In what circumstances is a tenant entitled to reimbursement of overpaid rent for a period following a lease break? The Supreme Court decided that a term for the rent to be repaid to the tenant for the period after termination could not be implied into four leases.
Background
Marks and Spencer plc (Appellant) v BNP Paribas Services Trust Company (Jersey) Limited and another (Respondents) [2015] UKSC 72
Marks and Spencer (M&S) were tenants of four floors in a building under four leases on the same terms. They served notice to break the leases. The break clause was conditional on there being no arrears of basic rent or VAT on the basic rent and on payment of a lump sum of just under £1m—reflecting exactly a year’s rent.
The break date fell in the middle of a quarter on 24 January 2012. On the quarter day prior to the break date (25 December 2011), M&S paid the full quarter’s rent, full quarter’s ‘car park licence fee’ (also reserved as rent) and the full quarter’s on-account service charge. Approximately six months prior to the break it also paid a year’s insurance premium.
The High Court allowed M&S’ claim to be reimbursed the amount which related to the period after the break date ie from 24 January 2012 to 24 March 2012.
The Court of Appeal allowed the landlord’s appeal, deciding that the lease, read as a whole against the relevant background, would not reasonably be understood to include a term providing for such reimbursement and so the test for an implied term was not met.
M&S appealed to the Supreme Court.
What was the issue involved?
M&S accepted that there was no provision in the leases expressly obliging the landlord to pay the apportioned sum to the tenant. Accordingly, in order to succeed, M&S had to establish that such an obligation had to be implied into the leases.
What did the Supreme Court decide?
The Supreme Court dismissed M&S’ appeal.
It confirmed that there are two types of contractual implied term. The first, with which this case was concerned, was a term which is implied into a particular contract, in the light of the express terms, commercial common sense, and the facts known to both parties at the time the contract was made.
The second type of implied terms arises because, unless such a term is expressly excluded, the law (sometimes by statute, sometimes through the common law) effectively imposes certain terms into certain classes of relationship.
What was the test for implication of a contractual term?
The judicial approach to the implication of contractual terms so far represented a clear, consistent and principled approach. A term will only be implied if it satisfies the test of business necessity. As per BP Refinery, for a term to be implied, the following conditions (which may overlap) had to be satisfied:
- it must be reasonable and equitable
- it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it
- it must be so obvious that ‘it goes without saying’
- it must be capable of clear expression
- it must not contradict any express term of the contract
The Supreme Court acknowledged that it could be dangerous to reformulate the principles, but it added further comments:
the implication of a term is not critically dependent on proof of the actual intention of the parties when negotiating the contract. If one approaches the question by reference to what the parties would have agreed, one is not strictly concerned with the hypothetical answer of the actual parties, but with that of notional reasonable people in the position of the parties at the time they were contracting
a term should not be implied into a detailed commercial contract merely because it appears fair or merely because one considers that the parties would have agreed it if it had been suggested to them. Those are necessary but not sufficient grounds for including a term
- however, it was questionable whether the requirement for reasonableness and equitableness, will usually, if ever, add anything—if a term satisfies the other requirements, it is hard to think that it would not be reasonable and equitable
- a term will only be implied if it satisfies the test of business necessity or it is so obvious that it goes without saying—only one of these requirements need be satisfied, but it would be a rare case where only one of them was met
- it was vital to formulate the question posed by the ‘officious bystander’ with the utmost care
- necessity for business efficacy involved a value judgment. The test was not one of ‘absolute necessity’. A more helpful way of putting it may be that a term can only be implied if, without the term, the contract would lack commercial or practical coherence.
The Supreme Court also made some observations about the test as laid down in Belize:
- the test in Belize as to whether a term is implied, is to be judged at the date the contract is made
- Belize did not dilute the test for the implication of contractual terms
- the process of implying a term was not part of the exercise of interpretation—even though the factors to be taken into account on an issue of construction are also taken into account on an issue of implication
Lord Neuberger confirmed that Lord Hoffmann’s observations in Belize were open to more than one interpretation on these points and some of those interpretations were wrong in law. In those circumstances, the right course for the Supreme Court to take was to say that those observations should henceforth be treated as a:
‘characteristically inspired discussion rather than authoritative guidance on the law of implied terms’
However, Lord Carnwarth, while agreeing that Belize did not dilute the test for implication of contractual terms, considered that, though the judgment had stimulated more than usual academic controversy, that was not sufficient reason to question its continuing authority. On the contrary, properly understood, it was a valuable and illuminating synthesis of the factors which should guide the court.
Lord Clarke agreed that Belize did not dilute the relevant test and also agreed with Lord Neuberger that as the factors to be taken into account on construction and implication were the same, that both processes were part of construction of the contract in a broad sense.
What about the general law as to apportionment of rent payable in advance?
It was well-established that rent, whether payable in arrears or advance, was not apportionable in time in common law. Section 2 of the Apportionment Act 1870 (AA 1870) provides that all rents and other periodical payments should be considered as accruing from day-to-day and be apportionable in respect of time accordingly. There was no doubt that AA 1870, s 2 applied to rent payable in arrear. The conclusion of the Court of Appeal in Ellis that AA 1870 did not apply to rent payable in advance was correct. This mirrors the position on forfeiture, where a landlord who forfeits a lease under which the rent is payable in advance is entitled to the payment of the whole of the rent which falls due on the quarter day preceding the forfeiture.
