28 May 2013 #Commercial Real Estate
One of the many pitfalls which can arise when negotiating and exercising break clauses in leases is the condition for the rents to be paid up to date at the break date.
In the case of the yearly rent, if the break clause states that rent must be paid up to the break date that means that the tenant has to pay the whole quarter’s rent for the quarter in which the break date falls. Even if the break date falls in the early part of the quarter, the remaining quarter’s rent must be paid, together with any VAT on it for the condition to be satisfied.
Some leases provide that the landlord is to refund the proportion of rent paid following a successful termination of the lease within a fixed period, following the date of termination, but this is a matter for negotiation by the parties.
When leases do not contain this repayment provision, tenants will often be surprised and dismayed to discover that they are obliged to pay a whole quarter’s rent even though they will only be in actual occupation of the premises for part of the quarter.
This point has recently been considered in the case of Marks & Spencer Plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another (2013). The decision is only a High Court decision, but it was held that the tenant was entitled to a refund of the rent which was overpaid in exactly these circumstances, despite the fact that the lease did not contain an express repayment provision.
The Court held that a term allowing the tenant a refund of the overpaid rent should be implied into the lease and it gave various reasons for this decision. One of the various reasons was that the break clause also contained a penalty provision for the payment by the tenant of the same equivalent to one year’s rent. The Court found that that this provision showed that the parties had applied their minds to the issue of compensation that the landlord should receive for the exercise of the break and made it unlikely that the parties would have intended that the landlord would, in addition, be entitled to retain the overpaid rent.
This was not the only reason given by the Court, and the decision does give some encouragement to tenants who are in the situation of having overpaid their rent (because of the wording of the break clause) to be able to demand that sum back from the landlord after the break has taken effect. The case may be appealed, so this might not be the last word in the matter.
Break clauses continue to attract litigation and new case law because of their importance to both landlords and tenants. The best advice which we can give, when taking a lease or seeking to exercise a break clause in an existing lease, is to obtain specific legal advice so as to minimise, and if possible eradicate, any possibility for any dispute.