Break notices: a win for tenant

31 May, 2013

The High Court decision in Marks & Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited & Another is the latest in a long line of cases concerning the exercise of break clauses in commercial leases. M&S were the tenant of commercial office space occupied on a series of leases, all of which contained a tenant‘s break clause on similar terms. The break date in each case fell mid way through a rent period (24 January 2012). The break clause was conditional upon M&S giving written notice, paying all rent and other charges due under the lease and paying a break penalty equivalent to one year’s rent.

M&S exercised the break clause, on the quarter day prior to the break date paid a full quarter’s rent and tendered the break penalty. The break was effectively exercised.

There was no question that M&S was, on 25 December 2011, required to pay a full quarter’s rent in order to exercise the break clause. However, following an effective exercise of the break option was the landlord under an obligation to reimburse to M&S the rent paid for the period 25 January to 24 March?

The court determined that there was no express obligation in the leases to reimburse the tenant, but should one be implied? The landlord said no. The written terms of the break clause were clear, as was its effect. That it resulted in one party suffering a loss was no more than the effect of the negotiated bargain between the parties. The tenant contended that any reasonable person reading the lease would expect that whilst the tenant would be obliged to pay a full quarter’s rent in order to exercise the break clause it would be entitled to a reimbursement once it had been established that the break clause had been validly exercised.

The Court decided the question in favour of the tenant by reason of the following:

  • The contractual term date of the lease fell midway through a quarter and that lease expressly provided for that last payment of rent to be apportioned. A party to the lease would reasonably expect a similar consequence in the event of termination midway through a quarter by the exercise of a break clause;
  • It was accepted as a matter of law that if the payment of a full quarter’s rent was not a break condition, the tenant could get away with paying an apportioned amount of rent to the break date, irrespective of what the lease might say; and
  • The parties had agreed that compensation would be payable to the landlord of a year’s rent upon the exercise of the break clause. This payment was to compensate the landlord for not receiving rent after the break date and it was reasonable to assume that the parties would not have intended the landlord to retain the balance of rent on the last quarter day as well.

Whether this decision is appealed remains to be seen. On the one hand the decision does appear to demonstrate a degree of common sense. However reimbursement provisions are often seen within break clauses, yet there was no such provision here. Furthermore, the parties had expressly provided for an apportionment on the last rent payment absent an exercise of the break clause but did not provide for the same within the break clause itself. In such circumstances it might be said that the implication of a reimbursement term has given to the tenant something materially more advantageous than it contracted for and, as such, goes further than the principles of implying terms into contracts should go.

A full transcript of the decision can be found here: https://www.bailii.org/ew/cases/EWHC/Ch/2013/1279.html