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Exercising a Break – What Happens to Rent Paid in Advance?

Date: 29/01/2016 | Real Estate

The Supreme Court recently gave its ruling in the landmark English case of Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd.  The case revolved around the question in relation to a tenant’s option to break in a lease: once the option to break has been exercised, if the lease is silent on the matter, can a tenant recover rent paid in advance for the period after the break date? 
The Supreme Court’s answer: no.

Marks & Spencer plc (M&S) was tenant under a lease at The Point in Paddington Basin, London.  Rent and other charges were payable quarterly in advance and M&S was entitled to end the lease on giving 6 months’ notice, subject to there being no rent arrears.  M&S exercised its break option effectively, and the lease was brought to an end on 24 January 2012 (“Break Date”).  The rent had been paid up to 24 March 2012.

The fact that the lease had been terminated on the Break Date was not in dispute between the parties.  Rather, M&S were seeking repayment from the landlord (BNP Paribas) of the proportion of the quarterly rent paid for the two month period after the Break Date.  BNP Paribas refused and M&S launched legal proceedings to recover this proportion of rent (together with service charge paid).  

Morgan J, at first instance, found in favour of the tenant on the basis that M&S was entitled to payment as an implied term in the lease.  The Court of Appeal disagreed with this decision following an appeal by BNP Paribas.

Finding in favour of the landlord, the Supreme Court held that, except in very exceptional circumstances, a lease would need to expressly confirm that a tenant shall be reimbursed for rent paid in advance relating to the period post-termination.  Interestingly, however, the Supreme Court did not take the same approach in relation to service charges, which it was held should be apportioned and reimbursed to the tenant.

Reaction to the decision is divided but it is clear that this is a significant decision.

For a tenant, these circumstances present a fairly tricky situation.  In order to be entitled to exercise its break option, M&S had to be up to date with its rent payments – it did not therefore have the option of simply paying the rent up to the Break Date, but had to pay the full quarterly amount.  This then raises the question of how to prevent a similar situation – an express provision leaves little doubt of the parties’ intentions and perhaps this will become a drafting trend in future leases.  An alternative of ensuring that any break date falls on a quarter day may be a logistical nightmare.

Despite being an English case, the Supreme Court’s decision may have some weight in Scotland given its stature in the judicial hierarchy.  It will be interesting to see which approach the Courts in Scotland will adopt.  One argument a Scottish tenant in similar circumstances may seek to run could be the Scottish doctrine of unjustified enrichment – that the landlord had received payment with no reciprocal value in kind received by the tenant (i.e. occupation of premises). 

The matter in this publication is based on our current understanding of the law.  The information provides only an overview of the law in force at the date hereof and has been produced for general information purposes only. Professional advice should always be sought before taking any action in reliance of the information. Accordingly, Davidson Chalmers LLP does not take any responsibility for losses incurred by any person through acting or failing to act on the basis of anything contained in this publication.

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