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Lease Break Clause: Marks & Spencer Exercised an Expensive Exit

View profile for Ian Riley
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Break clauses are fairly common in leases. They give the tenant some flexibility, enabling them to bring the lease to an end early and walk away from the lease liabilities (payment of rent, repairing the property etc.). They may need to do so because business is not going so well, or circumstances have changed.

A lease break clause will almost always say that it can only be exercised if the tenant has paid all of the rent due as at the break date. Most leases require payments of rent to be made in advance, often on a quarterly basis. This can then lead to a situation where a tenant has paid rent for a period beyond the break date. For example:

  • Break date is 30 June 2014.
  • Rent is paid quarterly in advance on the usual quarter days.
  • Rent is therefore payable on 24 June 2014 for the period 24 June-28 September 2014.
  • From the break date (30 June 2014) to 28 September 2014, the tenant is not occupying the premises so has arguably “overpaid” the rent.

The widely accepted view for many years has been that such “overpayments” are not refundable to the tenant, unless the parties expressly agree to refund them in the lease.

Concern amongst landlords and their advisers

The case of Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another [2014] EWCA Civ 603 challenged this and Marks and Spencer claimed (amongst other things) the refund of rent for the period after the break date.

The initial court decision went in favour of Marks and Spencer. The court’s view was that the “overpayment” should be refunded, despite the absence of any repayment clause in the lease. This caused some concern amongst landlords and their advisers. However, the appeal (reported in May 2014) confirms that unless there is a repayment clause, the advance rent is not returned to the tenant. Marks and Spencer therefore lost the overpaid rent.

This is a good example of the kind of trap that an unrepresented tenant might fall into. The issue may not be considered at all by the tenant when reviewing a lease for themselves, or they might assume a common sense approach (i.e. that such overpayment would be refunded). Depending on the level of rent payable, the overpayment can be a substantial sum.

Whether it is a landlord or tenant entering a lease, I strongly recommend that suitable legal advice be sought from a specialist Commercial Property lawyer to review and negotiate the terms. A client can save themselves a lot of money later down the line, by spending a little at the outset on legal fees.