Many landlords – and a few well advised tenants – will be relieved that the Court of Appeal has overturned the High Court decision in Marks and Spencer v BNP Paribas.
Regular readers of the Property Press will recall that in 2013 the High Court decided that, where a break clause provided for a break date part way through a rental period, the tenant was entitled to a refund of the rent, apportioned on a daily basis, from the break date to the end of the quarter. It reached that decision on the basis that it must have been what the parties intended (really?) and that the tenant should have a refund for a period when he was not receiving any benefit.
Property lawyers were of course taught at their mother’s knee that an annual rent payable, say, quarterly, was payable on the quarter day, in one instalment, for the whole of that quarter. On that analysis, there is no automatic right to a refund.
The Court of Appeal has now endorsed this view, overruling the High Court, with the result that any tenant who does require a refund must negotiate an express clause to that effect into the lease. Those of us who have continued to do that, on behalf of our tenant clients, despite the High Court decision, are no doubt feeling extremely smug. Indeed, many landlords volunteer such provisions, as they prefer to get the job done rather than pay for their lawyers to argue.
While break clauses are very much in the public eye, it may be worthwhile offering a few thoughts on drafting principles generally:
- When negotiating break clauses, try to have them on the last day of the quarter (not the quarter day itself) so that there is no refund due.
- If you cannot arrange this, for example because you are negotiating an agreement for lease and do not know exactly when the lease term will start, it may save time to put in an express refund provision.
- The Court of Appeal also had some interesting things to say about the apportionment of service charges on a break clause. It seems to be accepted in those circumstances that the tenant is entitled to an apportioned refund of sums paid on account of service charge. It is important therefore that managing agents ensure that on account service charge payments are running at an appropriate level to avoid too much shortfall at year end.
- Many landlords still attempt to impose conditions on break clauses, requiring total or partial compliance with tenant’s lease obligations as a precondition of operating the break. To be cynical, the Heads of Terms may say that the tenant will have a break clause; they do not say that the landlord will pretend to give him a break clause and then cheat him out of it. Such provisions do not really assist the landlord any more than the tenant – it does your client no favours to spend money on litigation to discover that the break was effective after all.
Anyway, to look on the bright side, break clause cases are the product of the recession. Last week I was asked for some advice on a rent review clause, for the first time in several years. Now I know things are looking up…
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