Landlord triumphs in the apportionment bout of the break battles

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

Ding ding. The final bell sounds. The fighters are Marks and Spencer (as tenant) in one corner and BNP Paribas (as landlord) in the other. The Supreme Court is the ring and today marks the end of a long, and hard fought, fight.

And the matters at stake are these: almost one million pounds and, of much wider significance, whether a tenant should receive a refund for rent paid in advance but which relates to the period after a break date - even though there is no express apportionment clause.

And the knock-out winner (having secured the support of all five judges) is... the landlord BNP Paribas.

There can be no re-match and no further appeal. So as BNP, together with other landlords across the country, breathes a collective sigh of relief, we summarise the facts, the outcome and the wider implications of this long-awaited case.

Please see below for our practical guidance and next steps.

The Facts of the Fight

• M&S had a lease which contained an option to break on 24 January 2012 (the “Break Date”).
• The break was conditional on there being no arrears of basic rent and VAT and the payment of a premium amounting to £919,800 plus VAT.
• M&S paid the full quarter’s rent (for the period from 25 December 2011 to 24 March 2012) shortly before the due date of 25 December 2011.
• It paid the premium after this quarter date but before the Break Date.
• The lease successfully terminated on the Break Date and M&S argued that it should be entitled to an apportioned refund of the rent paid on 25 December 2011 but which related to the period after the Break Date. The sums in dispute amounted to almost a million pounds.

The Previous Bouts

The High Court found in favour of M&S and held that there was an implied term that M&S should be entitled to an apportioned refund.

The Court of the Appeal found in favour of BNP Paribas and held that, on the facts of the case, the test for an implied term had not been made out. As such M&S were not entitled to an apportioned refund.

The Final Round - the Supreme Court's Decision

The Law Lords unanimously dismissed the appeal and held that a term will only be implied into a contract if it satisfies the test of business necessity or it is so obvious that it goes without saying.

Though these are technically two alternative routes to implying a term into a contract, Lord Neuberger commented that most cases where it is appropriate to imply a term will have facts which will satisfy both of these of routes.

In deciding what is meant by “business necessity”, the Supreme Court stated that this involves a value judgment and it is not correct to say that the test is one of “absolute necessity”. This means the parties do not need to show that the contract cannot work without the implied term. Rather, a term can only be implied if, without the term, the contract would lack commercial or practical coherence.

Furthermore, the Supreme Court expressly stated that “a term should not be implied into a detailed commercial contract merely because it appears fair or merely because one considers that the parties would have agreed it if it had been suggested to them.”

The Impact of the Battle

Has the arena changed?

This is one of the most anticipated cases of 2015. It will be one of the most discussed. But does it really warrant such focus and fanfare? If one takes a step back - have the rules of engagement actually changed that much (or, indeed, at all)?

On the one hand, and though drawing a line under a much discussed question, the answer may be no. This case has always been about the circumstances in which a court will see fit to imply a term into a contract.

It is just that, as the case has beaten its path to the highest court in England and Wales, the judges have disagreed along the way about whether - on the specific facts - the relevant test for the implication of a term into a contract has been satisfied.

And, in this case, the Supreme Court has not fundamentally altered the test for an implied term which has been established over a long line of cases. The position today (and the hurdles that a party must overcome) in order to imply a term into a contract is much the same as it was yesterday.

Additionally, the Supreme Court has not re-construed the provisions of the Apportionment Act 1870 nor has it reversed the decision in the case of Ellis v Rowbotham [1900]. The effect of this is that, without a clear clause to the contrary, rent payable in advance (which is by far the most common position in modern leases) is NOT apportionable. And in this case, there was no express clear clause to the contrary and the Lords did not consider that the test to imply such a clause had been satisfied.

Furthermore, cases of this nature are inherently fact-specific: what does the specific contract say (and, importantly, not say) and how should that specific contract be understood against the specific and relevant factual background?

Therefore, there are grounds to say that this case does little to fundamentally alter the state of play between landlords and tenants in the break clause arena. It is still all about what the lease can be understood to mean (including whether some extra terms need to be implied into that lease). Perhaps this leads to the somewhat trite statement of: each case turns on its own facts.

Drafting is king

However, whilst true to an extent, an off-the-cuff-dismissal of this case being relevant only to its own specific fact pattern would be overly simplistic. To take such a view would be to ignore the fact that, hot on the heels of Arnold v Britton earlier this summer (for our briefing on this, please click here, the Supreme Court's decision in this case is yet another reminder that "drafting is king".

The court is going to be very slow to intervene and save a party from the perhaps unforeseen consequences of certain drafting just because it feels "unfair”.

However, whilst not a triumph for tenants in the context of break clauses, the case is a victory for all those who are parties to contracts of whatever nature because certainty (and the approach in this case does lead to greater certainty) is of benefit to everyone.

A future break bout?

One question that may have been left open is whether a tenant would be able to apportion the rent paid in advance if it was known on that last rent payment date that the break would definitely operate.

There is some support for this proposition in Lord Neuberger’s judgment but it was not central to this particular case because, here, the premium was not paid until after the last rent payment date and therefore there was no certainty on that last rent payment date that the lease would definitely end on the break date.

This point may be of limited practical significance given that most tenant break options will be conditional on at least vacant possession. Therefore, in most cases, there will never be certainty on the last rent payment date that the lease will in fact determine on the break date. And, indeed, it would be a bold tenant who has an unconditional but once and for all fixed break option that relies on Lord Neuberger’s comments and apportions his rent in advance (and potentially risks the break not operating at all).

However, it might just be that tenant who then, after the break has operated, argues (and perhaps with a green light from the Supreme Court) that he should be entitled to an apportioned refund. Time will tell whether that fact pattern will come before the court.

Practical Guidance and Next Steps

• If you are the tenant, then negotiate into a lease an express apportionment clause to deal with a refund of monies paid in advance but which relate to the period after the break date. It is relatively common in recent years and now, after this case, is essential for a tenant.
• If you are the tenant, consider lining up your break date so that it is the last day of the quarter.
• If you are the landlord, then so long as the break is conditional on something which cannot be satisfied until after the last rent payment date (for example, the common condition of the tenant having to provide vacant possession on the break date), then this will further support your ability to not give an apportioned refund of rent.
• If you are the landlord and the lease does not contain an express apportionment but the tenant is seeking a refund – hold firm! It will be a difficult argument for a tenant to win.