Real Estate Update: Not Just Another English Decision on Break Clauses
24 February 2016
A court will not rewrite a freely negotiated lease, even if the outcome appears unfair. In a recent court case involving Marks and Spencer, the tenant was not entitled to a refund of rent paid in advance where payment occurred shortly before the lease break option date. The lease was silent on the point. The case, from England’s highest court, emphasises the importance of clearly setting out your expectations in the lease.
The decision in the case Marks and Spencer Plc. v. BNP Paribas Securities Services Trust Company Ltd.  of is of significant interest to landlords and tenants in relation to the interpretation of commercial lease provisions. Generally, the lesson is to make terms explicit. As the March Hare said “you should say what you mean”.
The tenant, Marks and Spencer, opted to terminate its lease early pursuant to a break option. The only precondition, in addition to notice, was that rent had to be up to date on the break date. The tenant paid rent for the full quarter in advance. The tenant then sought a refund for the rent for the part of the quarter which was after the break date.
The High Court  implied a provision into the lease that the rent should be refunded. This surprised the market and the outcome of the appeal was eagerly anticipated. The High Court concluded that a refund was “obviously what the parties meant”.
The Court of Appeal  overturned the decision and decided that no refund was due, so the landlord could keep the full quarter’s rent. The Court based its decision on the failure of the parties to require a refund in the lease – the parties had not included a refund provision and the Court was not going to infer one. The Supreme Court has upheld the Court of Appeal’s decision.
Interpretation of Commercial Lease Terms
Marks and Spencer argued for the refund because:
- retention of the rent would be a pure windfall for the landlord through it getting both rent and vacant possession of the premises for the same period;
- the parties did not intend for the rent to be retained by the landlord as compensation; and
- the lease stipulated that the rent was to be paid by equal quarterly instalments in advance “yearly and proportionately for any part of a year”.
The Supreme Court based its refusal of a refund because:
(a) the lease was a detailed and carefully considered contract negotiated by two substantial and experienced commercial entities and drafted by expert lawyers;
(b) the proposed implied term did not sit easily with express terms in the lease making provision for other financial contingencies of a similar nature depending on whether or not the break option was exercised;
(c) the contract was workable without the implied term; and
(d) it was long established law that rent was apportioned only if this was expressly provided for in the lease.
An Irish court would probably reach the same decision. Absent a statutory requirement, a court will imply a term in two scenarios. First, if the court decides that the term was intended by the parties judged from the position of an objective bystander. This was the basis of the High Court decision in the M&S case. The two appeal courts did not share this conclusion, which shows how difficult predicting court outcomes can be.
Secondly, a court will imply a term where it is necessary for business efficacy and the term is consistent with the express terms of the contract. The appeal courts in M&S pointed out that the lease worked perfectly well without any refund provision.
Courts are not contract makers and do not have discretion to substitute a better commercial bargain for that which the parties actually made.
If a lease does not include a refund clause for advance payments, then a landlord has good grounds for refusing to give a refund.
If you have a break option soon, getting timely legal advice will help you understand the meaning of the lease. The focus will be on the words used, not what one might consider to be fair or commercial.
Whether you are a landlord or a tenant, the M&S case demonstrates that spending time reflecting on the possible future outcomes and then agreeing lease provisions to deal with those outcomes is a good investment.
For more information, please contact a member of our Real Estate team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.