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

A lease contains a tenant’s break clause which allows the tenant, subject to its compliance with certain conditions, to terminate the lease on a specified date. Rent is payable by instalments quarterly in advance on the usual quarter days. The specified date for the termination of the lease is in the middle of a quarter. On the quarter day before the specified date, the tenant is obliged to, and does, pay a full quarter’s rent as an instalment of rent. The lease ends on the specified date. Is the tenant entitled to be repaid a part of the quarter’s rent which he has paid, the relevant part being based on a daily apportionment of the quarter’s rent in relation to the part of the quarter which is after the specified date? That is the principal issue raised in this case. A substantial sum turns on the answer to this question. Similar questions arise in relation to a rent for car parking, and in relation to payments made in relation to insurance and service charge.

Prior to 24^th January 2012, the Claimant was the tenant and the Defendants were the landlord in relation to four floors, namely the 3^rd, 4^th, 8^th and 9^th floors, of an office building in Paddington, London, W2 known as “The Point”. The four floors were let under four separate sub-underleases. For ease of expression, I will refer to the sub-underleases as “leases”. The 3^rd and 4^th floors were let to the Claimant by leases dated 25^th January 2006, granted by the Defendants’ predecessor in title. The 8^th and 9^th floors were let to the Claimant by leases dated 19^th April 2006, granted by the Defendants’ predecessor in title. The Defendants acquired the reversion on the four leases in 2007. On 15^th January 2010, the Defendants and the Claimant entered into four deeds of variation, one in relation to each lease. Each deed of variation varied the terms of a lease. The terms as varied were then “restated” by being set out in a form in the schedule to the deed of variation.

So far as material to the issues in the case, the four leases as varied are in the same terms. For ease of expression, I will refer to the lease as varied as simply “the lease”. The parties referred me only to the lease in relation to the 3^rd floor. It was accepted that whatever decision I came to in relation to that lease would apply to the other three leases. Accordingly, in this judgment I will refer only to the terms of that lease and to the facts as to its determination and to the payments made under it. In the course of argument, I was referred to a large number of the provisions in the lease. I have set out in an Annex to this judgment the principal relevant provisions.

In brief summary, the relevant premises were demised for a term of years starting on 25^th January 2006 and ending on 2^nd February 2018. Although the premises were intended to be occupied by the tenant for the purposes of a business, the lease was contracted out of the security of tenure provisions in sections 24 to 28 of the Landlord and Tenant Act 1954, pursuant to section 38A(3)(a) of that Act. This meant that the term of years would expire on 2^nd February 2018 and could not continue thereafter under the 1954 Act. The Claimant had the benefit of an option (conventionally called “a break clause”) to determine the lease on either 24^th January 2012 or 24^th January 2016. The option to determine was conditional on certain matters. Under the lease, the tenant was obliged to pay a rack rent and a further rent (called “the Car Park Licence Fee”) by equal quarterly instalments in advance. The lease also contained provisions as to payment for insurance and a service charge.

On 7^th July 2011, the Claimant served on the Defendants a notice dated 7^th July 2011 pursuant to the break clause. The notice was expressed to determine the lease on 24^th January 2012. Whether the lease would determine on 24^th January 2012 then depended on whether the Claimant would comply with the conditions expressed in the option. The first condition, imposed by clause 8.3, was that there were no arrears of Basic Rent or VAT on Basic Rent as at 24^th January 2012. The second condition, imposed by clause 8.4, was that the Claimant had paid to the Defendants, on or prior to 24^th January 2012, the sum of £919,800 plus VAT. The Defendants were entitled to waive compliance with the condition in clause 8.3 but were not entitled to waive compliance with the condition in clause 8.4.

On 19^th July 2011, the Defendants invoiced the Claimant in relation to a contribution said to be due from the Claimant in relation to insurance. The insurance was in relation to the relevant insured risks for the period 1^st July 2011 to 30^th June 2012. The sum invoiced was £14,972.85 plus VAT. On 2^nd August 2011, the Claimant paid to the Defendants the sum invoiced.

On 8^th December 2011, the Defendants invoiced the Claimant in relation to the Basic Rent, Car Park Licence Fee and service charge said to be due on 25^th December 2011. In this invoice, the sums due were calculated on the basis that the sums payable were for the period from 25^th December 2011 to 24^th January 2012 (i.e. the date of the expiry of the Claimant’s break notice) and not for the full quarter beginning on 25^th December 2011.

On or about 25^th December 2011, the Claimant paid to the Defendants in relation to the Basic Rent, Car Park Licence Fee and service charge sums in excess of those invoiced by the Defendants on the 8^th December 2011. The sums paid by the Claimant were in relation to the full quarter beginning on 25^th December 2011.

On or about 18^th January 2012, the Claimant paid to the Defendants the sum of £919,800 (the sum specified in clause 8.4 of the lease) plus VAT.

The result of the foregoing was that the Claimant complied with the conditions in clauses 8.3 and 8.4 of the lease and the term of the lease ended on 24^th January 2012.

On 9^th February 2012, the Claimant wrote to the Defendants pointing out that the Claimant had paid to the Defendants sums substantially in excess of the Defendants’ invoices of 8^th December 2011 and asking for repayment of the excess. On the same day, the Defendants replied stating that the invoices of 8^th December 2011 were “incorrect” and that the Claimant ought to have been invoiced for the various charges for the full quarter and that “supplementary” invoices would be served. Correspondence between the parties’ solicitors then ensued. The Claimant also claimed repayment of part of the insurance payment it had made on 2^nd August 2011. The Defendants contended that the Claimant was not entitled to be repaid any such sums and in particular it was not entitled to be repaid that part of the sums which it had paid for the full quarter commencing on 25^th December 2011 which were in excess of the amounts invoiced on 8^th December 2011.

