Landlords Get A Break

Landlords Get A Break

Landlords can breathe a sigh of relief following a recent decision concerning a tenant’s entitlement to a refund if a break date is between rent payment dates.

What are break clauses?

A break clause can be included in a fixed term lease allowing either the landlord or the tenant to terminate the lease early. The right to break may arise on one or more specified dates or it may be exercisable at any time during the term on a rolling basis. Any conditions attached to the right to break must be strictly performed. In particular, time will be of the essence in respect of any time limits in the break clause

If the break falls in the middle of a rental period, is the tenant entitled to a refund for the period after the break date?

Until recently, it was accepted law that if a break date was in the middle of a rental period, any rent paid in advance in respect of the period after the break date was only recoverable if the lease contained an express provision for this.

The High Court’s decision in the case of Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another  appeared to change this.

The Facts

The tenant had a lease that provided that the tenant was to pay the rent yearly and proportionately for any part of a year by equal quarterly instalments in advance. The tenant was also required to pay a service charge, insurance charge and a car park licence fee. The provision for these payments did not include the words “proportionately for any part of the year”.

The lease contained a break clause that permitted the tenant to determine the lease on 24 January 2012. The break was conditional upon there being no arrears of rent and the tenant paying a break premium on or prior to 24 January 2012. The premium amounted to the equivalent of a year’s rent. There was no express provision entitling the tenant to a refund of rent or other payments for the period after the break date.

The tenant served notice to exercise the break clause on 7 July 2011, paid the full December quarter’s rent and paid the break premium. Accordingly the lease came to an end on 24 January 2012.

The tenant claimed a refund for the sums paid which related to the period 25 January to 24 March 2012. Those sums amounted to around £1.1 million. The High Court held that the tenant was entitled to a refund of the rent, insurance charge and car parking fees attributable to this period despite the fact that the lease did not contain an express provision for this. The landlord conceded that it should repay the tenant the service charge after the break date.

Was the High Court decision overturned?

Yes. The Court of Appeal did not agree with the High Court. It ruled that the lease, read as a whole against the relevant background would not be reasonably understood to have included a term that entitled the tenant to a refund of any rent paid in advance.

The court did not accept, as a general principle, that a tenant should only pay under a lease for what the tenant actually received. Rent is not simply a payment to a landlord for the use and occupation of the premises. It is also a used as a yardstick for compensating a party for some loss that it incurred by entering into a lease or for the operation of one of the rights conferred by it.

What should tenants do?

When negotiating the terms of a lease with a break clause, tenants should seek to negotiate that:

• The break date is the last day of a rent period.
• The lease expressly provides for a repayment of rent and any other payments from the break date to the next payment day.

If a tenant intends to serve a break notice, it must comply strictly with all relevant requirements in the break clause and should protect its position by keeping evidence of its compliance.

The tenant should also consider carefully whether it really intends to break the lease. In a tenant friendly market, the tenant may threaten to exercise a break right or actually exercise it, with the intention of persuading the landlord to give the tenant more favourable terms. Once a break notice has been served, however, it cannot be withdrawn unilaterally.