Not just any lease, this is an M&S lease

The day after judgment in Marks and Spencer plc v BNP Paribas Security Services Trust Company (Jersey) Limited and another was given, I attended the Property Bar Association annual dinner. Perhaps inevitably (property lawyers all together in one place, ?much anticipated judgment just out) there was talk of the decision. The general consensus was that nothing much had changed, and I think that must be right. 

The Supreme Court has Court has affirmed the traditional position in respect of implied terms and the apportionment of rent payable in advance. Notwithstanding the result in the High Court ?at first instance, it seems to me that, absent something fairly radical, this was always likely ?to be the case.

Which begs the question, why did M&S bother? Just as the members of the board in Attorney General of Belize v Belize Telecom Ltd [2009] ?1 WLR 1988 are not known for lack of independent thought (see paragraph 58 of the judgment), boards of high-powered FTSE 100 companies are not known for a desire to throw good money after bad. At this point, M&S is down the unrecoverable rent (about £203,000 plus VAT) and – presumably (although the transcript does not say) – a good few hundred thousand pounds in costs. In every case, there is a risk of losing, and a real risk of costs being awarded against you if you do. Why was M&S willing to take the risk?

M&S held business premises from BNP Paribas pursuant to sub-leases that were long (70 pages) and detailed (15 pages of tenant’s covenants, nine of landlord’s) and had been drafted by experienced professionals. Earlier sub-leases had been granted in 2006, but varied or restated in 2010. Rent was payable in advance on the usual quarter days. ?By December 2011, the basic rent per quarter ?was £390,172.25 plus VAT.

Clause 8 of the lease provided for two ?possible break dates (24 January 2012 and 24 January 2016); the lease would otherwise have ended on 2 February 2018. The break dates were anniversaries of the grant of the earlier sub-leases: self-evidently, they did not coincide with the rent days. The break clause could be exercised by the tenant’s giving the landlord six months’ written notice. It would be effective if there were no arrears of basic rent on the break date and, in respect of the first break date, if the tenant had paid £919,800 plus VAT on or before that date. 

On 7 July 2011, M&S served notice to determine the lease on the first break date. Just before ?25 December 2011, it paid the rent for the coming quarter. On or around 18 January 2012, it paid the £919,800 plus VAT; accordingly, the break notice was effective and the lease determined on ?24 January 2012.

M&S wished to recover an apportioned ?amount of the rent it had paid on 25 December 2011, representing the period of 25 January to ?24 March 2012 when it had had no use of the premises. It argued for an implied term that, if the ?tenant exercised the break clause and the lease determined on 24 January, the landlord should repay a proportion of the basic rent due on the immediately preceding 25 December, being apportioned in respect of the period from 24 January up to and including the ensuing ?24 March 2012. 

Implied terms 

The court considered the authorities on implied terms, in particular Lord Simon’s five-stage test ?in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 (PC), and the law in respect ?of apportionment, in particular section 2 of the Apportionment Act 1870 and Ellis v Rowbotham [1900] 1 QB 740, to the effect that rent payable in advance could not be apportioned under the ?1870 Act.

M&S’s three best points were that:

• Each quarter’s rent could be said to be referable to use and enjoyment of the demised premises for the forthcoming quarter, so the rent that fell due on 25 December 2011 could be said to be the tenant’s quid pro quo for occupation and enjoyment of the premises up to 25 March 2012, which – having exercised the break clause – M&S did not have. Unless M&S could recover the apportioned sum it sought, the landlord received a windfall (paragraph 33);

• The break dates owed their origins to the grant of the earlier sub-leases, which had required consent from the head landlord, so it could be said that the parties had agreed the terms of the break clause not knowing whether the break dates would be after, before, or even on a quarter day. This supported the notion that ?the parties were unlikely to have intended ?the apportioned rent to be retained by the landlords as part of the compensation for ?the tenant’s operation of the break clause ?(paragraph 34); and

• The basic rent was stipulated in the lease to be paid ‘yearly and proportionately for any part of a year by equal quarterly instalments in advance’. It was common ground on the basis of this stipulation that, had the lease run to 2 February 2018, the final rent instalment on 25 December 2017 could have been apportioned because, at that date, the parties would have known the lease would determine before the next quarter day. Because clause 8.4 (payment of £919,800) applied only to the first break date, M&S would have been entitled to pay an apportioned part of the quarter’s basic rent had it sought to determine the lease on the second break date, 24 January 2016; this reinforced the point. Similarly, had M&S paid the £919,800 before paying the rent on 25 December 2011, as it could have, it would have been entitled to ?pay an appropriate proportion of that rent because it would have been clear as at 25 December that the lease would end on ?24 January next (paragraph 35). 