On 15^th March 2012, the Defendants invoiced the Claimant in relation to the Basic Rent, Car Park Licence Fee and service charge said to be due on 25^th December 2011. Unlike the earlier invoice of 8th December 2011 to which I have referred, in the invoice of 15^th March 2012, the sums due were calculated on the basis that the sums payable were for a full quarter from 25^th December 2011 to 24^th March 2012. The invoice of 15^th March 2012 set out the amounts due by giving credits for the smaller amounts invoiced by the invoice of 8^th December 2011.

On 20^th April 2012, the Claimant brought the present proceedings to claim repayment of sums which it had paid for the period after the termination of the lease on 24^th January 2012. The Defendants have served a Defence denying that the Claimant is entitled to be repaid any sum and, further, relying upon the terms of a settlement agreement which the parties entered into on 24^th January 2012. The Defendants contend that the terms of the settlement agreement prevent the Claimant asserting a right to be repaid the relevant sums, even if there had previously been such a right. I will deal with the facts and the arguments as to the settlement agreement towards the end of this judgment.

On 3^rd September 2012, the Defendants served on the Claimant a service charge certificate drawn up in accordance with the service charge provisions in the lease for the year from 1^st January 2011 to 31^st December 2011. All of that service charge year had elapsed before the end of the lease on 24^th January 2012. The certificate and associated paperwork showed that the expenditure for that year had been less than the expenditure shown in an earlier budget. As the Defendants had been paid by the Claimant sums on account of service charge for that year by reference to that budget, the paperwork served on the Claimant included a credit note for the sum whereby the payments on account exceeded the Claimant’s liability to contribute to the expenditure. The claim was amended to include reference to the events described in this paragraph. In an Amended Defence, the Defendants have contended that as the lease had been determined before 3^rd September 2012, there was no continuing duty on the Defendants to provide any service charge certificate or give any credit for any overpayment for the 2011 service charge year. The parties also disagreed as to what if anything should be done, as between these parties, in relation to the 2012 service charge year.

Mr Fetherstonhaugh QC appeared on behalf of the Claimant and Mr Reynolds QC appeared on behalf of the Defendants.

The Claimant says that it was only liable under the lease to pay the Basic Rent (and indeed the Car Park Licence Fee, the insurance rent and the service charge) during the period of the term of the lease. Conversely, it was not liable to pay the Basic Rent and the other sums for a period after the lease had ended. The Claimant relied upon general statements about rent being paid for the use and occupation of land in Property Holding Co Ltd v Clark [1948] 1 KB 630 at 648, Escalus Properties Ltd v Robinson [1996] QB 231 at 243 and United Scientific Holdings Ltd v Burnley BC [1978] AC 904 at 935. The Claimant accepted that it was obliged to pay a full quarter’s rent on 25^th December 2011. That was because, on that date, it could not be said with certainty that the lease would determine on 24^th January 2012 as there were conditions that remained to be performed. Accordingly, the Claimant did pay a full quarter’s rent on 25^th December 2011. Later, the conditions in the break clause having been performed, the lease ended on 24^th January 2012. The Claimant submits that it is entitled to be repaid by the Defendants the part of the quarter’s rent for the period from 24^th January 2012 to 24^th March 2012. The Claimant says that its right to be repaid in this way is pursuant to the express terms of the lease, alternatively pursuant to a term to this effect to be implied into the lease, or in the further alternative in restitution on the ground that the consideration for the quarter’s rent failed for the period after 24^th January 2012.

The Defendants agree that the Claimant was obliged to pay a full quarter’s rent on 25^th December 2011. The Defendants then submit that there is no express provision in the lease which confers on the Claimant a right to be paid a sum of money in relation to the period after 24^th January 2012, nor which imposes on the Defendants an obligation to pay such a sum. The Defendants further submit that no such right or obligation is to be implied into the lease. Further, the established principles of the law of restitution do not permit the Claimant to recover part of the quarter’s rent for the period after 24^th January 2012.

The parties developed their submissions by referring to a number of cases which were said to bear on the questions in this case. I will refer to those cases next before I discuss the matter and reach my conclusion.

It is appropriate to begin with Ellis v Rowbotham [1900] 1 QB 740. In that case, the premises were let for one year from 10^th June 1898 at a total rent of £357. The agreement provided that the tenant was to pay, before taking possession, a sum which was a little over 50% of the total rent and was to pay the remainder of the rent by three equal instalments on 10^th September 1898, 10^th December 1898 and 10^th March 1899. The tenant paid the initial sum and the instalment due on 10^th September 1898. He did not pay the instalment due on 10^th December 1898. The landlord forfeited the tenancy on 2^nd March 1899. The landlord sued for the full amount of the instalment due on 10^th December 1898. The tenant contended that he was only liable to pay an amount calculating by apportioning the sum of £357 on a daily basis for the period 10^th June 1898 to 2^nd March 1899 and taking credit for the payments made. The tenant contended that this result was produced by the Apportionment Act 1870. The Court of Appeal dismissed this argument, holding that the 1870 Act only applied to sums payable in arrears. In the course of argument, leading counsel for the tenant referred to there being a partial failure of consideration and he also contended that if the tenant had paid the full instalment on 10^th December 1898 and the tenancy had been forfeited (on grounds other than non-payment of rent) before 10^th March 1899, the tenant would be entitled to sue to recover part of the rent which had been paid. The judgments of the Court of Appeal did not mention the argument based on failure of consideration and did not discuss the possibility of recovery of any overpayment but regarded the case as turning exclusively on the non-application of the 1870 Act.

