Posts Tagged ‘break clause’

Break clauses and sub-leases: PW & Co v Milton Gate Investments Limited

February 14, 2022

In  PW & Co v Milton Gate Investments Limited ([2004] Ch. 142) Milton Gate Investments Limited (‘MG’) was the landlord and PW & Co (‘PW’) was the tenant of office premises. The lease (‘the head-lease’) was for a 25-year term.

The head-lease contained a break clause (clause 5(6) of the head-lease) entitling PW to terminate the head-lease by giving not less than 12 months’ notice to expire on 24 June 2002. The head-lease provided that if PW exercised this right, it would pay MG a sum equivalent to 9 months’ rent (‘the penalty’).

The penalty was not payable if, as at 24 June 2002, not less than 75% of the area contained in the head-lease was sub-let through leases approved by MG with an unexpired term of at least five years. PW granted seven approved sub-leases.

PW exercised its rights under the break clause. It argued that it was not obliged to pay the penalty because of the approved sub-leases.

This argument failed. It was established in Pennell v Payne that the effect of determining a head-lease through the exercise of a break right is that any sub-leases are also determined. Thus, the condition for escaping the penalty was not satisfied.

Clause 5(6) was an attempt to contract out of Pennell v Payne in that it envisaged that the approved sub-leases would survive PW’s exercise of its break right. It is not possible to contract out of Pennell v Payne:

‘When a tenant grants a subtenancy, he is granting a subsidiary estate out of the estate vested in him by the head tenancy. As a matter of principle, it would seem to follow ineluctably that, if and when the head tenancy determines, and the estate thereby created ceases to exist, any subsidiary estate carved out of it, including any subtenancy, must also determine. It is, I suppose, an example of the maxim nemo dat quod non habet. Ultimately, that is the simple proposition upon which decisions such as Pennell v Payne [1995] QB 192 and Barrett v Morgan [2000] 2 AC 264 rest. If that is the right analysis, it is difficult to see how a subtenancy can survive a destruction of the head tenancy simply because the landlord and head tenant agree that it should.’ (Neuberger J. at 164).

Michael Lower


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