Archive for the ‘Break clause’ Category

Break clause: implied term that rent paid in advance in respect of a period after termination should be repaid?

January 6, 2016

In Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd ([2015] UKSC 72) BNP granted a lease to M & S. The lease contained a break clause. The lease required M & S to pay rent quarterly in advance. The break right could only be validly exercised if there were no rent arrears at the time when the lease would end assuming the valid exercise of the break right (the ‘break date’). M & S had also to make a further payment to BNP if it exercised the break right. M & S served a clause to trigger the break right, paid the quarterly rent due immediately before the break date and made the further required payment. It now sought to recover the proportion of the rent attributable to the period from the break date up to what would have been the next quarter date under the lease. It argued that a term requiring BNP to make such a repayment should be implied into the lease. The Supreme Court upheld the Court of Appeal’s decision that there was no such implied term.

Lord Neuberger gave the main judgment. The decisive factor was ‘the established legal background against which the Lease was entered into, and in particular the general attitude of the law to the apportionability of rent payable in advance.’ ([42]) Rent is not apportionable in time in common law ([43]). Section 2 of the Apportionment Act 1870 varied this with regard to rent payable in arrear but not rent payable in advance ([45]). Thus:

‘Save in a very clear case indeed, it would be wrong to attribute to a landlord and a tenant, particularly when they have entered into a full and professionally drafted lease, an intention that the tenant should receive an apportioned part of the rent payable and paid in advance, when the non-apportionability of such rent has been so long and clearly established. Given that it is so clear that the effect of the case-law is that rent payable and paid in advance can be retained by the landlord, save in very exceptional circumstances (eg where the contract could not work or would lead to an absurdity) express words would be needed before it would be right to imply a term to the contrary.’ ([50])

There was a broader discussion of Lord Hoffmann’s statement in Belize Telecom that the process of implying terms into a contract was part of the general process of contractual interpretation. Lord Neuberger was critical of this view. He saw construction of the express terms of the contract as being logically prior to the question as to whether or not a term was to be implied ([28]) and as being ‘a rather different exercise’ ([29]). Lords Carnwath and Clarke, on the other hand, expressed support for Lord Hoffmann’s formulation. Lord Carnwath expressed the view that Lord Hoffmann’s formulation did not involve any watering down of the previous authorities to the effect that the implication of terms is based on necessity ([58] – [60]). Thus:

‘While I accept that more stringent rules apply to the process of implication, it can be a useful discipline to remind onseself that the object remains to discover what the parties have agreed or (in Lady Hale’s words) “must have intended” to agree. In that respect it remains, and must be justified as, a process internal to the relationship between the parties, rather than one imposed from outside by statute or the common law’. ([69])

Lord Clarke said:

‘like Lord Neuberger (at para 26) I accept that both (i) construing the words which the parties have used in their contract and (ii) implying terms into the contract, involve determining the scope and meaning of the contract. On that basis it can properly be said that both processes are part of construction of the contract in a broad sense.’ ([76]).

Michael Lower

Break clause: right to repayment of rent for period after the termination?

June 11, 2014

In Marks & Spencer plc v Bnp Paribas Securities Services Trust Company (Jersey) Ltd ([2014] EWCA Civ 603, CA (Eng)) 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.’ At first instance, it was decided that a term should be implied requiring the landlord to repay the portion of the final rent payment attibutable to the period after the termination of the lease. The landlords successfully appealed against this.

Arden LJ gave the only full judgment. After the decision of the  Privy Council in A.G. of Belize v Belize Telecom Ltd , the approach to implied terms has become an aspect of the general principles of contractual interpretation:

‘The test in Belize requires the court to ask whether the agreement has the meaning that such a term would achieve, because, even though the parties did not expressly include that term in their agreement, that is what their agreement means.’ ([23]).

In the next paragraph:

‘the implication of terms by interpretation requires a high level of loyalty to the parties’ agreement, read against the admissible background. The party seeking to establish an implied term must therefore show not simply that the term could be a part of the agreement but that a term would be part of the agreement.’ ([24])

The starting point is that no term should be implied ([25]). It must be necessary to imply a term to achieve the parties’ express agreement (determined in the usual way) ([26]).

