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Break clauses, apportionment and implying contractual terms: Supreme Court puts an end to the confusion

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03/12/2015

In an important decision which will be of interest to landlords, tenants and anyone concerned with commercial contracts generally, the Supreme Court has re-stated the judicial approach to the implication of contractual terms and has authoritatively re-established that, without an express apportionment provision in the contract or lease, post-break ‘overpayments’ will not be refundable.

M&S v BNP Paribas – a decision well worth the wait

Walker Morris frequently advises landlords and tenants on the exercise of commercial lease break options. We have monitored and reported on the long-running M&S v BNP Paribas litigation [1] with interest. We are now pleased to be able to explain the Supreme Court’s conclusion to the question whether a term can be implied into a commercial lease requiring the apportionment and repayment, following a lease break, of sums paid in advance.

Prior to this case, and in accordance with case law and statute [2], it was accepted law that a tenant would only be entitled to a refund of rent paid in advance if there was an express term to that effect in the lease. At first instance, however, and in a decision which seemed to fly in the face of established principle, the High Court held that the landlord (BNP Paribas) was obliged to repay to the tenant (M&S) rent which had been paid in advance but which related to the period following a contractual lease break. The High Court reached its decision despite the absence of an express apportionment provision in the lease placing any obligation on the landlord to return paid sums relating to the post-break period. It decided that a reasonable person would expect that, when a break took effect and a lease came to an end, rent would only be payable for the period up to, and not beyond, the break date; and that implying a term to that effect was necessary to give business efficacy to the lease.

Last year the Court of Appeal reversed the High Court’s decision and reasserted the widely accepted position, but the case was then appealed, by M&S, to the Supreme Court.

The Supreme Court has now [3] unanimously dismissed the tenant’s appeal and has confirmed the law relating to apportionment of paid sums following a lease break. The Supreme Court has also reiterated some important principles regarding the implication of terms into commercial contracts.

Supreme Court judgment – Key points

The key points to note from this case and the Supreme Court’s judgment are as follows.

Specifically in relation to leases and apportionment of post-break sums:

  • Where rent is payable in advance and a break date falls part way through a payment period, the tenant must pay the full period’s rent and will not be entitled to a refund for sums relating to the post-break period unless there is an express apportionment provision to that effect in the lease.
  • Neither the common law nor statute apportions rent in advance on a time basis.
  • Where a lease was negotiated against the background of a clear and correct understanding that rent payable in advance is not apportionable, it is highly unlikely that a party (this would, invariably, be a tenant) could imply an apportionment/refund provision.

More generally, in relation to the approach to the implication of contractual terms:

  • The implication of terms into commercial contracts is potentially intrusive, such that terms will not be implied lightly.
  • When deciding whether or not to imply a term into a detailed commercial contract the court will consider the presumed intention of the parties at the time the contract was made.
  • In order for a term to be implied, the test remains that it must be necessary to give business efficacy to the contract. The test is not an absolute one but whether, without the term, the contract simply does not work, either commercially or practically.
  • Where the parties have entered into a lengthy, carefully drafted contract, particularly where they have been legally advised, it will be difficult to imply any term(s) as it will be doubtful whether any omission was the result of the parties’ oversight or a deliberate decision.
  • In addition, for a term to be implied, it must be obvious; capable of clear expression; and must not contradict any express term of the contract.

WM Comment

Landlords will no doubt be pleased that the Supreme Court has definitively ruled that, without an express apportionment provision, post-break ‘overpayments’ will not be refundable. Landlords need not, therefore, brace themselves for the potential flood of refund claims that would surely have followed had this decision favoured the tenant.

However, throughout the real estate and other commercial industries, where contractual certainty is often key to the value and success of any business, this judgment is to be lauded more generally, for its clear message that the courts will not lightly intrude upon a contract so as to imply additional terms after the event.

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[1] See our previous briefings here: https://www.walkermorris.co.uk/controversial-break-case-update; https://www.walkermorris.co.uk/breaking-hard-do
[2] Ellis v Rowbotham [1900] 1 QB and sections 2 – 4 Apportionment Act 1870
[3] [2015] UKSC 72

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