Marks And Spencer Plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd & Anor

This appeal concerns a “break clause” in a lease, that is, a clause which permits the tenant to terminate the lease on a date (“the break date”) earlier than the last date of the term. Lessees often negotiate such clauses, recognising that the lessor may well demand compensation, often in the form of a “break premium”, payment of which is made a pre-condition of a “break” under the break clause. Here the parties negotiated a break premium but said nothing about an apportionment of rent, which the lease requires the tenant to pay in advance. Can the court imply a term which enables the lessee to get back that part of the advance payment of rent which relates to a period (“the broken period”) after the break date, by when the lease will have terminated? The closely-reasoned judgment of Morgan J dated 16 May 2013, which is the subject of this appeal, held that the court could do so. The lessor, BNP Paribas (“BNP”), now appeals.

I have come to a different conclusion from the judge for the primary reason that in my judgment the lease, read as a whole against the relevant background, would not reasonably be understood to include such a term, and thus the test for an implied term is not met. I start with the principal terms of the lease, some background about the exercise of the break clause and these proceedings and a summary of the judge’s detailed reasoning. Then I set out my full reasons on the basis of the parties’ submissions on this appeal.

There are in fact four leases (strictly, sub-underleases) between the parties, each for a separate floor of the same office block in Paddington, London. We have considered the terms of only one of those leases as they are all on the same terms, so far as material. The lessee is Marks and Spencer plc (“M&S”). The parties entered into a deed of variation dated 15 January 2010 which “restated” the terms of the lease. The previous terms of the lease are not material. I have set out the critically relevant terms of the lease in the Annex to this judgment.

Basic Rent was payable in advance on the usual quarter days, with additional payments for car parking, insurance and services. The reddendum in clause 2 of the restated lease setting out the grant or demise to the tenant and the terms as to rent (“the apportionment clause”) uses the words “proportionately for any part of a year.” The judge held that the apportionment clause applied not only to the first and final periods of the lease if it ran until expiry, which would not be full quarters, but also, if the break clause was operated, to the advance payment of rent from the last quarter day preceding the break date provided that the break premium had also been paid since it was then certain that the lease would terminate on the break date (“the apportionment conclusion”).

The term of the lease was expressed in the lease to expire on 2 February 2018. The parties contracted out of the security of tenure provisions in sections 24-28 of the Landlord and Tenant Act 1954 so the lease would be bound to end on that date if it had not expired on any earlier date.

The break clause allowed the lessee to terminate the lease on either 24 January 2012 (called “the first break date”) or 24 January 2016 (called “the second break date”), but he had to give six months’ advance notice. In addition, there had to be no arrears of rent or VAT on rent, and the lessee had to have paid a substantial premium by the break date. But these were the only conditions for the operation of the break clause.

There is no express term which entitles the lessee to be repaid any sum by way of Basic Rent, car parking fee, insurance or services that he has paid in excess of what is due from him for periods prior to the break date.

M&S complied with the conditions of the break clause to enable it to exercise the right on the first break date. It paid the Basic Rent for the quarter starting on 25 December 2011 (“the last quarter day”) in full and the break premium on 18 January 2012. So the lease came to an end on 24 January 2012. After that date, M&S demanded repayment of the rent paid in advance for the period from 25 January to 24 March 2012 (being the broken period). BNP refused to make repayment and so M&S started these proceedings to recover the Basic Rent, car parking fee, Insurance and service charges relating to the that period.

At trial, M&S puts its claim on several bases: (i) the express terms of the lease, (ii) restitution (iii) total failure of consideration and (iv) implied term. The judge rejected all these bases except implied term. M&S does not cross-appeal any of the claims which the judge rejected. We are solely concerned with the correctness of the judge’s conclusion in M&S’s favour that there was an implied term.

The judge’s reasoning on implied term proceeds by the following steps.

