In 2014 the Court of Appeal overturned the High Court’s decision which had been made in favour of Marks and Spencer PLC (“M&S”) in relation to refundable rents following the exercise of a break option, a decision that lost M&S £1.1 million. An outline of the facts and the ruling made by the Court of Appeal can be found at – https://www.foxwilliams.com/news/899/ and is summarised below.
Following on from this decision, M&S appealed to the Supreme Court in an attempt to reclaim the £1.1 million in rent from its Landlord, BNP Paribas (“BNP”). The Supreme Court came to the unanimous decision on 2 December 2015 that M&S’ appeal should be dismissed on the basis of “far-reaching implications for contract”.
In 2011, M&S exercised a break option in their leases with BNP of office space over four floors at The Point in Paddington. M&S, acting cautiously, paid the full quarterly rent (even though the leases were to terminate a month after the break date and despite the fact that BNP invoiced M&S for an apportioned amount) as well as the break option payment, in order to ensure that it satisfied all of the conditions of the break clause. One of these conditions required that there were no arears of rent on the date the break right was exercised. The leases came to an end on the break date in January 2012 and M&S claimed that it was entitled to a refund of £1.1 million in rent, representing the rent paid in advance for the period after the break date up to and including the next rent day.
The Supreme Court’s Decision
The Supreme Court looked at the issue of whether M&S could recover from BNP the apportioned rent in respect of the period after the break. The Supreme Court, on reviewing the leases, ruled that there was no contractual obligation on BNP to return the apportioned rent, and further that it would be wrong to attribute to a landlord and tenant an intention that the tenant should receive back an apportioned part of the rent paid in advance, as neither common law nor statute apportion rent payable in advance on a time basis. The Supreme Court rejected the argument that a term should be implied for reimbursement on the grounds that the absence of such a term made the contract unworkable or internally incoherent. The Supreme Court ruled that “a term will only be implied if it satisfies the test of business necessity or it is so obvious that it goes without saying; it will be a rare case where only one of those two requirements are met”. The Supreme Court ruled that rent payable in advance could only ever be apportioned as a result of a clear and unambiguous clause in the contract, which the leases in this case lacked.
This case is now set to be the leading authority on implied terms, break clauses and apportionment of rent payable in advance. It is important to note that the judgement applies not only to property law, but also to contract law in a wider sense. The Supreme Court made it clear that when dealing with a commercial contract, the court will respect the agreement made and will avoid interfering with what the parties have agreed. The test for implying a term into a contract remains a question of whether such term is necessary to give business efficacy to the contract, and that test is not one of absolute necessity, but whether, without the implied term, the contract would lack commercial or practical coherence.
It is critical to ensure when drafting the lease (or the heads of terms) that any provisions pertaining to apportionment or reimbursement are dealt with expressly within the lease so as to not leave room for uncertainty. It is also important to remember that notwithstanding any provision for reimbursement of rent, tenants should ensure when exercising break rights that all payments are made strictly in accordance with the lease terms, especially where a break is expressed to take effect mid-quarter and is conditional on payment of rents.
Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited  UKSC 72.