Recent Court of Appeal decision in break case costs M&S £1.1m

June 3, 2014

In a highly anticipated ruling from the Court of Appeal, the decision made by the High Court in favour of Marks & Spencer PLC (“M&S”) has been reversed, a decision that lost M&S a chance to recover £1.1 million.

Following this decision, tenants breaking leases partway through a rent period are advised to ensure that an express refund provision clause providing for landlords to repay rents following the exercise of a break is included in any new lease.

The facts
M&S was the tenant of four floors of an office building in Paddington, of which BNP Paribas (“BNP”) was the landlord. Each of the four leases was granted on identical terms, and the relevant terms were as follows:

  • The lease was granted from 25 January 2006 to 2 February 2018.
  • Rent was to be paid in equal instalments in advance of the usual quarter days.
  • The lease contained an option to break, exercisable by M&S on 24 January 2012 (and again in 2016). 
  • The break clause was conditional on payment of arrears, and the payment of a penalty equivalent to a year’s rent. 

M&S, after complying with the notice requirements of the lease when exercising the break clause, took a cautious view and paid the full quarterly rent (even though the leases were to terminate a month later) as well as the penalty. This payment was made despite the fact that BNP invoiced M&S for an apportioned amount.

As M&S had complied with all of the conditions surrounding the break the lease was terminated. When M&S requested a refund in respect of the period from the break date up to and excluding the next rent payment day BNP refused. M&S then made an application to the court claiming they were entitled to a refund.

The High Court Decision
The High Court held that M&S was entitled to a refund, despite the fact that the lease did not contain an express provision to that effect. When the payment was made in December 2011 there was no certainty that the lease would definitely end on the break date as the termination was conditional and all conditions were not yet satisfied. Prima facie the amount of rent due in December was the full quarter’s rent. Added to this, the High Court held that the penalty paid was compensation and it was unlikely that either party had any intention that BNP would also be entitled to keep the full quarter’s rent. As such, the Judge held that a term allowing M&S to a refund of the overpaid rent should be implied to give the lease business efficiency. That is, without the implied term, the lease would not make sense.

The Court of Appeal’s Decision
The Court of Appeal overturned the decision of the High Court, considering the wording of the lease as a whole and in the context of the relevant circumstances, and held that in the absence of an express clause, the rent overpaid would not be returned to M&S. The Court of Appeal held that a term can only be implied where it is necessary to do so and here the lease could not “reasonably be understood to include such an implied term”. The parties could have negotiated that such a clause be expressly inserted into the lease at the outset, and as the break clause was exercisable mid-quarter, the possibility that M&S would have to pay a full quarter’s rent should have been obvious. As such, M&S was not entitled to recover the £1.1m overpayment.

Top Tips
It therefore remains that tenants should ensure that all payments are made in accordance with the lease terms where a break is expressed to take effect mid-quarter and is conditional on payments of rents. Whilst this decision will be welcomed by landlords, tenants wishing to recover any overpayments should ensure that there is an express clause within the lease from the outset.

Marks and Spencer PLC v BNP Paribas Securities Trust Company (Jersey) Ltd & Anr [2014]EWCA Civ 603

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