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Break clauses - paying rent in advance: no change given

View profile for Paul McAndrews
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Most commercial leases reserve an annual rent and express it to be payable in advance by equal quarterly payments on the usual quarter days. The quarter days are 25th March (Lady Day), 24th June (Midsummer’s Day), 29th September (Michaelmas Day) and 25th December    (no prizes).

It is also a common condition of a break clause in commercial leases, which permits the tenant to serve notice during the term to bring the lease to an early end, that all rent has to be paid up to and including the break date. If this date is during a quarter does the tenant have to pay a full quarter’s rent upfront on the quarter day preceding the break date or can he a pay an amount apportioned to the break date ? After all, he will not be in occupation after the break date and if the landlord keeps the overpayment he will be getting a windfall.

In a case decided by the Court of Appeal in 1900, Ellis v Rowbotham, it was held that the Apportionment Act 1870, which permits rent to be apportioned in time to the actual period of occupation by the tenant, only applies where the rent accrues due on a daily basis and is payable in arrear, collected after it falls due. Where the lease reserves rent payable in advance it can not be apportioned to the period of actual occupation if the lease comes to an end mid-quarter. The full quarter’s rent remains payable in advance on the preceding quarter day. But a lease can be drafted to avoid this. It is open to the parties to agree that apportionment can take place in these circumstances.

In a recent case, Marks and Spencer plc v BNP Paribas Securities Services Trust Company    (Jersey) Limited, the Supreme Court approved the decision in Ellis and Rowbotham and upheld the rule that rent payable in advance is not apportionable in time unless the lease expressly states that it is.

In the M & S lease, the rent was to be paid “yearly and proportionately for any part of a year by equal quarterly instalments in advance”. The term of the lease was to end on 2 February 2018 and the Court accepted that the final payment of rent, due in advance on 25 December 2017, would indeed be apportioned to the 2 February 2018 because of the express wording (italicised and underlined above). Equally it would be so apportioned if the lease was determined at an earlier date, 24 January 2016, by a break notice served at least six months before. The final instalment, due on 25 December 2015 would have been apportioned to 24 January 2016 because of the same wording.

The problem for the tenant, M & S, was that they relied on an earlier break date, 24 January 2012, where the lease introduced an additional requirement. If the tenant gave notice ( of at least 6 months, which they did in July 2011) to terminate the lease  on this break date they also had to pay to the landlord  a premium of £919,800 on or prior to the break date itself. The payment of this premium, (a condition of the 2012 break which was not repeated at the 2016 break), was not made until 18 January 2012. When M & S came to pay the final instalment of rent in advance on 25 December 2011, they well advisedly paid the full amount due. But after the lease ended on the 24 January 2012, they sought re-imbursement of the amount paid for the balance of the quarter, the period from 25 January to 24 March 2012, and relying on the italicised and underlined words above argued that a term should be implied into the lease that they be reimbursed the overpayment (approx. £200,000 plus Vat).

The court refused.

The payment of the premium was not made until after  25 December 2011 so no one knew at that point whether the lease would continue or not. If the premium had been paid beforehand, the court accepted that the parties would have known that the lease would end in January and when the final instalment came to be paid on 25 December it could have been apportioned under the express wording of the lease. But the premium had not been paid by then and the lease could well have continued and the break notice become ineffectual, if the premium was not paid. The parties had not made express provision to meet this eventuality. They had not treated the conditional break notice in the same way as the unconditional break notice.

In the absence of express wording, the result sought by the tenant could only be achieved if a term was implied into the lease that the right to apportion rent, which had been expressly provided for in circumstances where the term date of the lease was unconditional and fixed (and known in advance of the December quarter day), could also be exercised in circumstances where it was conditional and uncertain on the quarter day in question such that any overpayment could be refunded once the condition had been met.

The court refused to imply such a term. In doing so, it reviewed the previous cases on implication of terms and reiterated that a term missing from a contract would only be implied if it satisfied the test of business efficacy:

  1. it must be reasonable and equitable to imply it and both parties must be presumed to have  intended it to be included
  2. it must be necessary to give business efficacy to the contract (such that if the contract works without it  the term will not be implied)
  3. if asked what would have happened in a certain, uncatered for, event both parties would reply  “Of course so and so will happen; we did not trouble to say that; it is too clear”
  4. the term  has  not been expressly included because it is so obvious it goes without saying.

In broad terms, the reasonable reader of the contract is treated as reading it at the time it was made and reaching the conclusion that the missing term was so obvious that it went without saying that it should have been included to give business efficacy to the contract. Only then will the court imply it.

On the facts of the present case, the lease was a lengthy complex document which had been carefully and expertly drafted by experienced lawyers who had made special provision for a large number of contingencies but not this one. It could not be said with certainty whether this was deliberate or an oversight or whether, indeed, they were unlikely to agree on what was to happen and so left it out in the hope that the eventuality would not occur.

The lesson from this is that if it is intended that rent payable in advance is to be apportioned in time to a mid-term or mid-quarter break date in all circumstances, whether or not there are conditions attached to the operation of the break clause, then express provision should be made either for it to be so apportioned when paid in advance or, if not, for the balance in respect of the broken period, when the tenant is no longer in beneficial occupation, to be refunded.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice.  If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.