Marks & Spencer has lost a Supreme Court case that entitles former landlord BNP Paribas to retain approximately £1.1 million in overpaid rent from the retailer. What precedent does this outcome set, and what does it mean for commercial landlords?
Break clause dispute
The legal dispute began when M&S exercised its break clause – a contract term allowing for early termination – which required the retail giant to pay a quarter’s rent in advance. After paying an approximate £900,000 advance on rent, plus VAT, M&S aimed to recover the amount overpaid. The High Court initially ruled in favour of M&S, and the judge implied a term into the lease to allow for the refund.
However, BNP Paribas challenged the ruling in the Court of Appeal. On this occasion, the court sided with BNP, stating that the lease lacked an express term to grant a refund and meant M&S was not entitled to claim back any overpaid rent.
Implied terms defined
After the case was escalated, the Supreme Court upheld the Court of Appeal’s ruling. Subsequently, the court eliminated the confusion surrounding implied terms and break clauses by stating that “a term will only be implied if it satisfies the test of business necessity or it is so obvious that it goes without saying”. The court added it would be a “rare case where only one of these two requirements are met”.
In UK contract law, implied terms are added after a lease has already been agreed, differentiating them from express terms. This created uncertainty for M&S and BNP because the High Court judge was later able to imply in a term granting the retailer a refund. However, the Supreme Court has now set a legal precedent for landlords and tenants to enter into clear agreements determined by express terms.
The Supreme Court’s decision means that UK commercial landlords cannot be drawn into legal cases relating to overpaid rent and break clauses. Nevertheless, there could be instances when tenants delay rent payments before activating a clause, as seen in a 2012 dispute between PCE Investors Ltd and Cancer Research UK.
Despite the ruling, it remains the case that commercial landlords cannot afford to let delayed rental payments affect their operations – it’s important that they have effective policies in place to collect commercial rent arrears.