Out of pocket after breaking your lease?

Tenants of commercial premises will no doubt be familiar with the potential pitfalls surrounding tenants’ break rights.

Where a tenant has the right to break its lease before the term expires, conditions will often be attached to the break right which require the tenant to have paid the rent in full, give vacant possession of the premises and comply with all of the tenant’s lease obligations in order to validly exercise its break.

Case law

Case law in recent years has addressed the meaning of “vacant possession” in this context, and also considered what the tenant must pay in order to be said to have paid the rent up to date.

The result has been that the exercise of tenants’ break rights has become a tricky area with traps for the unwary, and prudent tenants looking to break their lease would be well advised to seek professional guidance before doing so.

Less familiar

What may be less familiar to commercial tenants is the notion that having successfully exercised a right to break, they may then be unable to recover rent paid in advance from the break date to the next date that rent is due to be paid under the lease.

For tenants whose break date falls within the early part of a rental quarter, this can be very costly.

Marks & Spencer v BNP Paribas Security Services

In the case of Marks & Spencer Plc v BNP Paribas Security Services Trust Company (Jersey) Limited and another [2013], Marks & Spencer sought to exercise a right to break four leases of office premises.

The leases were all on the same terms and contained a break clause allowing M&S to break the leases provided that on the break date:

• There were no arrears of rent or VAT
• A year’s rent was paid on or before the break date as a “break fee”

Marks & Spencer duly exercised its break, paying the break fee in advance of the break date. The break date fell on 24 January 2012 and M&S had paid a full quarter’s rent in advance on 25 December 2011 in accordance with the terms of the lease.

They then sought to recover from the landlord the rent that they had paid in advance from the break date to the end of the rental quarter on 24 March 2012.

The landlord resisted repaying the rent as there was nothing in the lease requiring them to do so.

The High Court, however, decided that the tenant was entitled to a refund of its money. Although there was no express clause providing for this, the court could imply into the lease an intention on the part of both parties that if the break was exercised, rent was only payable up to the break date.

A sting in the tail

However, there was a sting in the tail for commercial tenants.

The High Court stated in its judgment that the substantial “break fee” which M&S had paid as a condition of exercising its break was an important factor in the court reaching its decision.

The fact that a significant break fee was payable suggested that the parties intended that the landlord would be compensated for early termination and would not expect further rent for the period following the break of the lease.

The judge made the point that in a case where the lease simply required rent to be paid up to the break date (and rent was payable quarterly in advance), an argument that rent from the break date should be reimbursed to the tenant would be less persuasive.

The landlord’s appeal

The landlord appealed and the Marks and Spencer case made its way to the Court of Appeal. The appeal court found in favour of the landlord.

The Court held that it was inappropriate to imply a term into the lease that entitled the tenant to a refund of the rent that it had paid in advance in accordance with the express terms of the lease.

The tenant sought leave to appeal to the Supreme Court which upheld the judgment of the Court of Appeal and found in favour of the landlord.

The result

As a result, any tenant seeking recovery of rent paid for the period following the break date is unlikely to be successful if their lease does not contain specific wording requiring the landlord to refund the money.

The only ways for commercial tenants to ensure that they will recover rent for the period following exercise of a break are:

1. Incorporate an express clause into their lease allowing for such recovery; or
2. Negotiate early on with the landlord to ensure that the break date is aligned with a rent payment date under the lease.

For further information, please contact Paul Hughes or Vanessa Warren.

This article is for general information purposes only. It does not constitute technical, financial, legal advice or any other type of professional advice and is no substitute for specific advice based on your individual circumstances. We do not accept responsibility or liability for any actions taken based on the information in this article. For more information, please click here.