First, the judge selected the test for implication of a term. He held that the applicable test was thar set out at the end of paragraph 21 of the speech of Lord Hoffmann in the Privy Council case of A.G. of Belize v Belize Telecom Ltd [2009] 1 WLR 1988, namely:

“21 It follows that in every case in which it is said that some provision ought to be implied in an instrument, the question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean. It will be noticed from Lord Pearson's speech that this question can be reformulated in various ways which a court may find helpful in providing an answer—the implied term must “go without saying”, it must be “necessary to give business efficacy to the contract” and so on—but these are not in the Board's opinion to be treated as different or additional tests. There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?” (italics added)

The core reasoning of the judge was that applying this test a term could be implied that advance rent paid for the broken period would be repaid following the break date principally for two reasons.

First, building on the apportionment conclusion, the judge held that a reasonable person would consider that such a term was to be implied because the lessee should be in the same position as a lessee who paid the break premium on the last quarter day (“the same position conclusion”). Second, the judge held that the break premium amounted to a year’s rent (before any rent review) and so the parties should be taken to have agreed that this was the full amount of compensation for the lessor if the lessee exercised his right to determine the lease under the break clause and in those circumstances they were unlikely to have considered that the lessor should retain the rent for the broken period as well (“the full compensation conclusion”).

The judge reinforced his principal reasons by a number of further reasons (“the subsidiary reasons”) as follows:

As a cross-check, the judge asked whether it was necessary to imply the term. He held that the implied term was necessary to give business efficacy to the lease.

Finally, the judge dealt with a possible objection to the implication of the term that it would enable a lessee whose lease had been forfeited to recover rent for the broken period. The judge held that it was possible to distinguish the present case from forfeiture. The judge would not have implied a term entitling the lessee in default to repayment of rent for any broken period after the date when the lessor forfeited the lease. There was no provision for compensation if the lessor terminated the lease.

The judge went on to hold that there was an implied term for reimbursement of the proportion of insurance charges attributable to the broken period and the proportion of the car parking fee which had been paid before the break date. He held that, while there was no express provision for this and the words “proportionately for any part of a year” did not appear in the relevant provisions, these charges would in any event have been subject to apportionment just as this court had apportioned rent without those words in York v Casey [1998] 2 EGLR 25: see per Peter Gibson LJ at 28 A - B. He held that therefore there was an implied term for repayment as in the case of the Basic Rent.

As regards service charges, BNP accepted before the judge M&S’s contention that by implication the lessee is entitled to recoup any service charges which it had paid but related to services which had not been provided by the break date and to be repaid the amount of any credit which it had earned as a result of overpayments of service charges in the past and which had not been used by the break date.

Not unsurprisingly, M&S has made the accepted right to apportionment of these charges a major plank of its argument on this appeal. However, BNP continues to dispute any right to reduce the Basic Rent by reference to the broken period in any circumstances (a point which it contends does not have to be decided in this case). It also disputes what the judge saw as the corollary, which does have to be decided, namely the right to recover any amount paid in advance on account of Basic Rent, or any amount paid by way of the charge for insurance and the car parking fee, for the broken period. The parties agree that, if there was a right to make a reduced payment on the last quarter day, there had, as the judge held, to be certainty that the lease would terminate on the break date, and thus the lessee had to pay the break premium by the last quarter date.

The issue for decision then is whether a term is to be implied into the lease that, if the lease is terminated by the tenant duly exercising his right to terminate the lease under the break clause, and the tenant pays the rent due on the last quarter day in full because (as in this case) it was not certain on that date that the other pre-condition for the operation of the break clause (payment of the break premium) would be duly made, the tenant can claim back that proportion of the rent paid on the last quarter day which relates to the period between the break date and the last day of the quarter.

It is common ground that the decision of the Privy Council in A.G. of Belize v Belize Telecom Ltd [2009] 1 WLR 1988 identifies the principles to be applied when considering whether a term can be implied, though the parties differ on how to interpret and apply those principles. I have already set out the crucial paragraph from this decision. Accordingly I consider that the judge applied the correct test. Neither party on this appeal has suggested otherwise.

As I explained in Stena Line Ltd v Merchant Navy Ratings Pension Fund Trustees Ltd and another [2011] EWCA Civ 543:

“36.

