No returns for M&S following Supreme Court ruling

The Supreme Court has upheld the decision of the Court of Appeal in the case of Marks and Spencer plc (M&S) v BNP Paribas Securities Trust Company (Jersey) Ltd (BNPP).

The issue was, where rent is payable quarterly in advance and a break date falls between the quarter days, whether the full quarter's rent paid by M&S for the final quarter should have been apportioned so that M&S could recover the balance of the rent from the break date to the end of the quarter.

The Supreme Court unanimously upheld the decision of the Court of Appeal which decided that there was no implied term in M&S's lease whereby rent was to be apportioned. Therefore, M&S was liable to pay a whole quarter's rent, despite the fact that the break date fell soon after a quarter day and a break premium had already been paid.

The facts and case history

M&S was the tenant and BNPP was the landlord under four sub-underleases (the Lease) of different floors in premises in Paddington Basin, London.

The key points in the Lease were:

• The basic rent was to be "paid yearly and proportionately for any part of a year by quarterly instalments in advance on the [usual] quarter days". The relevant quarter date was 25 December 2011
• clause 8.1 entitled M&S to determine the Lease by giving the landlords six months' written notice (a "break notice") to take effect on 24 January 2012
• clause 8.4 provided that a break notice would only take effect on the first break date "if on or prior to the first break date the tenant pays to the landlord the sum of £919,800 plus VAT [(the Break Premium)]".

In July 2011, M&S gave notice to terminate its Lease on 24 January 2012. M&S paid the rent and service charge for the full quarter from 25 December 2011 to 24 March 2012 and payment of the Break Premium was made to BNPP a week before the break date. The conditions being met, the Lease subsequently terminated on 24 January 2012. M&S issued proceedings to recover the rent and service charge, which it claimed should be apportioned, so that the sums paid for the period from 24 January 2012 to the end of the quarter should be repaid to M&S.

There was no express apportionment clause in the Lease which would allow M&S to recover the apportioned element, however, the High Court implied such a term to this effect. BNPP appealed in relation to the rent but not service charge, which it accepted was repayable.

The Court of Appeal did not agree with the High Court. The Court of Appeal found that, if there is no such express term in a lease, then none should be implied.

The Supreme Court's decision

The Supreme Court unanimously upheld the Court of Appeal's decision, finding that, as the effect of the current case law was that rent payable in advance could be retained by BNPP, save in exceptional circumstances, express words would be needed to imply such a term into a lease.

Lord Neuberger, who handed down the main judgement, thought there was some force in M&S' argument that, under a modern commercial lease, each quarter's rent paid in advance can fairly be said to be for the tenant's use of the premises. Therefore M&S would be unfairly prejudiced and BNPP would receive a windfall if the rent was not apportioned and repaid. M&S also argued that the Lease provided that the rent was due "proportionately for any part of a year" so that if it had paid the Break Premium before 25 December 2011 (the quarter day) then it would have been clear that the Lease would break on 24 January 2011, and M&S would then only have been required to pay apportioned rent for the next quarter. M&S argued that common sense meant that the position should not be different just because M&S paid the £919,800 in January 2012. Lord Neuberger agreed, but did not consider that this was enough to justify implying a term into the Lease allowing the rent to be apportioned.

BNPP relied on the fact that the Lease was very detailed, had been entered into by experienced parties and was negotiated and drafted by expert solicitors. In addition, clause 8 clearly showed that the parties had thought about what payments were to be made. This, BNPP argued, made it inappropriate for the Court to step in.

Lord Neuberger preferred BNPP's arguments, finding that implying a term into the Lease was not required for business necessity or because it was obvious and went without saying that the rent should be apportioned. Lord Neuberger concluded that the Lease was a very full and carefully considered contract, which included express obligations about financial liabilities. It had also been agreed against a legal background where rent paid in advance was not apportioned on a time basis.

Accordingly, M&S' appeal was dismissed and M&S could not recover the rent paid in advance.

Points for tenants to note

This decision is significant in relation to all commercial contracts, but from a real estate perspective it is a reminder to consider all contractual terms carefully, both when negotiating a lease and when deciding how to implement its terms.

Specifically, it also highlights the importance for tenants to comply with break conditions and to negotiate, at an early stage, an apportionment clause into their leases to ensure there is express provision to recover any overpaid rent.

If there is no express provision in the lease allowing apportionment, tenants should pay the full rent up to the end of the quarter and then seek repayment later, but apportionment and repayment will be at the landlord's discretion.