Commercial Lease Break Clause: Apportionment of Rent

In recent times the economic downturn has affected everyone, and commercial giants are no different. Well known brands have had to reconsider their business plans and in many instances look to cut costs. In the retail sector the largest cost is often that of the store itself. Making the decision to close a store is a big step to take but when doing so it is important to do it in the most cost effective way possible, or at least appreciate the cost of taking such an action – something Marks and Spencer recently learnt the hard way.

Caselaw

In Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2015] UKSC 72 the court was concerned with a lease of a building named The Point in Paddington Basin, London W2. The Defendant was the landlord under the lease and Marks and Spencer plc (“M&S”) the tenant.

The lease was granted for a fixed term which expired on the 2nd February 2018 and the rent was payable in advance on the usual quarter days, as is often the case. The lease also contained a break clause exercisable by M&S whereby it could determine the lease on the 24 January 2012 by payment of the sum of £919,800. M&S exercised that break clause having paid the full quarter’s rent at the point it fell due on the 25th December 2011. Accordingly M&S had paid the rent on the property up to the 24th March 2012 (a not inconsiderable sum of £309,172.25 plus VAT) but vacated it on the 24 January 2012. M&S, perhaps understandably, sought to recover from the Defendant the apportioned rent for the period from 25th January 2012 to 24th March 2012, albeit in the absence of any express term within the lease providing for such a recovery.

The Supreme Court had to weigh M&S’ argument that a term should be implied into the lease requiring for the recovery of the apportioned rent, against the fact that the lease was a detailed document, consisting of approximately seventy pages, entered into by two commercially focussed entities with the assistance of considerable legal advice and assistance. In the circumstances the court refused to imply such a term in the lease and M&S’ claim failed.

Guidance

When entering into a lease, consideration should be given to when the dates for payment of rent and any potential break clauses fall. As stated above, it is common practice for rent to fall due on the usual quarter days however little thought is often given to how those dates interact with the date the lease is actually entered into and thus the resultant break dates. This is often as a result of lease negotiations being lengthy and protracted; however even when agreement has been reached in respect of certain clauses, and negotiation continues in respect of others, review of the agreed clauses should still be ongoing until the lease is completed.

Moreover, consideration should be given as to when to inform the landlord that a break clause is to be exercised. In the M&S case, the break clause was to be activated by way of payment of £919,800 plus VAT prior to the break date. M&S chose to pay it on the 18th January 2012, which it was entitled to do, however as a result it was not clear that the lease was to be determined at the point the rent was paid on 25th December 2011. Had the break sum been paid prior to 25th December 2011, in the circumstances of that case, the Supreme Court’s view was that M&S would only have been liable for the rent up to 24th January 2012. A costly mistake which supports the argument for forward thinking business planning.