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Break clauses in commercial leases
I am a tenant of commercial premises and I have exercised my right to end my lease on 15 July 2016. The break clause requires me to give not less than six months' notice, which I have given, to pay all rents due to the break date and to pay my landlord a year's rent of £750,000 before the break date. I have been advised that I must pay the full quarter's rent due on the June quarter day otherwise the lease will not terminate on the break date. My lease does not contain any provision requiting the landlord to repay me the rent for the period 16 July 2016 to 28 September 2016 following the break date but it seems very unfair for me not to be able to recover the charges for this period. Is there any way in which I can do so?
It is a well-established principle that rent paid in advance cannot be apportioned on a time basis. Consequently, assuming that your lease is a comprehensive document negotiated between solicitors, it is unlikely that you will be able to establish an implied term that you are entitled to a refund of the rent due after the lease has terminated if there is no express provision entitling you to do so.
At common law rent is not apportionable in time whether it is payable in arrear or in advance. So a landlord who forfeits a lease where rent is payable in arrear is not entitled to payment of rent on the next quarter day. The Apportionment Act 1870 (“the Act”) was enacted to correct this. Section 2 of the Act provides that “all rents annuities dividends and other periodical payments in the nature of income” should “be considered as accruing from day to day and shall be apportionable in respect of time accordingly”. The Act does not apply to rent payable in advance because such rent is not “accruing from day to day”. The recovery of rent paid by a tenant for the period after a lease had terminated as a consequence of the tenant exercising a break clause was the subject of the Supreme Court decision in Marks & Spencer plc v BNP Paribas Securities Trust Company (Jersey) Ltd and another  UKSC 72;  EGLR 8, the facts of which are similar to your own position.
Lord Neuberger, who gave the leading judgment, considered the authorities as to when a court will imply a term into a detailed commercial contract. In BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings  52 ALJR 20 Lord Simon said that in order to be implied a term must be reasonable and equitable; be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; be so obvious that “it goes without saying”; be capable of clear expression; and not contradict any express term of the contract.
In the later decision of Philips Electronique Grand Public SA v British Sky Broadcasting Ltd  EMLR 472 Sir Thomas Bingham MR considered that it was difficult to infer what the parties must have intended in entering into a lengthy and carefully drafted contract which omits to deal with the matter in question and that the court should resist the temptation to interfere in order to reflect the merits of the situation as they see it with the benefit of hindsight. Lord Neuberger considered that necessity for business efficacy involves
a value judgment and that perhaps a more helpful way of describing it is that a term can only be implied if, without the term, the contract would lack commercial or practical coherence.
On the facts of the case, Lord Neuberger considered there to be real force in a number of the tenant’s arguments that it should be entitled to recover the rent paid for the period after the lease had terminated, namely:
i) rent payable in advance is referable to the tenant’s use and enjoyment of the premises for the forthcoming quarter and that it was unfairly prejudicial to the tenant and a windfall for the landlord if the tenant could not recover the portion of the quarter’s rent which related to the period after the lease had come to an end;
ii) the break dates referred to in the lease related to the date of grant of an earlier lease and so it was unlikely to have been intended that the apportioned rent was to be retained by the landlord; and
iii) the rent payable was stipulated to be “paid yearly and proportionately for any part of a year by equal quarterly payments in advance”. So if the lease had run its full course to 8 February 2018 the tenant would only have had to pay an apportioned rent for the final quarter commencing on 25 December 2017.
However, the landlord’s arguments were equally compelling: the lease was a very detailed document, negotiated and drafted by expert solicitors and entered into by substantial and experienced parties. In these circumstances, it was peculiar to imply into the lease a term requiring repayment of a significant sum when – as in your case – the lease contained an express provision requiring the tenant to pay the landlord a much larger sum. There was also an express term requiring the tenant to pay all rents due to the break date as a condition for termination of the lease on the break date. In addition, the lease contained a provision for payment of a lump sum by the landlord to the tenant if the tenant did not exercise the break.
These provisions supported the landlord’s argument that the parties had considered what payments were to be made at the exercise of the break right and that the court should not interfere. In rejecting the tenant’s argument, the court also took into account the fact that the lease had been negotiated against the background of a clear general understanding that rent payable in advance was not apportionable in time.
Unless there are circumstances which would justify a different approach in your case, it will not be possible for you to reclaim that part of the rent which relates to the period after the lease has terminated.
For more information please contact Louise Clark on +44 (0)20 7203 5017 or firstname.lastname@example.org
This article appeared in the Estates Gazette on March 12th 2016