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Breaking Bad – The unintended effects of break clauses in commercial leases
Break clauses allow tenants and landlords the right to bring a lease to an end at certain fixed points during the term of the lease.
A break clause is usually exercised on a fixed date during the lease term although rolling breaks, which are exercisable at any time during the term, can also be agreed. Break clauses will usually include an obligation on the tenant to have paid the rents due, but what happens when the break date falls between rent payment dates? Is the tenant entitled to a refund of overpaid rent?
This was considered in the recent case of Marks and Spencer plc v BNP Paribas Securities Trust Company (Jersey) Limited 2015. M&S (the tenant) served a break notice on their landlord and paid the landlord the following quarters rent in full as required by the lease.
The lease came to an end on the date set out in the notice and M&S then demanded repayment of the rent relating to the period between the date the lease ended and the end of the quarter. There was no express clause in the lease entitling M&S to a reimbursement, but surely that was only fair for M&S to receive a refund of the overpayment of rent and this could be implied into the body of the lease?
The Supreme Court found that as reimbursement was not necessary to make the lease commercially workable and coherent, they could not imply a clause into the lease for reimbursement of the rent, meaning M&S’ claim was rejected, resulting in a loss of over £1 million.
In short, if M&S wanted to be reimbursed for the rent paid between the date the lease ended under the break clause and the rent payment date, the lease should have included a clause to that effect.
The decision highlights:
a) the importance of ensuring that everything the landlord and tenant want is expressly set out in the body of the lease, as failing to do so could prove costly; and
b) that a clause will only be implied into a lease by the court if it is needed for business efficacy or the obviousness of its inclusion, regardless of whether it may seem very unfair to one of the parties.
For legal advice on break clauses or any other commercial property matter please contact us or call 01453 832566.
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