The Belize case constitutes an important and recent development in the principles of interpretation, which the courts are probably still absorbing and ingesting. It is appropriate to take the statement of principles in it in more detail since it is directly relevant to the issue that I am considering in this case. In Belize, the Privy Council analysed the case law on the implication of terms and decided that the implication of terms is, in essence, an exercise in interpretation. This development promotes the internal coherence of the law by emphasising the role played by the principles of interpretation not only in the context of the interpretation of documents simpliciter but also in the field of the implication of terms. Those principles are the unifying factor. The internal coherence of the law is important because it enables the courts to identify the aims and values that underpin the law and to pursue those values and aims so as to achieve consistency in the structure of the law.”

Interpretation enables the court to take into account the parties’ common aim in entering into a transaction or any provision in it (see Investors Compensation v West Bromwich Building Society [1998] 1 WLR 896). It is a different exercise from implying a term using the conventional pre-Belize test, which involves asking whether the term to be implied was necessary in order to give effect to the agreement. The test in Belize requires the court to ask whether the agreement has the meaning that such a term would achieve, because, even though the parties did not expressly include that term in their agreement, that is what their agreement means.

However, in the same way as the pre-Belize test for implying terms into a contract required the court to pay close regard to the terms of the contract, so too the implication of terms by interpretation requires a high level of loyalty to the parties’ agreement, read against the admissible background. The party seeking to establish an implied term must therefore show not simply that the term could be a part of the agreement but that a term would be part of the agreement.

It follows, as Lord Hoffmann made clear in Belize, that the starting point is that, if there is no express term, none should be implied because if the parties intended that a particular term should apply to their relationship they would have included a term to that effect, rather than left it to implication. As Lord Hoffmann held:

“17….[t]he most usual inference in such a case is that nothing is to happen. If the parties had intended something to happen, the instrument would have said so.”

Furthermore, as this court made clear in Mediterranean Salvage and Towage Ltd v Seamar Trading and Commerce Inc (The Reborn) [2009] EWCA Civ 531, and Mr Dowding submits on this appeal, the court will not imply a term as a matter of interpretation following the Belize approach unless it is necessary that the agreement should contain such a term to achieve the parties’ express agreement, purposively construed against the admissible background. Lord Hoffmann also made this point in Belize:

“An unexpressed term can be implied if and only if the court finds that the parties must have intended that term to form part of their contract: it is not enough for the court to find that such a term would have been adopted by the parties as reasonable men if it had been suggested to them: it must have been a term that went without saying, a term necessary to give business efficacy to the contract, a term which, though tacit, formed part of the contract which the parties made for themselves.”

Mr Fetherstonhaugh accepts this but points out that the word “necessary” is imprecise, and that courts have not always applied this test strictly (see per Lord Wilberforce in Liverpool City Council v Irwin [1977] AC 239). I agree that what is necessary must depend on the particular type of contract. So, for example, the House of Lords implied a term that directors should use their power under their company’s articles to pay bonuses so as not to frustrate the expectations of holders of annuity policies which contained a guaranteed annuity rates (Equitable Life Assurance Co Ltd v Hyman [2002] 1 AC 408). In this case, however, there is little admissible evidence of communications between the parties beyond that contained in the lease, and so the exercise admits of less room for argument than might otherwise have been the case.

However, I would accept that a party does not show that a term is unnecessary simply by showing that the parties’ agreement could work without the implied term. That approach overlooks the fact that as part of the process of interpretation the court seeks to find the parties’ common aim in entering into the agreement. A term may be implied if it is necessary to achieve the parties’ objective in entering into the agreement.

Having directed myself as to the legal principles on implied terms, I turn to the provisions of the lease. The parties made no provision about return of rent for the broken period but this point is not as striking as it might at first sight seem because, as Mr Fetherstonhaugh points out, neither did they make any provision for the return of unutilised payments on account of service charges for that period. Likewise they made no provision for the return of any part of the amounts paid for insurance or by way of car parking fee when these related to the broken period. Mr Dowding submits that the lease is a detailed complex document, but, submits Mr Fetherstonhaugh in response, it clearly contains a gap here.

