Mr Justice Morgan handed down judgment on 16 May 2013 in the High Court decision in the case of Marks and Spencer v BNP Paribas and it may have opened the door to claims by former tenants for reimbursement of “overpayments” made to ensure full compliance with a conditional break clause but that relate to periods after the break date.
Break notices are a frequent cause of litigation, especially in the current market where it can be more difficult to re-let premises once a tenant vacates. Usually it is the uncertainty caused by the conditionality of the break provisions that leads to litigation but in this case the break was successful and it was the financial position post termination that was in issue.
In this case the break clause that M&S exercised was conditional upon there being no arrears of rent as at the break date and also upon payment of a break premium of £918,000 plus VAT to the landlord. The break date was 24 January 2012 and this meant that M&S had to pay the full quarters rent payable on 25 December 2011 for the period to the March 2012 quarter day, even though if the break was successful M&S would not be in occupation for two thirds of that period and would get no benefit for the rent paid.
Having complied with the conditions and having exercised the break, M&S claimed for recovery of the overpayment of rent as well as other items due under the lease on the basis of:
1) An express term of the lease provided for apportioned repayment;
2) An term should be implied into the lease providing for apportioned repayment;
3) Restitution for total failure of consideration.
The landlord resisted the claim on the basis that there was no express term, a term need not be implied, that there was not a total failure of consideration and that there was a binding settlement agreement.
M&S failed with its first and third arguments but Mr Justice Morgan did believe that a reasonable person in possession of all of the background information which would reasonably be available would expect that such a term would be implied. He based this in a large part upon the reservation of rent clause that provided for an apportionment of the final quarters rent at the end of the fixed term of this contracted out lease.
The implication of such a term represents a significant shift in favour of tenants, especially if it can be applied across the board into all commercial leases with break clauses. Landlord could face claims from former tenants for reimbursement in a similar way (not just in relation to basic rent but also service charge and insurance payments as well). However, it may be possible to confine this decision to leases in substantially the same form as this one, given the reasoning applied. It is uncertain what part the requirement to pay a break premium to the landlord also played in the judges findings because it may be that the premium meant that Mr Justice Morgan was more inclined to think that the parties had already decided what the landlord’s compensation for an early break was and that it should not effectively benefit twice.
It may not be the last we have heard of this case as it is rumoured to be the subject of an appeal by the landlord as so the Court of Appeal may get to express its views on the issues. This will be watched closely by landlords and tenants alike.
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© SA LAW 2013
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