Marks & Spencer (M&S) offer a generous returns policy allowing a customer a period of 35 days to return an item purchased from them and receive a full refund. (That said, those of you who have also braved the queue at the refund desk at their flagship Marble Arch store on a busy day might agree it can be a painful experience to claim a refund.) Unfortunately for M&S, one of its landlords (BNP Paribas) was not so generous with some overpaid rent, but then there was £309,172.25 plus VAT at stake.
The important lesson from this case is that if you have negotiated a break option for a proposed new lease, if the agreed break date falls between rent payment dates, the lease must include a provision obliging the landlord to refund at least the basic rent and service charge paid in advance in respect of any period falling after the break date. It is unlikely you will be entitled to a refund if this is not expressly stated.
Further, the case highlights the importance of careful drafting in any contract, as the courts will usually hold parties to the express terms.
Background
M&S had a lease of a floor of a building in Paddington Basin for a term starting on 25 January 2006 and ending on 2 February 2018. The lease obliged M&S to pay its rent yearly and “proportionately for any part of a year” by equal quarterly instalments in advance on the usual quarter days.
M&S had the benefit of a break clause allowing it to terminate the lease on 24 January 2012 by giving at least six months’ notice but conditional on:
- There being no arrears of the basic rent on the break date; and
- Payment of a premium of £919,800 plus VAT on or before the break date.
M&S served the requisite notice and had to comply with the two conditions for the break to be effective. The basic rent at the time was £1,236,689 per annum plus VAT. M&S paid a full quarter’s rent in respect of the period from 25 December 2011 to 24 March 2012, two months of which fell after the anticipated break date. On 18 January 2012, M&S also paid the break premium to BNP Paribas. The two conditions being met, the lease ended on 24 January 2012 in accordance with the break clause.
The lease contained no express provision entitling M&S to a refund of the rent for the two months after the break date (£309,172.25 plus VAT). However, in February 2012, M&S asked BNP Paribas for a refund of that rent. BNP Paribas refused and M&S issued court proceedings to recover it.
The High Court held that a term allowing the refund should be implied into the lease. BNP Paribas appealed and the Court of Appeal reversed this decision. M&S appealed to the Supreme Court.
Supreme Court
M&S argued that a term should be implied into its lease requiring BNP Paribas to refund the overpaid rent. It argued that the phrase “proportionately for any part of a year” meant that if the lease ran to 2 February 2018, it could have paid an apportioned part of the rent on 25 December 2017 as the parties would know the lease was due to expire before the next quarter day. Whilst the parties could not be sure on 25 December 2011 that the lease would break on 24 January 2012, once the break premium had been paid, they could be. Had M&S paid the premium before 25 December 2011, it would only have needed to pay the appropriate proportion of the rent on that date.
M&S argued, therefore, that commercial common sense should be applied so that it would be in the same financial position whether it paid the break premium before 25 December 2011 or chose to wait and pay it later.
M&S also argued that the phrase “proportionately for any part of a year” supported the argument that there was an implied term requiring the refund.
The Supreme Court clarified that in order for a term to be implied into a contract it must be either necessary for business efficacy (i.e. to give an intended or desired effect) or so obvious that it goes without saying. This would be rare.
The lease was a very full and carefully considered contract. It included express obligations of the same nature as the proposed implied term (i.e. financial liabilities in connection with M&S’s right to break). Implying a term as argued by M&S would sit uneasily with those provisions.
Case law clearly established that rents payable in advance could not be apportioned under the Apportionment Act 1870 and that save in very exceptional circumstances (e.g. an unworkable contract or absurdity), rent payable and paid in advance could be retained by the landlord. Express words would be necessary to imply something to the contrary.
The court noted that it was curious that M&S could have paid an apportioned part of the rent had it paid the break premium before 24 December 2011. However, it was the tenant’s decision when the break premium was paid and the contract was not unworkable or commercially or otherwise absurd.
Regarding the phrase “proportionately for any part of a year”, the court commented that the fact that the parties had expressly agreed that rent could be apportioned in some circumstances undermined the notion that a term should be implied to have a similar effect in other circumstances.
The Supreme Court decision was long-awaited following the uncertainty created by the High Court in May 2013. Where rent is paid on a date and it is not then certain that the lease will break in accordance with an option in it, landlords can again be sure of their position in keeping any rent covering any period after the break if the lease does not expressly allow a refund. Many, particularly tenants, will consider this to be unfair.
To read our blog on how to exercise a break option, click here.
Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd and another [2015] UKSC 72
Charles Hylton-Potts