Here, the parties must have realised that this question would arise and could have dealt with it by express words ([35]). The state of the case law at the time of the lease (part of the admissible background) was such as to point to the conclusion that there was no right to recover the rental for the period after termination. This reinforces the need for express words ([39]) No term was to be implied ([43])

Michael Lower

 

Break clauses: the conditions for valid exercise of a break right must be complied with

April 28, 2014

In Friends Life Limited v Siemens Hearing Instruments Limited ([2014] EWCA Civ 382, CA (Eng)) S were tenants and the lease contained a break clause giving them the right to determine the lease before the end of the term on serving a notice exercising the right on the landlord. The break clause clause required the tenant’s break notice to be ‘be expressed to be given under section 24(2) of the Landlord and Tenant Act 1954’ (in fact this section makes no reference to the service of any notice). The tenants served a break notice that complied with the requirements of the clause in every respect except that it was not expressed to be given under section 24(2) of the Landlord and Tenant Act 1954. The question was whether the notice was valid. The English Court of Appeal (Lewison LJ giving the main judgment) held that the notice was not valid; it had failed to comply with one of the conditions for its exercise.

Break clauses are a form of option. The conditions for the exercise of an option must be fully complied with; there is no concept of substantial compliance. In failing to be expressed in the manner required, the notice failed to comply with one of the conditions for its valid exercise.

‘Where an option prescribes substantive conditions that must be fulfilled by the promisee before the promisor’s obligations are triggered, those conditions must be completely fulfilled. Substantial fulfilment is not enough.’ ([27])

‘Here there was no compliance with the formal requirement of clause 19.2 that the notice be “expressed” in a particular way. There was quite simply no reference in the notice to section 24 (2) at all.’ ([65]).

Michael Lower

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

June 10, 2013

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

Construction of notice exercising break right

April 25, 2013

Trafford MBC v Total Fitness (UK) Ltd ([2002] EWCA Civ 1513, CA (Eng)) concerned a six year lease. L had the right to bring it to an end at any time by giving two weeks’ notice. L purported to exercise this right on 8 October 2001 by giving 17 days’ notice. The notice confirmed ‘for the avoidance of all doubt’ that it would take back possession at the end of 24th October 2001. T contended that the notice was fatally flawed: it gave two inconsistent expiry dates and T could not know which was intended (T relied on the ‘rule’ in Lester v Garland to the effect that the date of giving the notice is to be excluded from the expiry period so that it was not clear whether the notice was intended to take effect on the 24th or the 25th October).

T failed. It was open to the draftsman to expressly provide that the date of giving the notice was to be included in the 17 day period ( to expressly disapply the Lester v Garland approach). In effect, this was what had been done by making it clear ‘for the avoidance of all doubt’ that the notice would take effect on 24th October 2001. The notice was clear and valid.

Break clauses and notices to quit: validity determined by reference to principles of contractual interpretation

April 24, 2013

In Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd ([1997] A.C. 749, HL) two leases contained break clauses giving T the right to terminate the lease by a notice to expire on 13 January 1995. By mistake, the notice to quit referred to 12 January 1995. The question was whether the notice was valid or not. By a majority, the House of Lords held that it was.

The majority emphasised that notices exercising break right belong to the same class of legal document as notices to quit. The modern approach is to interpret a notice in the same way as any other contractual document would be interpreted. An older, stricter approach that saw these documents as being a class apart and as demanding strict compliance for validity (Hankey v Clavering) was disapproved.

Lord Steyn made the following points:

1. This was not a case in which the relevant break clause made the inclusion of certain content in the notice a condition of validity;

2. In general:

‘The question is not how the landlord understood the notices. The construction of the notices must be approached objectively. The issue is how a reasonable recipient would have understood the notices. and in considering this question the notices must be construed taking into account the relevant objective contextual scene.’ (768)

3. The fact that a notice exercising a break right has only one purpose is relevant to the interpretation of the notice:

‘Prima facie one would expect that if a notice unambiguously conveys a decision to determine a court may nowadays ignore immaterial errors which would not have misled a reasonable recipient.’ (768)

4. Break clauses and notices to quit ‘belong to the general class of unilateral notices served under contractual rights reserved.’ (768) Even if they contain an error they may be valid if they are sufficiently clear and unambiguous to leave a reasonable recipient in no doubt as to how and when they are intended to operate.

