Court of Appeal overturns Marks and Spencer's successful claim for overpaid rent following lease break

The facts:

Marks and Spencer (M&S) were tenants of four floors in a building under four leases on the same terms. They served notice to break the leases. The break clause was conditional on there being no arrears of basic rent or VAT on the basic rent and on payment of a lump sum of just under £1 million – reflecting exactly a year’s rent.

The break date fell in the middle of a quarter. On the quarter day prior to the break date, M&S paid the full quarter’s rent, full quarter’s ‘car park licence fee’ (which the court described as a further rent) and the full quarter’s on-account service charge. Approximately six months prior to the break it also paid a year’s insurance premium. In Marks and Spencer v BNP Paribas Securities Services [2013] EWHC 1279 (Ch)  the High Court allowed its claim to be reimbursed the sums owing for the period after the break date.

The Court of Appeal allowed the landlord’s appeal, deciding that the lease, read as a whole against the relevant background, would not reasonably be understood to include a term providing for such reimbursement and so the test for an implied term was not met.

Why did M&S pay over sums owing for a period after the lease was terminated in the first place?

If a break date falls between rent payment dates (usually quarter days) and the rent is payable in advance, then, if the lease is silent, the safest route is to pay the full quarter’s rent to ensure the break condition is satisfied.

Are tenants generally entitled to repayment of rent in such circumstances?

M&S’ leases were silent on the matter. In those circumstances, traditionally, tenants have been unsuccessful in getting credit for any part of the rent paid in advance in respect of the period after the break option. In Quirkco Investments v Aspray Transport [2011] EWHC 3060 (Ch), it was held that wording in the lease which confirmed the rent was due ‘in proportion for any period less than a year’ did no more than deal with the fact that the commencement and expiry of the term did not coincide with the quarter days, so that proportionate payments would be required at either end of the lease. No such proportionate payment was required when the lease was broken.

Test for an implied term

The High Court in M&S had decided a term should be implied into the leases requiring the landlord to reimburse M&S for the overpaid rent. The Court of Appeal confirmed the High Court had applied the correct test. A court will imply a term into a contract if it would be regarded as obvious by anyone acquainted with the transaction that it goes without saying. This is the officious bystander test.The Court of Appeal went on to expand on this test. It confirmed that the court must ask whether the agreement has the meaning that such a term would achieve, because, even though the parties did not expressly include that term in their agreement, that is what their agreement means. However, the party seeking to establish an implied term must show not simply that the term could be a part of the agreement but that a term would be part of the agreement.

The starting point is that, if there is no express term, none should be implied because if the parties intended that a particular term should apply to their relationship they would have included a term to that effect, rather than left it to implication. What was necessary depended on the particular type of contract. Here, there was little admissible evidence of communications between the parties beyond that contained in the lease and so the exercise admitted less room for argument than might otherwise have been the case.

High Court’s approach

The High Court had decided that an implied term as to reimbursement of the rent for the period after the break was eminently reasonable primarily because:

• the tenant should be in the same position as a tenant who paid the break premium on the last quarter day (‘same position conclusion’)

• the break could only be operated on payment of the lump sum. This showed the parties applied their minds to the compensation the landlord should receive for loss of its income stream. This made it unlikely that the parties would have intended that, in addition, the landlord should be entitled to retain the overpaid rent (‘full compensation conclusion’)

What about the car park licence fee, insurance and service charge?

The High Court decided there was an implied term for reimbursement of the proportion of insurance charges attributable to the broken period and the proportion of the car parking fee which had been paid before the break date. The landlord had accepted that by implication M&S was entitled to recoup any service charges which it had paid, but which related to services which had not been provided by the break date and to be repaid the amount of any credit which it had earned as a result of overpayments of service charges in the past and which had not been used by the break date.

What did the Court of Appeal decide and on what basis?

The Court of Appeal decided that in all the circumstances, the correct inference to draw was that the parties proceeded on the basis that the loss from a payment of rent for the broken period should lie where it fell. No term for repayment would be implied.

Was there a general principle that a tenant should only pay for what it receives?

The fact the parties made no provision about return of rent for the broken period was not as striking as it might at first sight have seemed, as they made no provision for the return of service charge, insurance or car parking fee for that period either. The fact the lease did not provide for repayment of service charge did not mean that it should not be reimbursed. In Southwark Roman Catholic Diocesan Corporation v Brown's Operating System Services [2007] All ER (D) 09 (Mar)the Court of Appeal decided, on the true interpretation of the lease in that case the tenant was only liable for amounts actually spent by the landlord in providing services before the expiry of the lease and that monies unspent at the end of the term would belong to the tenant.

