It is difficult to imply a term into a lease and parties need to spell out the position clearly regarding re-imbursement payments for rent, service charge, sinking fund, and insurance when a Lease can be ended early.
The Court of Appeal has decided that quarterly rent payable in advance is not normally apportionable if the lease is broken during the quarter.
In a Judgment which will delight commercial landlords, the Court of Appeal overturned the decision of the Court below as it held there could be no implied term that rent was to be apportioned where it has been paid for a period beyond the break date.
The tenant, M&S, had exercised its break rights to terminate 4 leases entered into in 2006 of separate floors in an office block called The Point in Paddington. They terminated on 24 January 2012. For the breaks to be effective M&S had to have paid all rents under each lease for the quarter commencing 25 December 2011 and they also had to pay a total premium of a year’s rent. In relation to the one Lease featured in the case, the year’s rent totalled £919,800.
Once the breaks were effective, M&S sought repayment of the very considerable rent in excess of £1 million paid for the period from 25 January 2012 to 24 March 2012 but the landlord, BNP, claimed that they had no obligation to repay anything as the Leases made no provision for any repayments. M&S succeeded at first instance as the Court held that the intention was to only pay the year’s rent under each Lease as compensation for terminating early and not to pay 2 months extra rent as well, and that a term should be implied to give effect to this.
However, the Court of Appeal emphasised the importance of the Courts staying loyal to the words parties use in agreements and only adding terms where this is strictly necessary to give effect to the true intentions of the parties. The starting point must be that, if the parties did not include a term, they omitted to do so deliberately. In this case, there were detailed Leases prepared by solicitors which had various provisions relating to the leases breaking early but nothing at all about repaying any rent.
The Court held that it would have been obvious to the parties when the Leases were entered into that rent would have to be paid for the full quarter and, accordingly, if there was to be any repayment, this would have been expressly provided for. The Court also noted that, whereas more recent case law had highlighted the issue, there were case authorities that pre-dated the Leases in which rent was held not to be apportionable.
The Court rejected the arguments that a tenant should only pay for what it receives and that the position on a break should be the same as on a lease ending at the end of the term. It also did not accept that the substantial premiums payable were intended to be the totality of the agreed compensation to the landlord. Accordingly, there is to be no cashback for M&S and lawyers drafting leases need to be careful to make adequate provision for practical matters such as limiting liability rent and service charge to the actual period of a Lease and benefits actually received thereunder.