision, it is very important for tenants to ensure that a tenant’s break right, especially one containing a pre-condition in relation to the payment of rent where the termination date is not on the last day of the relevant quarter, includes an express landlord’s obligation to refund. The refund would be for an amount representing the proportion of the quarter’s rent plus any VAT in respect of it, received by the landlord on the quarter day preceding the termination date, for the period commencing on the day after the termination date until the end of that quarter. The refund would only be given if the lease had absolutely terminated on the termination date.

Tenants will regard this decision as unfair and producing anomalies, but construction of the express lease wording against the clear legal background when the lease was entered into, meant that there was no scope to imply a refund obligation. The lease remained workable and the result was not absurd.

One other point is worth noting in relation to the words frequently accounted in the rent payment clause of leases (and in the clause in this case) that the rent is to be “paid yearly and proportionately for any part of a year”. Lord Neuberger made an observation that suggested that (with such wording) if it was clear on the quarter day preceding the termination (break) date that the lease would end on the termination date (because there were no other pre-conditions that needed to be satisfied), then the tenant would only have had to pay the appropriate proportion of the rent until the end of the termination date. However, this observation was obiter since in the case at the quarter day there was another pre-condition still to be satisfied and there was, therefore, no certainty that the lease would end on the termination date.

While most leases have other pre-conditions such as ensuring that the premises are yielded up with vacant possession or free of occupiers, there may be leases where the only condition precedent is payment of rent. Lord Neuberger raises the possibility of paying an apportioned rent in that situation, but absent a decision specifically on that scenario, there is no binding authority sanctioning such an approach. There is also the much greater concern for tenants of having the exercise of their break right challenged, because the full quarter’s rent was not paid on the quarter day. The adverse financial implications for the tenant of a successful challenge by the landlord will be considerably greater than the tenant failing to obtain a refund for a part quarter’s rent.

The easiest solution for tenants may be to ensure that the termination date is on the last day of the quarter.