However, this did not mean there was a general principle that a tenant should only pay under a lease for what he actually receives. The calculation of the break premium, in this case a year’s rent before any increase on a review, usefully illustrated the point that rent is not simply a payment to the landlord for the use and occupation of the premises - it was also used as a yardstick for compensating a party for some loss it incurs by entering into a lease or operation of one of the rights conferred by it.

Nor did the same conclusion as the service charge (that the tenant was entitled to repayment) apply to the car parking fee or insurance.

This car parking fee was a relatively small amount (£6,000 pa) and the break premium did not include any element for the loss of it. There was no basis for implying a term for return of the fee for the broken period.

The same applied to the insurance charges. This did not mean the tenant was at risk of having to make a payment for insurance stretching for a long period into the future without any hope of recoupment, because the conventional period for insurance was not more than a year. Moreover, unless the landlord was able to renegotiate the position with the insurer, it would be unable to obtain any rebate on the premium. If it did manage to renegotiate the premium, the rebate may not be time-apportioned. Again the break premium took no account of insurance charges that the lessor might incur during any consequent void. There was no reason for implying a term for repayment of insurance charges referable to the broken period.

Why was the rent not repayable?

The reimbursement of rent and service charge were readily distinguishable. The purpose of the break clause was to enable the tenant to terminate the lease if he satisfied the pre-conditions as to payment of rent and break premium. By contrast, the break clause expressed no particular intention about the rent for the broken period. It would have been obvious to the parties before they signed up to the lease that there was a possibility that rent would have to be paid on the last quarter day in full for a period which went beyond the break date. They would therefore have made some provision for this case. Furthermore, they must have had some discussions about what was to happen on termination pursuant to the break clause because the break clause dealt with other consequences of termination (eg delivery up of the lease and ancillary documents). The words ‘proportionately for any part of a year’ in the reddendum were only applicable to a payment of rent for a broken period within the original term of the lease. They did not apply where, as here, on the last quarter day there was no certainty as to whether termination would take place on the break date. The Court of Appeal did not accept the High Court’s point that these words together with the description of the quarterly payments of rent as ‘instalments’ of rent might have led the parties to believe that there was a right to recoup a payment of rent insofar as it was attributable to the broken period.

‘Same position conclusion’

The Court of Appeal disagreed with the High Court’s ‘same position conclusion’. It proceeded on the basis (without deciding the point) that the tenant could make a proportionate payment of rent on the last quarter day if it had by then also paid the break premium. However, the situation where a proportionate payment of rent can be made on the last quarter day as the break premium has been paid and the situation where termination does in fact take place on the break date because by then the tenant has paid the break premium, were not the same. In the latter case, the landlord remained uncertain whether the lease would terminate on the break date until the break premium was paid. Why should the parties not have proceeded on the basis that the landlord was entitled to be compensated for that?

‘Full compensation conclusion’

The ‘full compensation conclusion’ also assumed the break premium was the totality of the agreed compensation. However, the landlord could be compensated in other ways and the absence of terms for repayment of the car parking fee illustrated this.

The fact there was a distinction between cases where the break premium is paid on or before the last quarter day and cases where it is not paid until after that date, undermined the assumption that the break premium should be full compensation.

Remaining points

The Court of Appeal dealt with two remaining points:

• the important point was that any implied term had to be certain. Therefore, the fact it could be easily drafted was not a factor of much weight. Indeed the point that it could have been easily drafted and included expressly in the parties’ agreement may be a factor against its implication.

• the fact the VAT would need to be repaid if the rent for the broken period was repaid, was be a matter of mechanics and would not cause any difficulties in practice

Has the decision clarified the law in this area?

The Court of Appeal’s judgment makes it clear that the court will not readily imply a term for the reimbursement of overpaid rent , even where the tenant is to pay a lump sum as compensation to the landlord - which appeared to be a key factor in the High Court’s decision to imply a term as to reimbursement.

A key factor in the Court of Appeal’s decision was that the landlord remained uncertain whether the lease would terminate on the break date until the break premium was paid.

The decision also confirms reference to rent payable ‘proportionately for any part of a year’ only relates to a payment of rent for a broken period within the original term of the lease.

What are the lessons for lawyers?

The judgment will not be popular with tenants, but is in line with previous decisions on the issue and clears up the waters which were somewhat muddied by the High Court decision.

The message is clear – to be certain, reimbursement must be expressly provided for in the lease.

This article was written by Joanna Bhatia, solicitor in the Lexis®PSL Property team and was first published in LexisPSL Property on 15 May 2014.  Subscribers to Lexis®PSL Property can find a fuller summary of the case here.  Otherwise, click here for a free one week trial of Lexis®PSL Property.