Many leases of commercial premises granted for a period of 5 years or more will contain a right for the tenant to terminate the lease early. A tenant is obliged to give the landlord suitable notice to expire on a date or dates specified in the lease. The effectiveness of the break notice is often subject to the tenant having satisfied various conditions by the break date, such as payment of the rent and compliance with other tenants’ covenants in the lease. Leases of commercial premises also traditionally require the tenant to pay the annual rent by 4 quarterly instalments in advance on nominated days of the year.
So what happens when the coordination of the date for the early termination of the lease and payment of the rent do not coincide? An example of this would be where the tenant can terminate the lease on, say, 28 July and the last rent payment date before 28 July is 24 June. Does the tenant pay a proportion of the rent for the period from 24 June to 28 July? Or do they pay the full quarters’ rent but be entitled to a refund for the rent covering the period from 28 July to the end of that rent quarter? Alternatively does the tenant pay the full quarters’ rent due on 24 June without any entitlement to any refund, so that the landlord gets a windfall?
The law was quite settled up until last summer, when the High Court heard a case brought by Marks & Spencer against the landlord of one of its stores. The facts of the case essentially followed the example given above. In addition to rent paid in advance, Marks & Spencer also paid a service charge and insurance premiums together with an extra fee for use of a car park. Having successfully exercised the right to terminate the lease early, it sought a refund of all of these payments covering the period from the date of that early termination, even though the lease did not explicitly require the landlord to pay a refund.
Surprisingly, the High Court agreed with Marks & Spencer. However the matter has come before the Court of Appeal and it has overturned the High Court’s decision. The various arguments put forward by the tenant based on the specific terms of the lease were not successful, so landlords can now sleep soundly. In the absence of an express provision in the lease covering the point, a tenant is not entitled to a refund of any rents paid that relate to the period after an early termination date. When negotiating the terms of a lease with a break clause, tenants’ lawyers should ensure that either the break date is the last day of a rent period and that the lease expressly provides for a repayment of rent and any other payments from the break date to the next payment day.
Richard Freeman-Wallace is a partner in the commercial property department at Hay & Kilner.
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