In the present case, the lease does not provide for excess amounts paid for services to the lessor on termination of the lease. However, in my judgment it would be wrong to infer from this that no monies are to be returned if they have not been spent by the break date. Indeed since the break date the parties have agreed otherwise. Mr Fetherstonhaugh relies on Brown’s Operating System Services v Southwark Roman Catholic Diocesan Corporation [2007] EWCA Civ 164 where this court held that on the true interpretation of the lease in that case the lessee was only liable for amounts actually spent by the lessor in providing services before the expiry of the lease and that monies unspent at the end of the term would belong to the lessee. From this Mr Fetherstonhaugh seeks to derive a principle that a lessee should only pay under a lease for what he actually receives. I do not accept that as a general principle. The calculation of the break premium in this case - a year’s rent before any increase on a review – usefully illustrates the point that rent is not simply a payment to the lessor for the use and occupation of the premises: it is also used as a yardstick for compensating a party for some loss that he incurs by entering into a lease or operation of one of the rights conferred by it. This point is in my judgment the short answer to Mr Fetherstonhaugh’s submission that there was a principle that a lessor should only pay for what he actually receives. So far as rent is concerned, this is not conventionally the sole purpose which rent serves. No inference can therefore be drawn from this principle.

Moreover, despite the persuasive submission of Mr Fetherstonhaugh, I do not consider that the same conclusion as applies to service charges is true about the car parking fee. This was a relatively small amount (£6,000 pa). The break premium did not include any element for the loss of the car parking fee. In the circumstances there is no basis for implying a term for return of a time-apportioned or any part of the fee for the broken period.

On the same basis I likewise do not accept that the same follows for the insurance charges. I do not consider that this conclusion necessarily leaves the lessee at risk of having to make a payment for insurance stretching for a long period into the future without any hope of recoupment because the conventional period for insurance is not more than a year. If the lessor sought to negotiate insurance for a much longer period than that, the lessee might have other remedies. Moreover, unless BNP was able to renegotiate the position with the insurer it would be unable to obtain any rebate on the premium. If it did manage to renegotiate the premium, the rebate may not be time-apportioned. Again the break premium took no account of insurance charges that the lessor might incur during any consequent void. So there is no reason for implying a term for repayment of insurance charges which are referable to the broken period.

That still leaves the point about service charges and the question is whether, as Mr Fetherstonhaugh argues, one can deduce from that that there is an implied term that rent paid for the broken period should be returnable.

In my judgment, the two situations are readily distinguishable. The purpose of the break clause is that the lessee should be able to bring the lease to an end if he satisfies the pre-conditions as to payment of rent and break premium. By contrast the break clause expresses no particular intention about the rent for the broken period.

What is the correct interpretation of the break clause so far as the right to repayment of the rent is concerned? I leave aside for separate consideration below the judge’s same position conclusion and full compensation conclusion. The first factor to bear in mind is that it would have been obvious to the parties before they signed up to the lease that there was a possibility that rent would have to be paid on the last quarter day in full for a period which went beyond the break date. They would therefore have made some provision for this case. Furthermore, they must have had some discussions about what was to happen on termination by operation of the break clause because clauses 8.5 and 8.7 deal with two consequences of termination. I do not go as far as Mr Dowding suggested, namely to conclude that these provisions are inconsistent with the implied term which must therefore fail. But clauses 8.5 and 8.7 do show that the parties could easily have added to clause 8.5 words to the effect that the lessor was to repay any rent (or other charges) paid for the broken period.

That position is reinforced by the state of the case law surrounding claims for repayment of rent for the broken period when a lease terminated before the end of the term of the lease, because the lessee operated a break clause or because the lease was forfeit. The judge set out the case law in full in his judgment and there is no need for me to go through it again.