In this case, a reasonable recipient would have appreciated that the tenant wished to determine the lease on 13 January.

‘The question is not whether 12 January can mean 13 January: it self-evidently cannot. The real question is a different one: does the notice construed against its contextual setting unambiguously inform a reasonable recipient how and when the notice is to operate under the right reserved? As Lord Hoffmann has observed we no longer confuse the meaning of words with the question of what meaning in a particular setting the use of words was intended to convey.’ (772)

Lord Steyn cautioned against drawing the wrong conclusion:

‘I do not accept the extreme argument of counsel for the tenant that whenever a notice to determine refers to a break clause, and whatever the other circumstances of the case, the notice must be valid. That goes too far. One can easily conceive of much weaker cases where the test posed above could not be satisfied.’ (773)

Lord Hoffman, too, emphasised that the normal principles of contractual interpretation had to be applied and that according to these the notice in the present case was clearly valid.

Lord Clyde said:

‘The standard of reference is that of the reasonable man exercising his common sense in the context and in the circumstances of the particular case. It is not an absolute clarity or an absolute absence of any possible ambiguity which is desiderated. To demand a perfect precision in matters which are not within the formal requirements of the relevant power would in my view impose an unduly high standard in the framing of notices such as those in issue here. While careless drafting is certainly to be discouraged the evident intention of a notice should not in matters of this kind be rejected in preference for a technical precision.’ (782)

Clerical errors in notice exercising right to give notice to determine a lease

April 23, 2013

In Carradine Properties Ltd v Aslam ([1976] 1 W.L.R. 442) a lease included a break clause giving the landlord the right to determine the lease on September 27 1975. By mistake, the notice (served in 1974) purported to terminate the lease on September 27 1973. The question was whether or not this slip invalidated the notice. It was held that the notice was valid. As a matter of construction (having regard to the relevant factors as they applied in this case) it was clear that the notice sought to exercise the right to terminate the lease on September 27 1975. Goulding J. thought that the same approach to construction would be equally applicable to a notice to quit in relation to a periodic tenancy.

Goulding J. explained the test as follows:

‘I would put the test generally applicable as being this: “Is the notice quite clear to a reasonable tenant reading it? Is it plain that he cannot be misled by it?” Applying that test, if applicable, to the present case, I think the notice would be saved because the tenant receiving that notice and knowing the terms of the lease must have seen there was a mistake, as it would not say “1973” in 1974. Once that is accepted, it is obvious that the notice is for 1975 and not 1973. In no ordinary circumstances would a reasonable tenant knowing the terms of the lease take the notice as being other than for 1975. It therefore seems to me that if one applies the test I have mentioned, then the notice would be saved.’ (444)

A little later:

‘In an option clause the requirement is that a party must strictly comply with the condition for its exercise. If the condition includes the giving of a particular notice, it seems to me that the logical first approach is to interpret the notice, looking at the words and applying legal principles to their construction, and then ask whether it complies with the strict requirements as to exercise of the option. If that is right, I think a benevolent approach could be applied in this case, as in the Duke of Bedford’s case (1796) 7 Term Rep. 63, because reasonably read by a reasonable tenant the mistake is obvious on the face of it, and there is no doubt what the mistake was. Therefore one interprets the notice as asserting an intention to  determine in 1975. It is true that if whoever made the mistake had typed 1976 instead of 1973, the error would probably have been incurable because although the tenant might suspect there was a slip, it might be that the landlord did intend 1976, not knowing or understanding his rights under the lease. In such a case the tenant would be entitled to disregard the notice but because a past date was given in the notice it is insensible and therefore an authority such as the Duke of Bedford’s case is in point.’ (446)