Break Clauses in Commercial Leases: Landlords Breathe a Sigh of Relief

Landlords can breathe a sigh of relief… that is, if your commercial lease has been drafted  to reflect the current position on break clauses and any potential refund due to an outgoing tenant.

In Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another [2014] EWCA Civ 603, the Court of Appeal held that it was not appropriate to imply a term into a lease which would entitle a tenant to a refund of rent paid in advance in respect of the period from the break date until the next rent payment date, be it a quarter, a month or even a week.

In this case, the tenant had paid rent in accordance with the lease in advance and had then served notice to bring the lease to an end in accordance with the conditions of the break clause.

Break clauses in commercial leases are common and allow the tenant, landlord or either party to bring the lease to an end by servingthe requisite notice.

Commonly, conditions are attached to the break clause and one of the usual conditions is that the rent due under the lease is fully paid. This has created much confusion over the years with tenants unsure of their obligations in respect of the payment of rent when exercising their right to break the lease.

Tenants are often under the misconception that they are complying with the lease terms by paying the rent up to the break date. It is now clear that rent must be paid in full in accordance with the lease notwithstanding that this may include a period of time after the break date.

In earlier proceedings with the Marks and Spencer case, the High Court had held that if a tenant exercised a break clause part way through a quarter and had paid the full quarter’s rent, a term should be implied entitling the tenant to a refund in respect of the overpayment of rent.

This contradicted the accepted legal position that if the break date was in the middle of two payment dates, the rent paid in advance was only to be repaid to the tenant if there was specific provision in the lease entitling the tenant to the refund.

The High Court awarded the tenant the refund in respect of the rent paid. This has, understandably, caused concern for landlords that they could find themselves inundated with tenant requests for refunds.

The case went to appeal and the Court of Appeal has given new life to the widely accepted commercial view and restored the position that a refund of any rent paid in advance for the forthcoming quarter is only due to the tenant if the lease expressly provides for it.

For more information on this, or any aspect of Commercial Law, please contact our Commercial Team.