A Break for Landlords – Recent Court of Appeal Decision Restores Certainty

The Court of Appeal has overturned the decision of the High Court relating to the refund of rents for a period after a break option has been exercised.

In Marks and Spencer Plc v BNP Paribas Securities Services Trust Company (Jersey) Limited & Another [2014], the Court of Appeal overturned a decision of the High Court concerning the repayment of rents made by a tenant to a landlord before a break date, which relate to period after the break date.  Last May, the High Court held that where a tenant exercised a right to break part-way through a quarter, and where the rent had been paid for the full quarter, a term should be implied into the lease entitling the tenant to a refund of rent for the period from the break date to the end of the quarter.  The decision caused some concern and commentators noted at the time that it was a departure from the widely-held view that, in the absence of an express provision in the lease, a tenant will not be entitled to a refund of rents paid before a break date which relate to a period after the break date.

The Court of Appeal has now ruled that it is not appropriate to imply a term into the lease entitling the tenant to a refund of rent that it had paid in advance.  Lady Justice Arden said: “…the Lease, read as the whole against the relevant background, will not reasonably be understood to include such a term, and thus a test for an implied term is not met”.

Lady Justice Arden added that it would have been obvious to the parties before they completed the lease that there was a possibility that the rent would have to be paid on the last payment day prior to the break date in full for a period which extended beyond the break date, and that the parties would therefore have made some provision in this regard in this lease.  She said that the parties could easily have added words to oblige the landlord to refund any rent paid for the period beyond the break date.  Later in the judgment, she adds: “when all the circumstances are considered, the correct inference to draw is that the parties proceeded on the basis that the loss from payment of rent from the broken period should lie where it fell.  Thus no term for repayment is implied”.

It is likely that landlords in particular will welcome this ruling as it clearly sets out the position for the repayment of rents following the exercise of a break option. It also means that, when negotiating the terms of a lease with a break clause, the parties should seek to ensure, whenever possible, that the lease expressly provides for the repayment to the tenant of rent (and other payments such as service charge and insurance premiums) from the break date to the next rent payment day.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 020 7404 0606 and ask for your usual Goodman Derrick contact.