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Articles 26th Feb 2016

Is a tenant entitled to a rent refund after exercising a break right?

In certain circumstances, the court will imply terms into a contract or lease to fill a gap in the drafting in order to properly reflect the parties’ intentions when they entered into the deal and to make the document ‘work’.

The test is an objective one – what would a reasonable person have understood the parties’ intentions to be? – but the courts will not step in to save a party just because they have signed up to a bad deal.

M&S served a break notice to terminate its leases of office premises in Paddington. The leases contained the usual obligation that rent be paid in advance on the usual quarter days.  Service charge, insurance rent and a car parking licence fee were also payable.

The break right was conditional on there being no rent arrears on the break date and on M&S paying a substantial break premium. There was nothing in the leases that said M&S was entitled to a refund of any rent paid in advance that related to the period after the break date (‘overpayment’). M&S paid the full amount of rent for the quarter than spanned the break date, along with the break premium, and later sought a refund of the overpayment.

The High Court held that M&S was entitled to a refund, and that such a term should be implied into the leases. The Court of Appeal disagreed and overturned that decision, so M&S went to the Supreme Court (there was a lot of money at stake!)

Unfortunately for M&S, the Supreme Court unanimously upheld the Court of Appeal’s decision.

The judgment clarifies the rules on implying terms into contracts; briefly a term must either be necessary to give the contract business efficacy, or must be so obvious it goes without saying.

Practical tip – although relating specifically to drafting (or lack of), the decision also confirms the importance of getting the main principles of the deal agreed in the first place.  If it is agreed at heads of terms stage that there will be a rent refund, appropriate drafting can be included at the outset.

Practical tip – another way of avoiding the issue is to negotiate a break date that coincides with the last day of a rent payment period, although if sums (such as insurance rent) are not payable quarterly in advance on the usual quarter days, express provision will need to be made for these.

The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.

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