These points are all well and good. As Lord Neuberger says ( paragraph 37), they have considerable force and assist the case that it was necessary for business efficacy that M&S’s desired term should be implied. Certainly – in lay terms ?at least – the position M&S found itself in seems unfair. But it is hard to see how these arguments could ever prevail in the final reckoning, assuming a strict application of the law in the face of the best countervailing arguments, viz:

The lease was very detailed;

• It had been negotiated and drafted by ?expert solicitors;

• It provided for a large number of contingencies (although not that contended for by M&S).

• The parties were ‘substantial and experienced’;

• It would be peculiar to imply into a lease a term requiring the landlord to pay around £200,000 plus VAT to the tenant on 25 January 2012, in the light of an express term requiring the tenant to pay to the landlord over £900,000 ?by 24 January 2012; and

• The condition in clause 8.3 required M&S ?to have paid all rent due on 25 March 2012 ?in order to exercise the break so it might be thought somewhat peculiar to imply a term requiring BNP Paribas to repay M&S most of that sum (paragraph 38).

Reasonable expectation

Without M&S’s implied term, clause 8 might seem to work unfairly, even capriciously, but that could have been avoided had the term been drafted differently initially, or renegotiated in 2010 (paragraph 34). Much time and legal energy had been expended drafting the terms of the lease and, for whatever reason, the parties had agreed clause 8.

It is, therefore, hard to see how M&S might ever have reasonably expected to win – but for the case of Belize, and therein, it seems to me, lies probably the most important aspect of this decision. In Belize, Lord Hoffman – giving the unanimous decision of the Privy Council – said: ‘There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?’

Lord Neuberger (paragraph 24) emphasised that Belize was not a ‘dilution of the requirements which have to be satisfied before a term will be implied’; Lord Carnwath (paragraph 60) had no doubt that the BNP Paribas’s submission that, properly understood, Belize should not be read as watering down the traditional tests was correct. Still, academic lawyers and judges had viewed the decision as changing the law (paragraph 24) ?and M&S’s case sought to rely upon Belize as supporting a more liberal approach than the traditional ‘necessity’ test. 

In a detailed discussion (paragraphs 22 ?to 31), Lord Neuberger points to the failings ?of the Belize analysis, including that construing the words of a contract and implying terms into ?it are different processes governed by different rules (paragraph 26). 

In a similarly detailed passage, (paragraphs 57 to 74), Lord Carnwath – in broad terms at least – defends the authority of Belize. He says that, properly understood, Belize is a valuable and illuminating synthesis of the factors which should guide the court. The majority, however, hold that ‘henceforth’ (i.e. from 2 December 2015) Lord Hoffman’s observations should ‘be treated as a characteristically inspired discussion rather than authoritative guidance on the law of implied terms’.

Open interpretation

Many, even most, decisions are open to interpretation. The trouble with a decision that ?can actually be said to ‘work perfectly well if properly understood’ is that the statement itself encompasses the possibility that it may not be so understood. This must be particularly so where academics, lawyers, and judges have apparently missed the point. 

For that reason alone, the majority’s position that Belize is no longer authoritative must be both right and of infinite practical value. It is clear that a party seeking to imply a term into a contract must resign itself to an uphill struggle, and rightly so. ?A contract sets out terms upon which parties ?agree to do business. 

Sometimes, terms are implied by statute to reduce or eliminate potential unfairness. It is worth noting that parliament has recently amended the Housing Act 1988 so that where a possession order based on a section 21 notice brings a tenancy to an end part-way through a period, the court must order the landlord to repay a proportionate ?part of any rent paid in advance for that period (Deregulation Act 2015, section 40 (inserting section 21CB of the 1988 Act). 

The point must be that would-be assured shorthold tenants are unlikely to obtain much, ?if any, legal advice before agreeing terms of a tenancy; moreover, the service of the section 21 notice and the timing of any court order is likely ?to be outside a tenant’s control. The position is markedly different from that of multi-nationals, negotiating at arms’ length with the benefit of sophisticated legal advice. It behoves parties to take care as to the terms they agree and think through the consequences. It probably also behoves those advising them on such terms to keep their insurance premiums up to date. 

Sally Anne Blackmore is a barrister practicing from Ely Place Chambers, specialising in property and landlord and tenant matters @Ely_Place www.elyplace.com

---