In future, leases must state the position on rent refunds when a break is between quarter days.
A new decision by the Supreme Court means that in the future occupiers must ensure that their lease makes provision for a rent refund in the event that a conditional option to break is exercised between quarter days. Otherwise there is no guarantee of a refund of rent paid for the period between the break being exercised and the next quarter day.
The Supreme Court decision in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited [2015] UKSC 72 has ended a period of uncertainty as to whether, in the absence of express wording, a tenant is entitled to a rent refund if it breaks its lease between rent payment dates.
That uncertainty started in 2013 with the High Court decision in Marks and Spencer, which accepted the tenant’s argument that a provision should be implied into the lease, entitling the tenant to repayment of rent from the break date up until the next quarter day. Left unchallenged, the financial consequences of the decision for landlords and occupiers could have been far reaching.
In 2014 the Court of Appeal overturned the High Court decision concluding that the tenant had failed to satisfy the Court that it was necessary to imply a refund provision. The Supreme Court has reviewed the law and affirmed the Court of Appeal’s decision, concluding that it was not necessary for the Court to imply a term in order to make the contract effective or internally coherent. It is now clear that, in the context of a conditional break clause, a tenant is not entitled to a refund if it breaks its lease between rent payment dates unless the lease contains express wording and it will be exceptionally difficult, if not impossible, to imply a term to that effect.
Therefore, it is now critical that Heads of Terms containing conditional options to determine (breaks) cover off this position by specifically stating that, if the break date falls between two quarter days, the tenant will be entitled to a refund for the period in that quarter following the break date. The wording should also be clear as to whether this applies to just the principal rent or rents.
By Tim Allen, Senior Associate, Real Estate, Bristows; and Richard Proctor, Head of Central London Tenant Representation, Knight Frank.