Break Clauses Under Leases

A case has just been decided by the Supreme Court which will have major implications for most commercial tenants who are occupying property pursuant to leases and who are intending to rely on a break clause.

The case is Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd & Anor [2015] UKSC 72,.The essence of the case is if a tenant successfully breaks its lease, the landlord will usually not be obliged to refund to the tenant any advance rent paid for the period after the date that the lease terminates, unless the lease expressly requires the landlord to make the refund. The decision makes it clear that, while the impact of applying the relevant legal principles may be unfair prejudice to the tenant or a windfall for the landlord, those outcomes are unlikely to be sufficient to oblige the landlord to make a refund.

As a result of the Supreme Court decision, it is very important for tenants to ensure that a tenant’s break right, especially one containing a pre-condition in relation to the payment of rent where the termination date is not on the last day of the relevant quarter, includes an express landlord’s obligation to refund. The refund would be for an amount representing the proportion of the quarter’s rent plus any VAT in respect of it, received by the landlord on the quarter day preceding the termination date, for the period commencing on the day after the termination date until the end of that quarter. The refund would only be given if the lease had absolutely terminated on the termination date.

Please note that a break date which is actually on the  rent day (as opposed to the day before the rent date) where  the lease contains a pre-condition in relation to the payment of rent would be extremely bad for a tenant in circumstances where there  has not been included an express landlord’s obligation to refund. In such a case the tenant would be obliged to pay a full quarter’s rent on the break date to secure its break-with no guarantee of reimbursement.

There is possibly one saving grace which may help a tenant in circumstances where the lease contains words such as the rent is to be “paid yearly and proportionately for any part of a year”. Lord Neuberger made an observation that suggested that (with such wording) if it was clear on the quarter day preceding the termination (break) date that the lease would end on the termination date (because there were no other pre-conditions that needed to be satisfied), then the tenant would only have had to pay the appropriate proportion of the rent until the end of the termination date. However, this observation is not binding (termed obiter) since in the case at the quarter day there was another pre-condition still to be satisfied and there was, therefore, no certainty that the lease would end on the termination date.

While most leases have other pre-conditions such as ensuring that the premises are yielded up with vacant possession or free of occupiers, there may be leases where the only condition precedent is payment of rent. Lord Neuberger raises the possibility of paying an apportioned rent in that situation, but absent a decision specifically on that scenario, there is no binding authority sanctioning such an approach. There is also the much greater concern for tenants of having the exercise of their break right challenged, because the full quarter’s rent was not paid on the quarter day. The adverse financial implications for the tenant of a successful challenge by the landlord will be considerably greater than the tenant failing to obtain a refund for a part quarter’s rent.

The easiest solution for tenants may be to ensure that the termination date is on the last day of the quarter i.e. the day prior to the next rent day.