Ellis v Rowbotham was cited with approval in Canas Pty Co Ltd v K L Television Ltd [1970] 2 QB 433 at 442D which was in turn cited with approval inCapital & City Holdings Ltd v Dean Warburg Ltd [1989] 1 EGLR 90. In that case, premises were demised by a lease dated 7^th July 1987 for a term from 7^th July 1987 to 23^rd June 1991 at a yearly rent, payable by equal quarterly instalments in advance on the four usual quarter days. The quarter’s rent due on 25^th December 1987 was not paid. There was argument as to whether the lease was forfeited on 8^th January 1988 or 7^th March 1988. The Court of Appeal held that the tenant (and the guarantors of the liability of the tenant) were liable for the full quarter’s rent irrespective of the precise date of forfeiture. The guarantors pointed to the fact that the lease reserved the yearly rent using the words “yearly (and proportionately for any part of a year)” and argued that when the lease was forfeited in the middle of the quarter which began on 25^th December 1987, the liability to pay a full quarter’s rent was “reduced”. Ralph Gibson LJ (with whom the other member of the court, Nicholls LJ, agreed) said at page 92E that :

“The presence of those words [which I have quoted] does not, in my judgment, modify in any way the obligation imposed by the lease on the tenant to pay a full quarter’s rent on December 25, 1987.”

The only argument put forward by the guarantors appears to have based on the express terms of the lease. There does not appear to have been any argument as to an implied term or as to failure of consideration.

These three cases all concerned premature termination of a lease as the result of a forfeiture. They were, however, applied in the case of a lease which was arguably terminated in the middle of a quarter pursuant to the exercise of a tenant’s break clause: see Re A Company [2007] BPIR 1. In that case, the reservation of rent referred to the rent being payable “proportionately for any period of less than a year”. The judge (Pumfrey J) held that the matter was governed by the decision in Capital & City Holdings so that a full quarter’s rent was payable in advance on a quarter day even if the lease was determined pursuant to a tenant’s break clause after that quarter day but before the ensuing quarter day.

I was referred to Ocelota Ltd v Water Administration Ministerial Corporation [2000] NSWSC 370, a decision of Hodgson CJ in Equity in the Supreme Court of New South Wales – Equity Division. I was shown a report of part of the judgment in that case: see 9 BPR 97815. However, that report does not reveal much about the terms of the lease and, in particular, does not set out the terms of the break clause in that case. I have therefore consulted the full judgment. By a lease, agricultural land was let for a term of two years commencing on 1^st July 1999. The lease provided for an annual rental of $3 million, with $1.5 million being payable on 1^st July and $1.5 million being payable on 30^th May. The lease contained a provision which allowed the lessor to terminate the lease on one month’s notice, in the event that a named person ceased to be employed by the lessee. The lessee paid the instalment of rent due on 1^st July 1999. The named person did cease to be employed by the lessee and on 9^th September 1999 the lessor gave notice to terminate the lease on 8^th October 1999. The lessee successfully sued to recover an apportioned part of the instalment, the apportionment being by reference to the period from 8^th October to the expiry of half a year from 1^st July 1999. The judge held that the lessee was not entitled to an apportionment of the rent pursuant to the New South Wales equivalent of the Apportionment Act 1870 but the lessee was entitled to be repaid either on the ground of a failure of consideration or pursuant to a term to be implied into the lease.

In Quirkco Investments Ltd v Aspray Transport Ltd [2012] L&TR 282, the lease reserved a specified yearly rent “and so in proportion for any period less than a year”, payable by equal quarterly instalments in advance on the usual quarter days. The lessee operated a break clause in the lease to determine the lease on 18^th December 2010. The lessee had paid a quarter’s rent for the quarter beginning on 29^th September 2010. One of the issues which came before the court was, assuming that the lease did indeed determine on 18^th December 2010 pursuant to the break clause, whether the tenant was entitled to recover part of that quarterly instalment for the period 18^th to 24^th December 2010. The tenant argued that it was so entitled either pursuant to the express terms of the lease or on the grounds of unjust enrichment. The judge (HH Judge Keyser QC, sitting as a judge of the High Court) rejected the claim. He referred to the fact that the Apportionment Act 1870 did not apply. He referred to Ellis v Rowbotham and Canas Pty Co Ltd v K L Television Services. He specifically said that if there were to be a claim in restitution it would not be right to distinguish between a case where the lease ended by reason of a forfeiture and where it ended pursuant to the operation of a tenant’s break notice. He held that the rent due on 29^th September 2010 had accrued due on that date before the termination of the lease and the law of unjust enrichment did not circumvent the scheme of rights and obligations contained in the lease. As to the claim that the express terms of the lease provided for the tenant to recover the disputed sum, the judge followed the approach in Capital & City Holdings Ltd v Dean Warburg Ltd. He held that the full quarter’s rent was due on 29^th September 2010 because, at that date, the operation of the break clause remained conditional on matters which remained to be performed so that it was not certain as at 29^th September 2010 that the lease would end on 18^th December 2010. He also held that the lease made no provision for pro rata recovery of any moneys attributable to the period after 18^th December 2010. The decision in Ocelota was not cited.

In PCE Investors Ltd v Cancer Research UK [2012] 2 P&CR 71 the lease was for a term from 12^th October 2005 to 27^th September 2014 subject to a tenant’s right to break on 12^th October 2010. The tenant served notice to break the lease on that date. The operation of the break clause was conditional on, amongst other things, the tenant paying the rent “up to” the break date. The lease reserved a specified yearly rent payable by quarterly instalments in advance on the usual quarter days. The lease did not use language referring to the rent being paid “proportionately for a part of a year” but did provide for the first payment of rent for the period up to the first quarter day after the grant of the lease. The question was whether the tenant had to pay a full quarter’s rent on 29^th September 2010 or whether it was sufficient to pay a part of a quarter’s rent for the period 29^th September 2010 to 10^th October 2010. The judge (Peter Smith J) held that the full quarter’s rent accrued due on 29^th September 2010 and was payable under the lease and had to be paid to satisfy the condition in the break clause that the rent be paid “up to” the break date. The judge considered the earlier cases to which I have referred. He explained why he did not agree with the decision in Ocelota.