What were the Supreme Court’s conclusions?
There was force in the landlord’s argument that the leases were very detailed documents which had been entered into between two substantial and experienced parties and had been negotiated and drafted by expert solicitors. The implied term sought lay uneasily with the express terms. In particular, the provision that the tenant would be paid £150,000 if it did not exercise its right to break showed how carefully and fully the parties had considered and identified their rights against each other in relation to the break. This provision, combined with the break conditions as to payment by the tenant of the lump sum and for the rent to be paid up-to-date, showed that the parties had directed their minds to the specific question of what payments were to be made between them in connection with the break and, in particular, what sums were to be paid if the right to break either was implemented or was not implemented. It was therefore inappropriate for the court to step in and fill in what was no more than an arguable lacuna.
On the other hand, there was a strong case for an implied term on the basis argued by M&S that, had it paid the lump sum before 25 December 2011, it would have been known at that date that the lease would come to an end before 25 March 2012. Therefore, as the lease provided for the rent to be paid ‘proportionately for any part of a year’ the landlord would only have been due an appropriate portion of the basic rent on 25 December 2011 (ie up to the termination date on 24 January 2012). Commercial common sense mandated that it should be in the same position whether it paid the lump sum before or after 25 December 2011.
However, this was overridden by the general law on apportionment of rent. Given the clear, general understanding that neither the common law nor statute apportion rent payable in advance on a time basis, it would be wrong, save in a very clear case, to attribute to a landlord and a tenant, particularly where they had entered into a full and professionally drafted lease, an intention that the tenant should receive back an apportioned part of rent payable and paid in advance.
While the difference in result between the tenant paying the lump sum before or after 25 December 2011 could fairly be said to be capricious or anomalous, it did not begin to justify a suggestion that the contract was unworkable. Indeed, the result could not be said to be commercially or otherwise absurd, particularly as it was entirely up to the tenant as to when the sum was paid.
The Supreme Court came to the same conclusion regarding the:
- car park licence fee, where the case was even stronger, as there was no wording regarding paying rent proportionately for any part of a year and the sum involved was very small in relative term
- insurance rent, where the position was less clear, but, unless it could be shown to have been unreasonable for the landlord to have insured the building for the whole of the ensuing year when they did so, the reasons for dismissing the appeal in relation to the rent and car park licence fee applied equally to the insurance rent. After all, the insurance rent was a single annual sum, specifically reserved as rent, with no provision for apportionment, and it became payable in full in July 2011
The same conclusion did not apply to the service charge, in respect of which there was specific provision contemplating repayment.
What should lawyers take from this decision?
The message is clear—to be certain, reimbursement must be expressly provided for in the lease. The court will not readily imply a term for the reimbursement of overpaid rent.
The Supreme Court has provided clarity in deciding that M&S’ arguments—in particular as to the timing of the payment of the lump sum—were all overridden by the law as to apportionment of rent. Whereas, previously, the decisions of the courts below had left the waters slightly muddied with:
a key factor in the High Court’s decision to imply a term as to reimbursement was that the tenant had to pay a lump sum as compensation to the landlord, and
a key factor in the Court of Appeal’s decision not to imply a term being that the landlord remained uncertain whether the lease would terminate on the break date until the break premium was paid
The court also confirmed that:
the approach to apportionment of rent applies equally to a case where a lease determines by forfeiture as it does to a case where it determines by exercise of a right to break
reference to rent payable ‘proportionately for any part of a year’ related to payment of rent where a lease is terminated via a break clause and not just where the original lease term terminates by effluxion of time. The court agreed that had M&S paid the lump sum before 25 December 2011, it would have been known at that date that the lease would come to an end before 25 March 2012 and so—as the lease provided for the rent to be paid ‘proportionately for any part of a year’—the landlord would only have been due an appropriate portion of the basic rent on 25 December 2011 (ie up to the termination date on 24 January 2012)
The Supreme Court could be regarded as having muddied the waters regarding the reasoning in/authority ofBelize. However, as Lord Clarke pointed out:
‘although Lord Hoffmann emphasised that the process of implication was part of the process of construction of the contract, he was not resiling from the often stated proposition that it must be necessary to imply the term and that it is not sufficient that it would be reasonable to do so.’
The technical arguments on the reasoning have not called this central tenet into question and so may be unlikely to affect the end result in most cases.
Jane Fox-Edwards Real Estate Litigation specialist at Allen & Overy, who acted alongside the firm’s Head of Real Estate Imogen Moss for the landlords (the BNP Paribas companies as trustees for Britel Fund Trustees Limited and WELPUT):
The case law surrounding break clauses has produced some harsh decisions for tenants over the past few years. The tenant here was looking for a way of ameliorating the effects of unfavourable lease terms but the Supreme Court has firmly closed that door. In so doing, it introduces some welcome certainty which benefits everyone. But the judgment applies to contract law more widely. In keeping with other judgments this year, the message from the Supreme Court is clear. Where there is a detailed commercial contract the court will respect the bargain struck and veer away from interfering with what the parties have said.
Joanna Bhatia, solicitor in the Lexis®PSL Property team.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
Source: LexisNexis Purpose Built
Supreme Court dismisses Marks and Spencer’s appeal for repayment of overpaid rent following lease break
