Giving tenants a break

A recent case in the Chancery Division is the latest in a series concerning payment of rent as a condition of exercising a break clause: Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2013] EWHC 1279; [2013] 22 EG 92. In this series of cases, tenants have sought to overcome the apparent unfairness of paying quarterly rent due in advance as a condition of exercising a break clause part way through a quarter, leading to an overpayment of rent when compared pro rata to the period of actual occupancy.

The cases commonly involve a standard rent clause such as: “rent shall be paid yearly and proportionately for any part of a year by equal quarterly instalments in advance on the usual quarter days”, together with a break clause which requires the payment of rent “up to and including the break date”.

Tenants have previously sought to argue that because the rent clause stated that rent was to be paid “yearly and proportionately for any part of a year”  in order to exercise the break clause, the rent only needed to be paid proportionately up to the break date.

In Canonical UK Ltd v TST Millbank LLC [2012] EWHC 3710 this argument was dismissed on the basis that the court was bound by established authority that rent payable in advance was not apportionable. In addition, there was specific authority in the context of forfeiture that the obligation to pay rent “yearly and proportionately for any part of a year”  was not to be interpreted as modifying an obligation to pay in full during the lease: Capital and City Holdings Ltd v Dean Warburg [1989] EGLR 90. The Court followed the decision in Capital and City on the basis that unless and until the break is properly exercised by satisfaction of break conditions the lease will not terminate on the break date. Therefore at the point of the quarterly rent payment termination on the break date was not a certainty and the advance rent was payable in full.

Canonical was due to be heard with PCE Investors Ltd v Cancer Research UK [2012] EWHC 884 in the Court of Appeal but both cases settled before the anticipated hearing in February 2013.

The question of "overpaying" rent has recently come before Morgan J in the Chancery Division in Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2013] EWHC 1279; [2013] 22 EG 92 with a more tenant-friendly outcome. In M&S the full quarterly rent was paid in advance of the break date but the tenant sought to recover the "overpaid" rent on three alternative bases: (i) express term, (ii) implied term or (iii) restitution.

The express term argument essentially relied on the same interpretation which failed in Canonical and PCE Investors. For the same reason the tenant could not recover the rent on this basis.

However, the tenant was successful in arguing that the lease should be read with an implied term such that the lease was reasonably understood to mean that if the tenant pays a full quarter’s rent on the last quarter day before the break date and the lease then ends on the break date, in the middle of the quarter, then the lessor is obliged to pay back to the lessee the part of the instalment of rent which exceeds the full amount which is due.

Morgan J’s two principal reasons for finding an implied term were as follows

(i)The inclusion of “proportionately for any part of a year” in the reservation of rent meant that if it was certain on the date of serving break notice that the term would end on the break date then the tenant would only be obliged to pay an apportioned part of a quarter’s rent and this would lead a reasonable person reading the lease to expect that where a break clause took effect, rent would be payable for the term leading up to the break date, but not for any period beyond it.

(ii) It was also significant that another condition of operating the break clause was that the tenant pays to the landlord a sum equivalent to one year’s rent (nearly £1m in this case) to compensate for loss of income stream following vacant possession which made it unlikely that there had been any intention that the landlord would also be entitled to keep the full amount of the quarter's rent.
Having found for the tenant on the basis of an implied term the Judge quickly dispensed with the restitution argument because there was no total failure of consideration. Indeed, the same argument had been rejected in PCE Investors following the earlier case of Quirkco Investments Ltd v Aspray Transport Ltd [2011] EWHC 3060. A restitution claim requires a total, not partial, failure of consideration and it is not possible to divide up a single consideration (i.e. a quarter’s rent) on a time apportionment basis.

Prior to M&S, tenants had very little leverage for recovering rent "overpaid" prior to a break date. This decision has given tenants some hope of recovering the additional rent by way of an implied term which had not previously been argued in PCE Investors or Quirkco.

The decision will not assist every tenant. In order to align factually with the M&S case tenants will want to consider the following two points:

• Whether the reservation of rent in their lease includes the provision for rent to be paid “proportionately for any part of a year”; and
• If there is another premium to be paid to the landlord as compensation for their loss of income following the exercise of the break.