Canonical UK Ltd v TST Millbank LLC [2012] EWHC 3710 (Ch) was essentially a similar case to PCE, save that the reservation of rent referred to a specified yearly rent and added the words “and proportionately for any part of a year”. The same result was reached as in PCE. I was told by counsel that appeals to the Court of Appeal in both PCE and Canonical have been compromised so that the views of the Court of Appeal in these two cases will not be available.

In relation to the Basic Rent, I need to consider the three ways in which the Claimant puts its case. These are that it is entitled to be repaid: (1) pursuant to an express term in the lease; (2) pursuant to a term to be implied into the lease; and (3) in restitution because there was a total failure of consideration.

I will begin by disregarding the existence of the break clause and by considering instead the amount of Basic Rent which would be payable on the last quarter day before the lease determines by effluxion of time on 2^nd February 2018. The last quarter day before that date would be 25^th December 2017. I consider that the amount of Basic Rent payable on 25^th December 2017 would be a proportionate part for the period from 25^th December 2017 to 2^nd February 2018. I consider that this result would be clearly produced by the presence of the words “proportionately for any part of a year” in the reservation of the rent. Indeed, even if these words had not appeared, the court would reach the same result following the common sense view expressed in York v Casey [1998] 2 EGLR 25 at 28 A – B per Peter Gibson LJ. It follows from this that on the last quarter day before the term would expire by effluxion of time, the tenant does not have to pay a full quarter’s rent and so there would not be a need for a tenant having paid a full quarter’s rent to seek to recover an alleged overpayment in relation to the period after 2^nd February 2018.

I now turn to consider the position as to the Basic Rent payable at 25^th December 2011. At that date, the Claimant had served a notice to determine the lease pursuant to the break clause on 24^th January 2012. If it had been certain as at 25^th December 2011 that the term would end on 24^th January 2012, then I consider that the tenant would have been in the same position as discussed above as at 25^th December 2017, i.e. the tenant would have been obliged to pay only an apportioned part of a quarter’s rent for the period from 25^th December 2011 to 24^th January 2012. However, the break clause in this case was conditional not only on there being no arrears of Basic Rent on the break date but was also conditional on the tenant paying the sum of £919,800 plus VAT on or prior to the break date. This sum had not been paid by 25^th December 2011. Accordingly, it was not certain on 25^th December 2011 that the term would end on 24^th January 2012. Judged as at 25^th December 2011 all one could say would be that the term might or might not end on 24^th January 2012. Prima facie the amount of the Basic Rent payable on 25^th December 2011 would be a full quarter’s rent. The only possible alternatives to this would be either an apportioned part for the period to 24^th January 2012 or no rent (on the ground that one did not know when the lease would end). If the first of those alternatives were right, it would be far from clear when the balance of the quarter’s rent would be payable if the term did not end on 24^th January 2012. The second alternative seems most improbable, allowing the tenant to defer payment of rent until it became clear what sum was in the end due. I consider that the true interpretation of the lease was that, in a case where one could not say on 25^th December 2011 whether the term would end on 24^th January 2012, that a full quarter’s rent was payable on that date. This conclusion is consistent with the decisions at first instance in PCE Investors Ltd v Cancer Research UK and Canonical UK Ltd v TST Millbank LLC and indeed that conclusion is not challenged by the Claimant in the present case.

The above conclusion means that the lease operates so as to require the tenant to pay a full quarter’s rent on 25^th December 2011 even in a case where it later emerges that the term ends on 24^th January 2012. What does the lease provide as to the tenant being entitled to recover from the landlord a part of that quarter’s rent, being apportioned to the period after 24^th January 2012? The short answer is that the lease does not contain an express provision which confers on the tenant a right to recover part of the quarter’s rent nor imposes on the landlord an obligation to repay to the tenant a part of the quarter’s rent. The Claimant points to the words “proportionately for any part of a year” but those words do not allow the tenant to pay only a part of a quarter’s rent on 25^th December 2011 and much less do they provide for the tenant to be entitled at a later date to claim to recover a part of a quarter’s rent from the landlord. The Claimant also relies on what it says is a general principle that a rent is the consideration a tenant pays for the use and occupation of land during a term. However, that statement of principle is at a high level of generality and I do not find it of any real help when construing the words used in the lease. Further, if the words relied upon by the Claimant were apt to confer on the tenant a right to recover a part of a quarter’s rent, then it is difficult to see why those words would not be similarly apt in a case where the term has ended during the relevant quarter pursuant to a forfeiture of the lease. It was held in terms in Capital & City Holdings v Dean Warburg that such words do not have that effect. Accordingly, I conclude that the lease does not expressly provide for the tenant to be entitled to recover a part of the quarter’s rent paid in respect of the rent due on 25^th December 2011.

I will next consider the Claimant’s submission that there is to be implied into the lease a term entitling the tenant to recover from the landlord at some point a part of the quarter’s rent paid on 25^th December 2011 in relation to the period after 24^th January 2012.

Both parties accepted the legal principles to be applied are those set out in the decision of the Privy Council in A.G. of Belize v Belize Telecom Ltd [2009] 1 WLR 1988. Although that was a decision of the Privy Council, it has been followed and applied on a large number of occasions in this jurisdiction. An example is the decision of the Court of Appeal in Crema v Cenkos Securities plc [2011] 1 WLR 2066, where the statements of principle in Belize were summarised by Aikens LJ at [38] – [39].

