This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.
The Court of Appeal published its judgment in Marks & Spencer v BNP Paribas, yesterday, 14 May 2014. This is an appeal from Morgan J's decision in the High Court last year, which related to whether a tenant was entitled to a refund of rent and other sums paid in advance where the break date was in the middle of a quarter and there was no express obligation on the landlord to refund. Morgan J, on the facts, decided that there was an implied obligation on the landlord to refund. Despite that decision (based on particular and somewhat unusual facts), good practice remained for a tenant to insist on there being a landlord's obligation in the lease to refund the proportion of the rent and other sums previously paid by the tenant for the period from and including the day after the break date to the end of the quarter, if the tenant successfully exercised the break.
That good practice has been vindicated by the Court of Appeal's decision to overturn Morgan J's decision. The primary reason was that the lease, read as a whole against the relevant background, would not reasonably be understood to include a landlord's obligation to refund, and, therefore, the test for an implied term was not met.
Legal principles on implied terms
- The implication of terms by interpretation requires a high level of loyalty to the parties' agreement, read against the admissible background. The party seeking to establish an implied term must show not simply that the termcouldbe a part of the agreement, but that a termwouldbe part of the agreement.
- The starting point is that, if there is no express term, none should be implied, because, if the parties intended that a particular term should apply to their relationship, they would have included a term to that effect. The court will not imply a term as a matter of interpretation, unless it is necessary that the agreement should contain such a term to achieve the parties' express agreement, purposively construed against the admissible background.
- A party does not show that a term is unnecessary simply by showing that the parties' agreement could work without the implied term. That approach overlooks the fact that as part of the process of interpretation, the court seeks to find the parties' common aim in entering into the agreement. A term may be implied if it is necessary to achieve the parties' objective in entering into the agreement.
Lease
Arden LJ rejected a submission made on the tenant's behalf (in reliance on the well-known service charge case of Brown's Operating System v Southwark [2007]) that there is a general principle that a tenant should only pay under a lease for what he actually receives.
It would have been obvious to the parties before they signed up to the lease that there was a possibility that rent would have to be paid on the quarter day preceding the break date in full for a period which went beyond the break date (the "broken period"). They must have had discussions about what was to happen on termination by operation of the break clause, because the clause dealt with certain consequences of termination and this showed that the parties could easily have added words to the effect that the landlord was to repay any rent (or other charges) paid for the broken period. This is reinforced by the case law.
Case law
There was no precedent case law for implying a term for repayment of rent for the broken period. This formed part of the admissible background against which the lease was to be interpreted and made it all the more likely that a reasonable person, having knowledge of this background, would conclude that if the parties had really intended there to be an implied term for repayment, they would have made express provision for it.
Impact of lease wording "proportionately for any part of a year"
The words "proportionately for any part of a year" in the reddendum in the lease might at first sight be read as meaning that there should be an implied term for repayment of the rent for the broken period, once termination has taken place. However, those words were only applicable to a payment of rent for a broken period within the original term of the lease and, therefore, did not apply in a case such as this when on the quarter day preceding the break date there was no certainty as to whether termination would take place on that break date.
Conclusions
When all the circumstances are considered, the correct inference to draw was that the parties proceeded on the basis that the loss from a payment of rent for the broken period should lie where it fell. Therefore, no term for repayment was implied.
For tenants or those acting for them, to address the concern for refunds, the break date should be the final day of a quarter (and certainly not the first day of the following quarter). If the break date has to be mid-quarter, include a landlord's obligation to refund the proportion of the rent and other sums previously paid by the tenant for the period from and including the day after the break date to the end of the quarter, provided that the tenant successfully terminated the lease.
