Where you have a lease of commercial premises and the tenant exercises a break clause, is the tenant entitled to be refunded any rent paid in advance beyond the break date?

A break clause is a clause which permits a tenant to terminate a lease on a date, known as the break date, earlier than the last date of the term. Break clauses usually contains conditions which the tenant must comply with before the break can be exercised. For example

· Payment of all sums due under the lease
· The giving up of vacant possession on the break date
· Compliance – or material compliance – with all the tenant’s covenants contained in the lease
· Payment of a premium.

Some of these conditions may have to be complied with on service of the break notice, or at the break date, or on both dates.

The courts when interpreting the meaning and effect of break clauses have emphasised the need for tenants to fully comply with these conditions. A breach may lead to the exercise of a break clause being unsuccessful.

However, if the conditions are complied with there is no reason why the lease should not be brought to an end.

Nevertheless, in a recent case, a dispute arose following the early termination of the lease by the tenant regarding the refund of rent. In Marks and Spencer p.l.c v BNP Paribas Securities Services the tenant (Marks and Spencer) exercised a conditional break clause. It took extra care in making sure all the conditions contained within the break clause were complied with. One condition concerned the payment of all sums due under the lease. Because the break date fell between two rent payment dates, the tenant paid all the rent in advance, and which related to the period beyond the break date. The annual rent was a significant sum so the tenant reclaimed the rent paid in advance beyond the break date. The landlord refused a refund. The tenant won in the first case heard in the high court. The landlord appealed to the Court of Appeal.

The Court of Appeal considered all the terms contained in the lease. There was no express provision which stated that any rent paid beyond the break date should be refunded. So should such a provision be implied? The Court of Appeal said no, it was not necessary to imply such a provision. The tenant was held not to be entitled to a refund of the excess rent. And this was the case eventhough in this instance, the tenant had already paid a substantial break premium. It appears the landlord enjoyed an unexpected windfall.

So what lessons can be learned from this?

· When negotiating a break clause for a tenant, a dispute like this could be avoided if the break date corresponds with the last day of any rent payment period. Therefore no apportionment will be due.
· If this is not possible, include an express provision in favour of the tenant requiring the landlord to refund to the tenant any rent paid in advance for the period beyond the break date to the day before the next rental payment date. Rent would normally be apportioned on a daily basis.

Written by Mark Sellers
Partner
PRINCE EVANS SOLICITORS LLP
Direct Line: 020 8799 1840
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