In Belize, Lord Hoffmann described the basic approach of a court asked to imply a term into a contract as follows (at [16] – [18):

“16 Before discussing in greater detail the reasoning of the Court of Appeal, the Board will make some general observations about the process of implication. The court has no power to improve upon the instrument which it is called upon to construe, whether it be a contract, a statute or articles of association. It cannot introduce terms to make it fairer or more reasonable. It is concerned only to discover what the instrument means. However, that meaning is not necessarily or always what the authors or parties to the document would have intended. It is the meaning which the instrument would convey to a reasonable person having all the background knowledge which would reasonably be available to the audience to whom the instrument is addressed: see Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912–913. It is this objective meaning which is conventionally called the intention of the parties, or the intention of Parliament, or the intention of whatever person or body was or is deemed to have been the author of the instrument.

17 The question of implication arises when the instrument does not expressly provide for what is to happen when some event occurs. The 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. Otherwise, the express provisions of the instrument are to continue to operate undisturbed. If the event has caused loss to one or other of the parties, the loss lies where it falls.

18 In some cases, however, the reasonable addressee would understand the instrument to mean something else. He would consider that the only meaning consistent with the other provisions of the instrument, read against the relevant background, is that something is to happen. The event in question is to affect the rights of the parties. The instrument may not have expressly said so, but this is what it must mean. In such a case, it is said that the court implies a term as to what will happen if the event in question occurs. But the implication of the term is not an addition to the instrument. It only spells out what the instrument means.”

In the present case, the Defendants espoused the approach referred to in paragraph [17] of Lord Hoffmann’s judgment and submitted that the lease does not contain any express words conferring on the tenant a right to recover part of the last quarter’s payment of rent when the tenant determines the lease on a break date which predictably would be in the middle of a quarter. Therefore, the tenant does not have any such right. The Claimant espoused the approach referred to in paragraph [18] of Lord Hoffmann’s judgment and submitted that a reasonable party to the lease would understand that the lease was providing, in the events which have happened, for the lessee to end up paying rent for the period from 25^th December 2011 to 24^th January 2012 and although this was not spelt out in the lease in express terms, what the lease meant was that if the lessee had paid a full quarter’s rent on 25^th December 2011, it would be entitled, on and after 24^th January 2012, in the event of the lease terminating on that date, to recover a part of the quarter’s rent in relation to the period after 24^th January 2012.

There was argument before me as to whether it was still helpful to ask whether the suggested implied term was necessary to give business efficacy to the lease and whether the suggested implied term was so obvious that it went without saying. As to these points, there is further relevant comment in the Lord Hoffmann’s judgment at [21] – [23] where he said:

“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?

22 There are dangers in treating these alternative formulations of the question as if they had a life of their own. Take, for example, the question of whether the implied term is “necessary to give business efficacy” to the contract. That formulation serves to underline two important points. The first, conveyed by the use of the word “business”, is that in considering what the instrument would have meant to a reasonable person who had knowledge of the relevant background, one assumes the notional reader will take into account the practical consequences of deciding that it means one thing or the other. In the case of an instrument such as a commercial contract, he will consider whether a different construction would frustrate the apparent business purpose of the parties. That was the basis upon which Equitable Life Assurance Society v Hyman [2002] 1 AC 408 was decided. The second, conveyed by the use of the word “necessary”, is that it is not enough for a court to consider that the implied term expresses what it would have been reasonable for the parties to agree to. It must be satisfied that it is what the contract actually means.

23 The danger lies, however, in detaching the phrase “necessary to give business efficacy” from the basic process of construction of the instrument. It is frequently the case that a contract may work perfectly well in the sense that both parties can perform their express obligations, but the consequences would contradict what a reasonable person would understand the contract to mean. Lord Steyn made this point in the Equitable Life case, at p 459, when he said that in that case an implication was necessary “to give effect to the reasonable expectations of the parties”. ”

Accordingly, I have to ask whether the implied term contended for by the Claimant would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean. I have already held that the lease expressly provides that, in a case where the break clause is not operated, the rent is payable for the term to 2^nd February 2018 and not for any period after that date. Further, I have held that if on the last quarter day before a break date it was certain that the term would end on the break date then the provisions as to the payment of rent by instalments do not require the lessee to pay a full quarter’s rent but only an apportioned part of a quarter’s rent. That leads a reasonable person reading the lease to expect that in a case where the break clause is operated to take effect on 24^th January 2012, the rent is payable for the term to 24^th January 2012 but not for any period after that date. I also consider it to be relevant that the break clause may only be effectively operated where the lessee pays to the lessor a sum equivalent to one year’s rent. That provision shows that the parties applied their minds to the compensation which the lessor should receive for the fact that after the break date the lessor would have vacant possession rather than an income stream under a continuing lease. That fact makes it unlikely that the parties would have intended that, in addition, the lessor would be entitled to retain the full amount of the quarter’s rent paid on the quarter day before the break date. It is also relevant that the provision as to the payment of rent on quarter days refers to the payment of “instalments” of rent. The ordinary concept of an instalment is that the payer does not pay the full amount which is due in one go but pays the full amount by instalments. Conversely, the obligation to pay by instalments should not produce the result that the payer pays more than the full amount which is due. I consider that these matters point to the lease being reasonably understood to mean that if the lessee pays a full quarter’s rent on the last quarter day before the break date and the lease then ends on the break date, in the middle of the quarter, then the lessor is obliged to pay back to the lessee the part of the instalment of rent which exceeds the full amount which is due.

