What happens to rent paid in advance when a commercial lease is terminated early under a break clause, and the lease is silent on refunds?
This question was at the heart of the Supreme Court’s decision in Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd, a case that has become the leading authority on whether tenants are entitled to a refund of rent for the period after a break date. The outcome has significant implications for both landlords and tenants when negotiating and drafting commercial leases.
Background
In this case, Marks & Spencer Plc (“M&S”) was the tenant and BNP Paribas Securities Services Trust Co (Jersey) Ltd (“BNP”) was the Landlord.
In accordance with their lease M&S had paid rent in advance quarterly on 25 December 2011 for the period ending 24 March 2012.
M&S then exercised their right to terminate the lease under a break clause, and the lease terminated on 24 January 2012, two months before the end of the rent quarter.
A key point of contention between M&S and BNP was whether M&S were entitled to a refund of the rent for the period after the break date. The Lease did not include an express clause entitling them to a refund and so a claim was issued, and it is the outcome of that claim that we analyse below.
Decision
The High Court, who heard the case in the first instance, determined that M&S was entitled to a refund of the advanced rent despite the lack of express entitlement in the lease.
However the Landlord appealed the decision of the High Court to the Court of Appeal (“CoA”). The CoA determined that it would not be appropriate to imply such a term and as such M&S were unable to recover the overpayment. The CoA reached this conclusion on the basis that it had been a long-standing and well-known legal position that there are no provisions in common law or statute which allow for rent paid in advance to be apportioned in time. The CoA held that if it was the intention of M&S and BNP for the rent paid in advance to be apportioned on termination of the lease, the Lease ought to have provided for this expressly.
Impact
This decision is significant for tenants who are seeking the inclusion of a break right in a Lease. It is often the case that a break will be conditional on payment of all rents that have fallen due before the break date. It will therefore almost always be the case that some element of overpayment will occur. tenants should ensure that an express right of refund is included within the lease.
This also has implications for landlords who will have to ensure that they have funds available to meet their obligations to refund such overpayments, as well as considering whether or not refunds of service charge should be subject to balancing first, and implications relating to VAT that has already fallen due on those sums.
The Court’s decision also highlights an important wider point that should be considered by landlords and tenants when agreeing the terms of a lease, being that if a particular term is within the contemplation of either party then it is best practice to document it in the lease itself.
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