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Break Clauses, M&S and Cashback

09/07/2014 | Caroline DeLaney

CarolineDelaney_I0A2614.121051The careful control of costs is an issue high on the list of business priorities.  Premises are often the largest overhead and so the opportunity for a tenant to reduce those costs, particularly when premises become surplus to requirements is always welcome.

In a buoyant market where landlords clamour to take properties back to redevelop and to re-let, the exercise of a break clause terminating a tenancy early will often be welcomed and any shortcomings in the notice are likely to be forgiven.  However in a market where property is hard to re-let or if the landlord does not wish to lose a valuable covenant, the landlord will closely scrutinise the tenant’s break.

Breaks are strictly construed.  They have to be in the correct form, served by the correct party in the manner prescribed by the lease.  If the break clause requires conditions to be fulfilled, these conditions have to be adhered to or the break will be ineffective.

There has been many a tale of woe coming before the courts over the years, exposing the many traps into which the tenant can fall.  The latest headline case is unusual in that it does not involve an unsophisticated tenant, but rather the titan in the retail world that is Marks & Spencer.  It does not involve a challenge on the validity of the break notice as the tenant was well-advised.  Rather it looks at the issue of whether a tenant is entitled to a refund of rent paid in advance when a tenancy comes to an end in the middle of a rent period. It was only after it had paid all the monies claimed by the landlord and successfully exercised its break, that Marks & Spencer sought a refund of monies it claimed had been overpaid.

Marks & Spencer PLC v BNP Paribas Securities Services Trust Company (Jersey) Limited & Another [2014] ECWA Civ 603 came before the Court of Appeal in March 2014,  The judgment was handed down in May 2014, a year after the controversial High Court decision that had caused landlords to revisit the drafting of their break clauses.

This case involved Marks & Spencer’s headquarters’ building in Paddington.  It had a lease of four floors for a term expiring in February 2018.  The lease contained a break clause permitting Marks & Spencer to terminate the lease early on 24 January 2012.  The break clause required the tenant to give six months’ notice and was conditional on there being no arrears of rent (including VAT) on the break date and on the tenant paying a penalty equivalent to a year’s rent on or prior to the break date.

Prior to the High Court decision, it was accepted that if the break date fell in the middle of a rental period, rent for the entire period had to be paid unless the lease contained express provision for apportionment.  The Apportionment Act 1870, which imposes apportionment by statute only applies to situations where rent is paid in arrears.  As the vast majority of tenancies require rent to be paid in advance, the parties have to rely on express provision in their agreement.

In the High Court, Mr Justice Morgan concluded that although the lease did not expressly provide that sums relating to the period after the break date should be repaid, such a term should be implied since a reasonable person would expect that a tenant should only pay for what the tenant has actually received.

Landlords were shocked, tenants rejoiced.  The Court of Appeal has however allowed the landlord’s appeal and restored order.

The Marks and Spencer lease contained an apportionment clause providing that the rent should be paid “proportionately for any part of a year” but it did not go further than this.  The Court of Appeal concluded that although at first sight this might be construed as provision for repayment of rent for any part of the quarter beyond the break date, these words were only applicable where it was clear at the time the rent was paid that the lease would end before the end of the rent period.

There were two conditions in the Marks and Spencer lease that had to be satisfied for the break to be effective.  The tenant had not to be in arrears of rent AND the break premium had to be paid on or before the break date.

When the break was exercised and the final quarterly payment fell due on 25 December 2011, there was no certainty that the lease would end at the break date.  On that basis the Court of Appeal concluded that the express apportionment provision did not apply to the exercise of the break provision.  Further the court concluded that no such provision could or need be implied.

The conclusion of the Court of Appeal means that Marks & Spencer is not entitled to cashback of over a million pounds which it would have received from its former landlord as a result of the High Court decision.  Nevertheless, it restores order to the world of break clauses.  Many people, including myself, had taken the view that the High Court judgment was wrongly decided.  The Court of Appeal has simply restored the status quo.

Top Tips:

1. Clarity in the drafting of the break notice is the key.  If a tenant wishes to only pay rent for the period for which it occupies the property, it must make sure that the break date is on the last day of the rent period or that the lease provides for the express apportionment of rent following the break.

2.  There are so many traps in the exercise of break clauses.  You have to think about the form and method of service of the break notice, the timing of the notice and the fulfilment of any conditions precedent.  Planning is key.  Everything must be checked, all information verified and nothing should be left to chance or to the last minute.

3. You should always take legal advice on the drafting of the break notice at the outset as many disagreements can be avoided by clear and careful drafting.  This applies both to the wording and timing of the break clause, and the provisions for service.  You need to think about the practicalities of serving the notice when the time comes.  I have had to serve break notices that required service by fax on numbers that no longer exist, or by hand at buildings that have been demolished.

4. You should always take legal advice on the exercise of the break notice as there are endless traps for the unwary.  What is fair or what appears to be common sense is irrelevant.  If the break notice is conditional you need to build in enough time to comply with those conditions. For instance, if the break is conditional on you complying with your repairing covenants, you need to build in time to identify and undertake the work required.  If the break is conditional on you giving vacant possession, you need to have planned your move and have somewhere to relocate.

5. If you are a landlord wanting to resist a break or a tenant wanting to exercise a break, different considerations apply.  Unfortunately the exercise of a break clause can often be a tactical affair between landlord and tenant, so careful legal advice at every stage is essential.

This bulletin should not be taken as definitive legal advice. Please contact Caroline DeLaney on 020 7955 1423 or for further advice or  for any questions you may have concerning break clauses

Caroline DeLaney is a partner specialising in real estate disputes at Rosenblatt.

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