It is a necessary (but not a sufficient) condition for the implication of any term that the suggested term be a reasonable term. I consider that the implied term contended for by the Claimant is an eminently reasonable term. However, the fact that a suggested term is a reasonable one is not itself sufficient to justify the implication of a term. This was emphatically stated by the House of Lords in Liverpool City Council v Irwin [1977] AC 239. I also remind myself that I must firmly resist the temptation to produce a result which strikes me as fair and reasonable: see the warning of Sir Thomas Bingham MR in Philips Electronique v British Sky Broadcasting [1995] EMLR 472 at 481. It can also be said that the court will be slower to imply a term where the contract is a lengthy one containing detailed provisions which have apparently been fully considered and expressed. Further, at the present time, it seems fairly obvious that, if the lessee paid a full quarter’s rent on the last quarter day before the break date and the lease then terminated at the break date in the middle of a quarter, then a question was going to arise as to whether the lessor was entitled to retain the full quarter’s rent but yet the lease does not contain an express provision dealing with that question. As against that, it may be that what is obvious at the present time, in the light of the decisions in Quirkco and PCE Investors, was less obvious when the lease was entered into. Further, it might be said that in view of the fact that rent is reserved “proportionately for any part of year” and that the quarterly payments were “instalments” that it was fairly obvious what the parties thought should happen in such a case.

I have also considered whether I am assisted in reaching a conclusion by addressing the questions whether the suggested implied term is necessary to give business efficacy to the lease and whether it is so obvious that it goes without saying. As to the first of these questions, in accordance with the elaboration of that question in paragraph [22] of the speech of Lord Hoffmann in Belize, I consider that the suggested implied term is necessary to give business efficacy to the lease. As to the second of these questions, I consider that the suggested implied term is obviously what the parties meant and it was made sufficiently obvious by the use of the words “proportionately for any part of year” and the fact that the quarterly payments were “instalments” even though they did not spell out a specific obligation on the lessor’s part to repay part of the quarter’s instalment in relation to the period after the break date. Further, the suggested implied term can be clearly and easily expressed and it does not contradict any express term of the lease.

Before finally determining whether the suggested term should be implied into the lease, I have considered whether a similar term should be implied in a case where the lease is terminated by way of forfeiture in the middle of a quarter. In such a case, could the lessee allege that although he was liable to pay a full quarter’s rent on the quarter day before the forfeiture, the lessor is obliged to repay to the lessee a part of that rent for the period following the forfeiture so that the net sum due from the lessee is only in relation to the period from the quarter day up to the date of forfeiture? If such a term were to be implied, it would cut across the decision in Ellis v Rowbotham (and the cases following it) to the effect that the lessee remains liable to pay the quarter’s rent in full, notwithstanding the forfeiture. In those circumstances, I would consider that the parties are to be taken to have contracted against the background of the established law and I would not be prepared to imply such a term in a forfeiture case. The question then arises: is it possible to distinguish between a case of forfeiture and the present case where the lease ends pursuant to a break clause? In my judgment, it is possible. First, at the date of the lease in this case, there was no established law to the contrary in the case of a tenant’s break clause. Secondly, on the facts of this case, it is significant that the parties agreed that the lessee could only break the lease if it paid a sum equivalent to one year’s rent to compensate the lessor for the fact that it is losing its income stream from the break date. There is nothing comparable in the case of forfeiture.

I have already referred to the decisions in Quirkco and PCE Investors and the conclusions and comments in those cases. Neither case considered the possibility that following the approach in Belize, a term could be implied of the kind which I favour. That was because the possibility of an implied term was not argued. That might suggest that the case for an implied term is not a strong one. However, now that the possibility has been fully argued in the case before me and I have, I hope, fully considered those arguments, I think that I should give effect to the conclusion which I think is justified.

My conclusion is that there is to be implied into the lease a term requiring the lessor to repay to the lessee, on and after 24^th January 2012, an apportioned part of the quarter’s rent paid on 25^th December 2011 in relation to the period after 24^th January 2012.

The Claimant had a further argument to the effect that it was entitled in the law of restitution to recover the part of the quarter’s rent which related to the period after 24^th January 2012. It was said that the consideration moving from the lessor had wholly failed in relation to that period. In view of my conclusion as to an implied term, it is not necessary to decide this point. However, as it was fully argued I will deal with it although more succinctly than would otherwise be appropriate.

Where money has been paid under a transaction which is or becomes ineffective then the payer may be able to recover the sum paid, provided that the consideration for the payment has totally failed. In a case where the consideration is “whole and indivisible”, the failure must be total. Various reasons have been given for this rule but the rule itself is established. It follows that the sum paid is not recoverable where the failure of consideration is partial. However, it may be possible to analyse a transaction so as to divide up different parts of the overall payments between different parts of the transaction. In such a case, if all of the consideration in relation to a divisible part of the transaction has totally failed then the relevant divisible part of the overall payments may be recoverable. In various cases, it has been argued that a payment for a right which is to endure for a period of time can be divided up between different parts of that period of time so that, in a case where the payer had only enjoyed the benefits for part of that period of time, there has been a total failure of consideration in relation to that part of the period. The cases show that is usually not appropriate to divide up a single consideration on a time apportionment basis: see Ferns v Carr (1885) 28 Ch D 409, Whincup v Hughes (1871) LR 6 CP 78 and Baltic SS Co v Dillon (1993) 67 ALJR 228 (the High Court of Australia). The question of apportionment is also discussed by Stadlen J in Giedo van der Garde BV v Force India Formula One Team [2010] EWHC 2373 (Comm). Applying the approach in those cases, I consider that it is not possible to say that the consideration for the quarter’s rent due on the last quarter day before the break date totally failed for the period from 24^th January 2012 to 24^th March 2012.

On reading the decision in PCE Investors, I noted the references to two shipping cases, namely, Wehner v Dene Steam Shipping Co [1905] 2 KB 92 and The Mihalios Xilas [1979] 1 WLR 1018. The judge in PCE Investors stated that those cases were of no help when construing the lease in the case before him. No doubt that is right in relation to construction. However, in so far as those cases dealt with general principles of law as to restitution for total failure of consideration, they are not irrelevant. Having indicated this view in the course of argument, both counsel then made written submissions on these two cases.

