Break clause: can the tenant recover ‘excess’ rent paid in advance?

In Marks & Spencer plc v Bnp Paribas Securities Services Trust Company (Jersey) Ltd ([2013] EWHC 1279 (Ch)) (since overturned by the Court of Appeal) a lease contained a break clause. If exercised, the lease would determine in between the quarter days on which rent payments were to be made. The tenants exercised the break clause. On the next quarter day, they paid a full quarter’s rent. After the lease had come to an end, the tenants argued that they were entitled to a repayment of that portion of the rent attributable to the period after the end of the lease.

The lease provided that rent was payable ‘yearly and proportionately for any part of a year by equal quarterly payments in advance on the Quarter Days.’

The tenants rested their argument for recovery on (i) the express words just mentioned, (ii) the presence of an implied term that such repayment would be made, and (iii) restitution. There was no express right of recovery ([29]). They succeeded on the second ground; there was an implied term to this effect ([35] – [37]). The court would not have ordered repayment under the heading of restitution since there had been no total failure of consideration ([42]).

The other ‘excess’ payments made (car park licence fee [47] and insurance charge [49] – [52]) were also recoverable.

The service charge clause provided for an advance payment and (once the accounts for the year were settled) a balancing charge or credit. It was held that the tenants were entitled to invoke the balancing mechanism in the service charge clause even though this was an exercise which would take place after the end of the lease. As a credit against future service charge payments was of no use to them, they were entitled to a refund of the ‘credit’. In fact, the landlords had conceded this point ([56]).

Returning to the recoverability of the excess basic rent payment attributable to the period after the lease came to an end, the court held that:

1. if there had been no break clause and the term had expired between quarters then the tenant would, as a matter of the express terms of the lease (‘proportionately for any part of a year’) have been obliged only to pay rent up to the end of the term . The same result could be reached based on a ‘common sense view’ even without these words ([27]); and

2. the same would be true if the lease had been brought to an end by the exercise of a break clause and it was certain from the outset that the notice was effective to determine the lease ([28]).

The effectiveness of the break clause in this case, however, was conditional so that prima facie rent had to be paid for the full quarter ([28]). There was no express right of recovery of the excess and the words ‘proportionately for any part of a year’ did not confer any such right ([29]).

There was, however, an implied term to the effect that a repayment of the excess rental payment would be made. The court referred to the amounts that would have been payable had it been certain that the lease would end when it did, in fact, end. This meant that a reasonable person would think that no rent was payable for the period after the lease had ended. This conclusion was reinforced by the fact that the tenants had to pay a capital sum if they exercised the break right and it seems unlikely that they were to get both this and rent for the period after the lease ended ([35]).

As a cross-check, the court considered whether the implication of the term was reasonable ([36]) and necessary to give business efficacy to the agreement ([37]). These cross-checks reinforced the conclusion that a term as to repayment was to be implied.

There would be no such implied term if the lease had come to an end as a result of forfeiture ([38]).

The same claim based on restitution would have failed: it was not possible to say that the consideration for the final quarter’s rent had totally failed ([42]).

Michael Lower

2 Responses to “Break clause: can the tenant recover ‘excess’ rent paid in advance?”

  1. ZCT Says:

    Thank you for the fantastic summary! I have a question of interest: suppose the tenant has, instead of paying rent periodically, paid a huge lump-sum premium to secure the lease at the start and now wants to terminate the lease before the expiry of the term. Will the ‘excess’ premium be recoverable in the same way?

    • Michael Lower Says:

      It is first and foremost a question of construction of the agreement / lease and so is context-sensitive. I would suggest, though, that if the premium was paid for the grant of the lease (including the break clause) then the tenant has got what it paid for. The same idea would presumably rule out a claim based on restitution.

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