The recent case of Marks and Spencer plc. v BNP Paribas Securities Services Trust Company (Jersey) Ltd went all the way to the UK's Supreme Court in an attempt to challenge a long-held legal principle. What are the implications of the new ruling for commercial landlords?
The legal principle
Typically, a lease cannot be ended early unless it contains a 'break clause', a term expressly allowing for early termination and setting out the circumstances under which this would be permitted. Where such an 'apportionment' clause exists, a tenant who terminates a lease early is only liable for a proportionate part of the rent, rather than the entire amount. Prior to the recent case, the established principle suggested that when rent is paid in advance, 'apportionment' does not apply unless the terms of the lease expressly provide that it should.
Marks and Spencer ended their commercial lease with BNP Paribas early by serving a valid break notice. The outfit subsequently commenced legal proceedings to recover a refund of the rent paid for the period after the break date, relying in part upon the payment of a 'Break Premium' as compensation to the landlord. The Supreme Court rejected this argument and upheld the existing legal principle.
Suzanne Gill and Claire Haynes of legal firm Wedlake Bell explain that the court based its decision on the mindset of the parties when they first entered into the contract. Since no 'apportionment' was intended at the outset, the court decided that it couldn't not imply a term retrospectively to save the tenant from an unfavourable agreement.
If a tenant wants to claim a refund of rent paid after the early forfeiture of a lease, the ruling suggests that this won't be guaranteed unless an explicit clause in the rental agreement provides for this. In the absence of such a term, the landlord will be entitled to retain the full sum.
The M&S case is good news for Britain's commercial property owners, many of whom are already riding high in a period of relative prosperity within the sector. Landlords who wish to take advantage of this positive climate by growing their businesses should start by securing rental incomes and eliminating commercial rent arrears today.