In Wehner v Dene Steam Shipping Co, a charterparty provided for hire to be paid half-monthly in advance and that in default of payment the owner might withdraw the ship from the service of the charterer. It was held by Channell J that if the owner did withdraw the ship in the middle of a half month then he was only entitled to be paid hire in respect of that portion of the half month during which the ship was in the service of the charterer. The reasoning in the judgment for this conclusion is very brief and amounts to little more than a statement of the conclusion. The judge said that the consideration had “wholly or partially failed” but he did not elaborate on how it was appropriate to allow restitution for a partial failure of consideration. No authority was cited in argument on this point and none was referred to in the judgment.

The decision on this point in Wehner was obviously picked up by Scrutton on Charterparties and by the time of the decision of the House of Lords in The Mihalios Xilas, the point was considered to be “well established” (see at 1024F) and “long … settled” (see at 1031H). Wehner was described as “long standing authority” (see at 1036D). It is cited without any comment in the current edition (22^nd ed.) of Scrutton on Charterparties at 16.022. Although Wehner has not been challenged in its own context for the proposition it establishes, I am not persuaded that I should extend that decision to the present context. First, it seems to me that the proposition is not in accordance with the general law to which I have referred above. Secondly, the opposite proposition is long established in the law of landlord and tenant by Ellis v Rowbotham. In that case, counsel had contended that there had been a partial failure of consideration and that there would be a right of recovery for a payment in advance followed by a forfeiture during the period for which the payment was made but the Court of Appeal reached a contrary conclusion. Accordingly, while the decisions in these two shipping cases are not irrelevant in the present context, I decline to derive from them a proposition as to the general law and I decline to extend them to the present context.

Further, I would not apply the reasoning in Ocelota to the present case. In any event, the circumstances in Ocelota were quite different from the present case. In Ocelota, the landlord unilaterally took back the premises from the tenant where there was no fault on the part of the lessee. In the present case, the lessor was perfectly willing to allow the lessee to enjoy the possession of the premises from 24^th January 2012 until the end of the term but the lessee chose to give up that right. That may or may not be a valid ground of distinction but, in any event, I do not find the decision in Ocelota persuasive in the present context. Instead, I reach the same conclusion as to total failure of consideration as was reached in Quirkco which is in turn supported by the comments in PCE Investors.

I reach the same conclusions (as for the Basic Rent) in relation to the Car Park Licence Fee paid on 25^th December 2011 in so far as it relates to the period from 24^th January 2012 to 24^th March 2012. There is one difference between the Car Park Licence Fee and the Basic Rent. The reservation of the Car Park Licence Fee does not use the words “proportionately for any part of a year” but I consider that the comment in York v Casey [1998] 2 EGLR 25 at 28 A– B allows me to hold that those words are implicit in the reservation. The lease does expressly refer to the Car Park Licence Fee being a specified sum “per annum” and being paid by instalments. Further, if I am right in concluding that the lease is subject to an implied term in relation to the Basic Rent for the period 24^th January 2012 to 24^th March 2012, I do not consider that one could possibly reach a different conclusion in relation to the Car Park Licence Fee.

The insurance provisions are contained in schedule 5 to the lease. Although the provisions are lengthy and detailed, only the provisions in paragraphs 1 and 6 of schedule 5 appear to bear on the present dispute. In summary, under paragraph 1, the lessor is obliged to insure the demised premises. Under paragraph 6, the lessee is obliged to pay a fair proportion of every premium payable by the lessor in accordance with its obligations in paragraph 1.

I consider that the lessor is only obliged to insure the demised premises during the term under paragraph 1 of schedule 5. If, for example, the landlord renewed the insurance of the demised premises six months before the end of the term on 2^nd February 2018 and only insured the premises up to 2^nd February 2018 and not for a conventional 12 month period, the lessor would not be in breach of its obligation to insure in paragraph 1 of schedule 5. If the lessor did insure for a full year, part of which went past 2^nd February 2018, it is clear that the lessee would not have to pay for insurance for that full year. That result would either be arrived at by holding that the insurance for the period after 2^nd February 2018 was not something which the lessor was obliged to take out and therefore the lessee was not obliged to pay for it under paragraph 6 of schedule, or if there was something wrong with that argument, then the obligation under paragraph 6 was to pay a “fair proportion” of the premium and that allowed an apportionment of the premium by reference to the time before and after 2^nd February 2018.

To recap, the facts relevant to the present question of insurance are as follows. The lessor insured the demised premises for the period from 1^st July 2011 to 30^th June 2012. On 7^th July 2011, the lessee served a notice to determine the lease on 24^th January 2012. On 19^th July 2011, the lessor invoiced the lessee for the insurance premium for the demised premises for the period from 1^st July 2011 to 30^th June 2012. It is not in evidence when the lessor effected that insurance and whether it was before or after 7^th July 2011. If it was before 7^th July 2011, then at that time the lessor was subject to a lease for a term to 2^nd February 2018 but subject to an as yet unexercised tenant’s right to break on 24^th January 2012. If it was after 7^th July 2011, then the lessor was in receipt of a tenant’s notice to break but it was not then certain whether the lease would end on 24^th January 2012. The sum invoiced was duly paid by the tenant.

Under the insurance provisions, in the events which have happened, the lessor was only obliged to insure up to 24^th January 2012. Further, the lessee was only obliged to pay for insurance up to 24^th January 2012. As the lessor in fact insured for a year from 1^st July 2011, the lessee was only obliged to pay part of that premium. The Claimant contends that the premium should be apportioned on a daily basis by reference to time. The Defendants contend that the premium for one year is not to be apportioned at all. The Defendants have not argued that I should hold that the Claimant is liable for the premium which the insurers would have charged for a part year from 1^st July 2011 to 24^th January 2012; that sum might not be identical to the sum produced on a time apportionment on a daily basis.

