Pitfalls and perils for tenants wishing to exercise a break clause

This case is about the tricky and contested issue of break clauses. Often, the exercise of a break option is conditional on the tenant paying the rent in full for the given quarter. But what happens if the break falls in between a rent quarter? Can the tenant apportion rent to the break date? Should the tenant pay the full quarter, but then seek a refund for the period after the break date? This recent case involving M&S clarifies the position.

Facts

• On 7 July 2011, the tenant, M&S, served a break notice on the landlords to terminate the lease on 24 January 2012.
• Shortly before 25 December 2011, the tenant paid the rent due from 25 December 2011 up to and including the 24 March 2012 (the day before the next quarter day).
• The break notice was effective and the lease terminated on 24 January 2012 (the break date).

The main issue was whether the tenant was entitled to recover rent and other sums from the break date to 24 March 2012, the end of the paid-up quarter. The tenant argued that a term should be implied into the lease to this effect. In 2013, the High Court held that the tenant was entitled to reclaim rent and other sums, but the Court of Appeal allowed the defendants’ appeal in 2014.

Supreme Court judgment

The Supreme Court upheld the decision of the Court of Appeal. It rejected the tenant’s argument that there should be an obligation implied into the lease, requiring the landlords to pay back rent, relating to the period from the break date to the end of the rent quarter. The Supreme Court held that a term will only be implied into a lease if it satisfies the test of business necessity or it is so obvious that it goes without saying. The Court held that this test was not satisfied in the circumstances.

1. Firstly, there was a very detailed lease, entered into by two substantial and experienced parties, and which had been negotiated and drafted by expert solicitors.
2. The Court also referred to the fact that neither the common law nor statute apportions rent in advance on a time basis. It also referred to the established rule that, where a landlord forfeits a lease where rent is payable in advance, the landlord is entitled to payment to all of the rent which fell due within that quarter.

So where does this leave us and what does this mean for you?

• This case provides landlords with much greater certainty. Provided that rent is paid in advance, and there is no express term in the lease requiring otherwise, landlords do not have to repay any rent relating to a post-break date period i.e. from the break date up to the end of the paid-up quarter.
• Where you are a tenant entering into a new lease, with a break option (falling between two quarter dates), you may want to push for an express term allowing you to reclaim rent following the break date. Landlords will obviously want to resist this.
• Although M&S did pay rent for the full quarter, care needs to be taken. If you are a tenant where the break date falls between rental payment dates and the break is conditional on payment of rent in advance, then you must not apportion rent up to the break date but must pay a full quarter’s rent.

For more information

For advice on exercising break clauses to end leases or any aspects of a disputed or potentially contentious break clause, please contact Hilary Harrison.