The Supreme Court recently handed down judgment in the case of Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd and another  UKSC 72
The case related to a tenant’s break right in a lease. M&S was the tenant under the lease, and BNP Paribas (and another) the landlord.
A tenant’s break right allows a tenant to serve notice to end a lease before its contractual termination date. Usually in commercial leases a break right will have conditions attached to its exercise, a common example being that the tenant has to pay all rents due under the lease at the break date to effect the break.
This can put tenants who pay annual rent in advance in difficulties. If the break date falls mid-way through a rent payment period, the tenant will usually still need to pay the rent for the whole period in full, resulting in the tenant paying rent for a period after the lease has determined.
In the M&S case, M&S’s break right was subject to a pre-condition that there should be no arrears of rent at the break date. M&S served a notice on its landlord to determine the lease on 24 January 2012 (the break date). M&S had already paid the full rent due on 25 December 2011, up to and including 24 March 2012.
When the lease came to an end on the break date, M&S brought a claim against BNP Paribas seeking a refund of the rent paid for the period following the break date to 24 March 2012 (approximately £1.1m). The lease did not contain an express term requiring BNP Paribas to return the money (an apportionment provision).
Historically, the Courts have ruled that where a break right operates to terminate a lease mid-way through a quarter; the tenant must pay the full quarter’s rent unless the lease contains an express apportionment provision. However, in the High Court in 2013, Mr Justice Morgan ruled that it was necessary for a term allowing M&S to recover the money to be implied into the lease to give the lease business efficacy.
In May last year, the Court of Appeal disagreed and found that it was not appropriate to imply a term into a lease where there was no express term providing for such repayment.
The Supreme Court upheld the Court of Appeal’s decision. Lord Neuberger’s judgment, in particular, provides useful guidance to all practitioners on the approach a court will take when implying terms into a commercial contract – although it remains the case that a term should only be implied into a contract if it is so obvious it goes without saying, or if it is necessary to give business efficacy to the contract. In the M&S case, the Supreme Court held that an implied term was not necessary to make the lease workable – the fact that its inclusion might lead to a commercially fair result was not enough.
While the judgment has wider implications for all commercial contracts, it will not be a popular decision with tenants who, if well advised, should now seek to:
- negotiate away any pre-conditions attached to a break right; or
- insist that the lease sets out how sums paid in advance should be dealt with following the exercise of a tenant break right (an express apportionment clause); or
- agree a break date which falls on the final day of a rent period (not mid-way through it).
Faye Hyland is real estate litigation associate at Fieldfisher