The judge correctly points out that the position would have been clearer if they had entered into the lease at a later date, as some of the case law was decided after the parties entered into the original lease, and some of it after the restated lease. However, Ellis v Rowbotham [1900] 1 QB 740 had been decided before any of the leases were executed. In that case, the lessee sought to recover rent for the broken period following forfeiture of the lease. This court rejected his claim on the basis that the Apportionment Act 1870 did not apply to advance payments of rent. In addition, this court had decided in Capital & City Holdings Ltd v Dean Warburg [1989] 1 EGLR 90 that there was no such right of reimbursement even where the reddendum also included the words “proportionately for any part of a year”. Re a Company [2007] BPIR 1 decided for the first time that there was no difference between forfeiture and termination under the break clause for this purpose: this decision was after the date of the original lease in this case but before the restated lease.

Mr Dowding produced a new authority which was not cited to the judge, namely William Hill (Football) v Willen Key & Hardware, Ltd. (1964) 108 SJ 482. In this case, a lessee who surrendered his lease, sought to argue that there was an implied term enabling him to recover the rent for the broken period. Megaw J rejected this argument. He held that the Apportionment Act 1870 did not apply and that any implied term would be inconsistent with the lease. This decision is obscurely reported and the report is meagre. Neither the judge nor counsel, all of whom have great expertise in this field, were aware of it below. Mr Dowding was clearly right to draw it to our attention but, had it stood on its own I would not have held that the parties ought to have been aware of it and that it formed part of the admissible background against which the lease should be interpreted.

Even if Re a Company had been decided after the date of the restated lease, it would in my judgment suffice to say that there was no precedent for implying a term for repayment of rent for the broken period. That case law forms part of the admissible background against which the lease is to be interpreted. It makes it all the more likely that a reasonable person, having knowledge of this background, would conclude that if the parties had really intended there to be an implied term for repayment they would have made express provision for it.

The words “proportionately for any part of a year” in the reddendum might at first sight be read as meaning that there should be an implied term for repayment of the rent for the broken period once the break premium has been paid and termination has taken place. But those words are in my judgment only applicable to a payment of rent for a broken period within the original term of the lease. So they do not apply in a case such as the present when on the last quarter day there was no certainty as to whether termination would take place on the break date. I do not accept the judge’s point that these words together with the description of the quarterly payments of rent as “instalments” of rent might have led the parties to believe that there was a right to recoup a payment of rent insofar as it was attributable to the broken period. Likewise I do not accept his suggestion that York v Casey assists on the facts of this case. York v Casey dealt only with the question of apportionment of rent at the end of the term by effluxion of time.

That takes me to the judge’s same position conclusion. I am not persuaded that this entitles the court to read the agreement as subject to the implied term for repayment. I proceed on the basis (without deciding the point) that the lessee could make a proportionate payment of rent on the last quarter day if he had by then also paid the break premium: that would seem to be correct but the point was not fully argued before us. Nonetheless the force of the judge’s point depends on saying that the situation where a proportionate payment of rent can be made on the last quarter day and the situation where termination does in fact take place on the break date because by then the lessee has paid the break premium are on all fours. I do not consider that that is so. In the latter case, the lessor remains uncertain about whether the lease will terminate on the break date until the break premium is paid. Why should not the parties have proceeded on the basis that the lessor was entitled to be compensated for that?

Likewise the full compensation conclusion assumes that the break premium constitutes the totality of the agreed compensation. However, the fact is that the lessor could be compensated in other ways and the absence of terms for repayment of the car parking fee illustrates this. If I am right in saying that there is a distinction between the cases where the break premium is paid on or before the last quarter day and cases where it is not paid until after that date, the assumption that the break premium should be full compensation is undermined.

In my judgment, when all the circumstances are considered, the correct inference to draw is that the parties proceeded on the basis that the loss from a payment of rent for the broken period should lie where it fell. Thus no term for repayment is implied.

On that basis I need not distinguish forfeiture clauses. Mr Dowding submits that the judge was wrong to say that these were distinguishable because there was no provision for the payment of compensation to the lessor, as the lessor was entitled to sue for damages and this would place him in an equivalent position. Therefore the judge should not have left the question of forfeiture clause to another day. I am not prepared to go that far. Had I found an implied term in this case, it would have arisen from the special provisions of the break clause. Thus it may have been correct to say that forfeiture could be distinguished.

There remain two points made by the judge or the parties in their submissions:

For these reasons I would allow this appeal.

I agree.

I also agree.