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Break Clauses: Will you be paying too much or refunding money that you do not need to?

11 May 2016

Are you just about to serve a break notice or have you just received one?

If so, it is probably a good time to remind yourself of the case of Marks and Spencer plc v BNP Paribas Securities. This case has provided welcome clarity on the issue of rents paid in respect of a period falling after a break date in a lease, where such break has been validly exercised.

Marks and Spencer plc (the “Tenant”) v BNP Paribas Securities (the “Landlord”) was an appeal case decided in early December 2015. Briefly, the facts of the case related to various leases held by the Tenant in an office building in Paddington. These leases gave the Tenant the right to break on two separate occasions, the first of which was 24 January 2012. The break right was subject to the following conditions:

“on the break date there are no arrears of Basic Rent or VAT on Basic Rent; and…..on or prior to the First Break Date the tenant pays to the landlord the sum of £919,800 plus VAT.”

The latter condition was not applicable at the second break date in 2016.

The Tenant served a valid notice to terminate in July 2011. On 25 December 2011, the quarter day before the break date, the Tenant paid to the Landlord a full quarter’s rent, advance service charge and car parking licence fees. The Tenant had already paid the full years insurance rent following a demand in July 2011.

A week before the break date, the Tenant paid the break premium of £919,800 + VAT. The break was therefore now fully effective.

Following termination, the Tenant sought a reimbursement of the overpaid rent, insurance rent, service charge and car-parking fee for the period after the termination date until the end of that quarter. The Landlord refused.

Initially the High Court ordered the Landlord to repay the overpayments having implied a term obliging the Landlord to return them. On appeal, the Court of Appeal and now the Supreme Court overturned this ruling, stating that no term can be implied into the break clause requiring the return of overpaid rents.

Whilst each case will be decided on its particular facts, in the Supreme Court hearing, Lord Neuberger stated very clearly that there would have to be exceptional circumstances for the court to imply into a commercial lease the kind of term for repayment of rent sought by the Tenant in this case.

It is worthy of note that had the Tenant paid the break premium prior to 25 December 2011, then it could have merely paid the apportioned rent up to the break date as the break conditions would have already been met.

So what does this mean for you?

Clearly, if you are a tenant, when negotiating a break condition in leases that have yet to be granted, an express provision should be inserted regarding the overpayment of any rents paid that relate to a period after the break date.

If you are a landlord and a tenant has made a claim for the reimbursement of overpaid rents, then you should review the lease terms to see if an express provision has been included before returning any monies.

In respect of leases that have already been granted, we would suggest that you review the leases very carefully to ascertain what conditions need to be met prior to exercising a break. Certainly, if you are a Tenant, ensuring compliance with all pre-conditions before the Break Date will mean that you should only need to pay the apportioned rent up to that Break Date to achieve compliance with the usual condition that ‘all rents and other sums are paid to-date’.

Be you Landlord or Tenant, please do not hesitate to contact us if you require advice on any break clause that may be contained in any of your leases.

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