Breaking a lease: payback time?

Consider this. You are a tenant. Your lease includes an option for you to break it after five years so long as you give at least six months notice. At the beginning of the fifth year, you think that your premises are surplus to requirements, and you decide to serve notice to break the lease. You are careful, though. You pay your rent quarterly. Because there is a condition attached to your break, which would render it ineffective if you have not paid the rents due at the break date, you pay the final quarter’s rent in full (even though the break date occurs half way through the quarter).

But that’ll be alright. Your landlord will have to refund you the overpayment. Right?

Wrong, or to give the lawyer’s answer − not necessarily.  

Why not?

If a lease does not oblige the landlord to refund to the tenant any overpayment of rent for the period after a break date, then it does not have to.

The court can imply a term in to a legal document if it is necessary to achieve the parties’ intentions. But in a case which considered this very point, the court would not do that. 

The logic is this:-

• When the landlord and tenant are negotiating a lease, they could easily include specific provision requiring the landlord to refund any overpayment for the period after the break date
• It would be obvious to both that, were the tenant to break the lease (and to avoid falling foul of the condition requiring all rents due to have been paid), it would have to pay the full quarter’s rent to make the break notice an effective one

Marks and Spencer came a cropper on this very point (Marks and Spencer PLC v BNP Paribas Securities Services Trust Company (Jersey) Limited (2014). It served a valid notice to terminate its lease on 24th January 2012. It paid the full quarter’s rent from 25th December 2011 to 24th March 2012. But BNP Paribas refused to refund the rent from 25th January 2012 on the basis that the lease did not oblige it to do that. And whilst the High Court initially found for Marks and Spencer, the Court of Appeal overturned that decision. 

Might the position change?

This is case law, so yes, it could. The Court of Appeal refused permission for Marks and Spencer to appeal its decision. But on 11 November 2014 the Supreme Court granted permission for an appeal nonetheless. No date has been set, but landlords and tenants alike will watch with keen interest.

I am a tenant – what can I do?

• If you are negotiating a lease now, with a tenant’s break clause, then you must include specific provision for the landlord to refund to you any overpayment of rent. Do not rely on the Court of Appeal’s decision being overturned
• As an alternative, if your break date is fixed to the last day of a quarter, then the point falls away – but only in so far as it relates to quarterly payments (insurance rent, for example, may be paid annually)
• If your lease is already in place, your break occurs before a further court decision on the point and  is conditional on the payment of rents (without any provision for refunds), then it is important to comply with the condition. Failure to do so could mean that the notice to break is ineffective, and you will then be locked in to the lease for the rest of its term (which could be significantly more expensive)

I am a landlord – what should I do?

• If your tenant breaks its lease, and there is no obligation on you to refund any overpayment, then (pending a further court decision) you should keep it, notwithstanding any request from the tenant
• Conversely, if the lease obliges you to refund an overpayment, then you should do so
• If there are conditions attached to the break clause – such as payment of rent – then you should always consider the extent to which they have been fulfilled. If they have not, then the lease may not end on the break date (and no refund will be due anyway)
• Even if you do not have to refund any overpayment, you might do so nonetheless. But always consider if there is anything else which the tenant might owe to you which is not caught by a break condition (in particular, terminal dilapidations), and which you could deduct

For further information about breaking a lease please contact Richard Honey, Partner and Head of the Estate Management team, at richard.honey@michelmores.com or 01392 687510.