Break Options and Apportionment of Rent

Will Lewis | 15 July 2013


As a tenant, or indeed their landlord, do you know how much rent should be paid prior to an option to break?  Take for instance the scenario where a break notice has been served in time and the break date will be 14th October 2013.  The landlord will issue a rent demand for the full September quarter (through to 24th December 2013):

  • Is the tenant liable to pay the full quarter’s rent, beyond the break date?
  • If so, can they claim the “over-payment” back?
  • Or, can they just pay rent up to the break date?

There have been number of cases recently including PCE Investors Ltd v Cancer Research UK [2012] 2 P&CR 71 and Canonical UK Ltd v TST Millbank LLC [2012] EWHC 3710 (Ch) which have held that, subject to the wording in your lease, to be able to comply with a condition in a break clause requiring payment of rent, if the break date falls between rent payment dates, the whole quarter’s rent is due and no subsequent apportionment is permitted.

So, as a tenant how can you protect your position to ensure that you do not pay rent for the period after your break option when you are not benefitting from occupation of the premises?  A recent decision in the case of Marks and Spencer PLC v (1) BNP Paribas Securities Services Trust Company (Jersey) Limited and (2) BNP Paribas Securities Services Trust Company Limited [2013] EWHC 1279 (Ch) highlights the approach that should be taken by tenants when complying with break options as well as the circumstances in which either payments of rent (and other sums) can only be paid up to the break date or overpayments can be recovered after the break has been validly exercised.

In brief, Marks and Spencer Plc (“M&S”) was the tenant and the defendants, both BNP Paribas Companies were the landlord of four floors of an office building in Paddington, London, known as “The Point”.  In accordance with the lease, M&S served notice on BNP Paribas to terminate the lease on 24th January 2012.  The lease would then determine if there were no arrears of Basic Rent or VAT on the Basic Rent as at 24th January 2012, and if M&S, on or prior to 24th January 2012, had paid the sum of £919,800 plus VAT to BNP Paribas.  M&S paid the full quarter’s rent until 24th March 2012 and later paid the premium of £919,800 plus VAT.

The result of M&S’ actions was that it had complied with the conditions in the break clause (this was not disputed by BNP Paribas).

M&S then sought to recover all of the sums it had paid in respect of the period after the termination of the lease on 24th January 2012 which BNP Paribas refused.

Taking into account the break notice served by M&S, the question arose of whether or not they were required to pay the whole quarter’s rent or only an apportionment until the break date.  The answer is the full quarter’s rent.   As the break clause was conditional, and the conditions were not met by the rent payment date it was not certain at the quarter day that the lease would end on the break date.  However, if it had been certain that the lease would end on the break date, for instance if there were no conditions attached to the break, then only an apportionment of the rent would be due.

Therefore, if your break option is conditional on the payment of the rent and/or other recurring sums, and it cannot be said with certainty that the lease will end on the break date, the full quarter’s payments need to be paid.

The tenant is then left in the position of attempting to recover such overpaid sums from the landlord.

In this instance, whilst the lease did not contain an express provision allowing M&S to recover part of the overpaid sums from BNP Paribas, the lease did contain an implied term to this effect. This ties in with the fact that if the lease were to expire part way through a rental period (not by way of a break option), only a proportion of the rent would be due.  It was further decided that a reasonable person reading the lease would expect that, in a case where the break clause operated to take effect on 24th January 2012, the rent would be payable up to this date, but not for any period after that.

Care needs to be taken however, as in this case, significant reliance was placed on the fact that the break clause provided that a premium of £919,800 plus VAT needed to be paid.  This shows that the parties clearly applied thought prior to commencing the lease to the compensation BNP Paribas would receive if M&S were to exercise the break on 24th January 2012.  This fact therefore made it unlikely that the parties would have intended BNP Paribas to retain the full quarter’s rent in addition to the compensation for being left with vacant possession in the place of an income stream.

When it comes to attempting to recover potential overpayments of rent, the decision in the M&S case is a helpful indication of the Court’s willingness to imply a term into the lease providing for such recovery.  It is unclear, however, how much of an impact the premium paid by M&S to BNP Paribas had in this regard and no doubt the future importance of a premium will be tested.

In my opinion this case highlights the importance of negotiating a robust break option at the outset.  From a tenant’s perspective, whilst making sure there are no onerous terms in relation to the break option, it is also imperative to ensure that the lease is explicit in dealing with how over-payments in rent are dealt with.

The content of this article is intended to provide a general guide to the subject matter.  Specialist advice should be sought about your specific circumstances.

Mike Morgan is Director of Asset Management of OBI Property. Please do not hesitate to contact him if you would like to discuss Landlord and Tenant matters in more detail.

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