Make or break - the implication of contract terms and apportionment of rent

Posted: 08/02/2016

The Supreme Court has unanimously dismissed Marks & Spencer plc’s (M&S) appeal in Marks & Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another [2015] UKSC 72. This decision confirms the approach that courts must take to imply contract terms and has significant implications for commercial landlords and tenants. 

BNP granted M&S four sub-leases of different floors in an office building in Paddington. M&S had the benefit of break clauses enabling it to determine the leases on two possible break dates. Two conditions applied:

• that there be no arrears of rent on the break date, and
• that M&S pay the sum of £919,800 plus VAT (applicable only on the first break date). 

M&S exercised the first break and following determination of the leases, brought a claim against BNP for repayment of rent and other charges attributable to the period from the date of the break to the end of the quarter. In a decision that surprised many practitioners, the High Court implied a term into the leases such that the landlord was required to return those sums. The Court of Appeal allowed BNP’s appeal and M&S subsequently appealed to the Supreme Court. 

Implication of terms

Does this decision change the law on the implication of contract terms? Yes and no; this Supreme Court judgment confirms and refines existing principles. 

The test for implying a term into a contract has traditionally been very high; a term had either to be necessary to give business efficacy to the contract or it had to represent the obvious, though unexpressed, intention of the parties. 

Many commentators considered that the most recent leading case on the implication of contract terms, Attorney General of Belize v Belize Telecom [2009] 1 WLR 1988, had lowered this high bar. The Supreme Court disagreed with that view. Lord Neuberger emphasised that the decision in Belize did not dilute the requirements that must be satisfied before a term will be implied; Lord Carnwath agreed that the judgment in Belize “is not to be read as involving any relaxation of the traditional, highly restrictive approach to implication of terms”. 

Lord Neuberger found that Lord Hoffman’s test in Belize, which is “what the instrument, read as a whole against the relevant background, would reasonably be understood to mean”, is consistent with the preceding case law on implied terms if it is applied subject to two provisos:

• the reasonable reader is treated as reading the contract at the time it was made, and
• the reasonable reader would consider the term to be so obvious as to go without saying or be necessary for business efficacy of the contract. 

How much to pay on the last quarter day before a break?

Tenants have long felt aggrieved at paying a full quarter’s rent on the quarter day immediately preceding the break date. The Supreme Court upheld Ellis v Rowbotham [1900] 1 QB 740 which established that the 1870 Apportionment Act does not apply to rent payable in advance. Therefore there is no statutory right to apportion such a rent payment. 

The parties can agree to apportionment. The M&S leases included the standard words that rent was payable, “yearly and proportionally for any part of a year…”. Unfortunately for the tenant, it had not satisfied all of the conditions of the break prior to the quarter day immediately before the break date (it had not paid the premium required). Therefore there was no certainty at that date that the lease would come to an end on the break date and so a full quarter’s rent was due and an obligation to refund part would not be implied. 

However the court hypothesised that had the break not been conditional or had the conditions all been satisfied before the last quarter day, then only an apportioned rent would have been due on that day, due to these contractual words of apportionment. Such a payment would not fall foul of the condition that there should be no arrears of rent on the break date. 

This analysis is very persuasive, coming as it does from Lord Neuberger, and it suggests that for the brave tenant there may be a potential silver lining. Could tenants argue that they have complied with all conditions prior to the last quarter day, have a lease containing the appropriate words of apportionment and are therefore only going to pay rent up to the break date? 

It is, however, hypothesis, not binding authority. In many cases the risk of failing to operate a break clause will mitigate against such a course of action. It is likely that most tenants will pay the full sum under protest, even though recovery of an overpayment may prove impossible.  

This article was published in New Law Journal in February 2016. 

Return to news headlines