For largely the same reasons as I gave when discussing the arguments in relation to the Basic Rent, I consider that on the basis of the principles identified in Belize, there is to be implied into the lease a term requiring the lessor to refund to the lessee a part of the premium charged for the year from 1^st July 2011 in relation to the period after 24^th January 2012. In the absence of any argument to the contrary, I consider that the annual premium is to be apportioned on a daily basis.

The service charge provisions are contained in schedule 7 to the lease. These provisions are lengthy and detailed and I have set out the principal relevant provisions in the Annex to this judgment. It seems that these provisions were not operated in all respects in accordance with their express terms. Schedule 7 provided for the payment of a service charge in relation to Estate Expenditure and also a service charge in relation to Building Expenditure. However, a convention grew up between the parties whereby the Estate Expenditure was apportioned to the Building and then added to the Building Expenditure. Such aggregate sum was then treated for all purposes as if it were Building Expenditure and the provisions relating to Estate Expenditure were disregarded. The parties are in agreement that the lease is to be read as modified by this convention. There was a further convention which the parties are agreed is effective to modify the lease whereby the year in respect of which the service charge was calculated ran from 1^st January to 31^st December and the on account payments to be made on 25^th December in any year were treated as applying entirely to the following service charge year.

The facts in relation to the service charge in respect of the 2011 and 2012 service charge years are set out earlier in this judgment. Although this was originally in dispute, it was accepted at the trial that, following 24^th January 2012, there were procedures as to the determination of the amount of the service charge which had not been completed and that those procedures could still be operated, notwithstanding the termination of the lease. The Defendants accepted that this was so adopting the approach in Torminster Properties Ltd v Green [1983] 1 WLR 676 in relation to the unfinished procedures for the determination of a reviewed rent. Thus when on 3^rd September 2012, the lessor followed through the procedures for the 2011 service charge and awarded to the lessee a credit note for overpayments in that year, it is now accepted that the lessee is indeed entitled to the benefit of that credit. Conversely, as I understand the way in which the Claimant put its case, it accepted that it was not on 3^rd September 2012 entitled to be paid the amount of the credit note because the procedures for the 2012 service charge year had not been completed; those procedures remained relevant because the term had extended into the 2012 service charge year. The Claimant therefore contended that the procedures for the 2012 service charge should be operated although they had not been finalised by the date of the trial. When those procedures are operated, the service charge for the 2012 service charge year ought to be apportioned on a daily basis for the period from 1^st January 2012 to 24^th January 2012 and the extent of the Claimant’s liability to pay for the period to 24^th January 2012 will be ascertained. At that point, the Claimant says that it will almost certainly be entitled to a further credit because on 25^th December 2011 it paid a full quarter’s service charge on account and in the event it will only be liable for the 2012 service charge apportioned for the period to 24^th January 2012. Thus, it is said that the Claimant will be entitled to two credits, one for the 2011 service charge year and one for the 2012 service charge year. I understand that this reasoning is not disputed by the Defendants.

However, merely having a credit against future service charge is of no use to the Claimant, as it will not be liable for future service charge. Accordingly, the Claimant wishes to be paid the amount of the credits when the final amount of the credits is known. The Claimant cited the decision of the Court of Appeal in Brown’s Operating System Services Ltd v Southwark Roman Catholic Diocesan Corporation [2007] L&TR 375 in support of its argument that it was entitled to be paid the amount of the credits now that the lease has ended. The service charge provisions in that case are not the same as the provisions in the present. There was perhaps this similarity in that there was no express provision dealing with what was to happen in relation to a surplus which had been built up during the term of the lease which the landlord was allowed to expend on services during the term but, the Court of Appeal held, it was not entitled to expend on services provided after the end of the term. The Court of Appeal proceeded from that premise to hold that the tenant was entitled to be paid the surplus at the end of the term. The precise reasoning was not spelt out. It looks to me like a case of an implied term based on the principles in Belize giving effect to how the lease should reasonably be read and take effect. One feature of the Brown’s case was that it was held that the situation which would pertain on the expiry of the term by effluxion of time also pertained where the lease was prematurely terminated pursuant to the operation of a tenant’s break clause.

Following the citation of this decision, the Defendants accepted that they were “in difficulty” in further resisting the Claimant’s case to be paid the sum the subject of a credit note or credit notes calculated in the way described above. I am content to accept that concession by the Defendants. That disposes of the dispute in relation to the operation of the service charge provisions.

So far in this judgment, I have held that the Claimant is entitled to be repaid part of the sums earlier paid in relation to Basic Rent, Car Park Licence Fee and insurance and that the Claimant may become entitled to be paid a sum in relation to earlier payments of service charge. Nonetheless, the Defendants contend that the Claimant has lost such entitlement because of the terms of a settlement which was entered into between the parties as recorded in a letter of agreement dated 24^th January 2012. That letter agreed on the amount of a sum to be paid by the Claimant to the Defendants. The letter stated that the agreed sum was to be:

“… in full and final settlement of all claims and satisfaction of all existing and future causes of action that we have against you however so arising out of or in connection with: i) all your obligations and/or liabilities under the Leases and/or the Licences for Alterations; and/or ii) your occupation of the Premises; including VAT (if any), interest and costs, whether or not such claims are known to, have been notified to, or are in the present contemplation of the parties.”

In the passage quoted above, “we” is a reference to the Defendants and “you” is a reference to the Claimant. Accordingly, the Defendants settled the claims which the Defendants might have against the Claimant in return for the agreed sum.

In my judgment, the settlement agreement does not involve a settlement by the Claimant of any claim which the Claimant might have against the Defendants. This reading gives effect to the clear wording of the settlement agreement. There is simply no wording which deals with the Claimant’s claims against the Defendants. I have also considered the background circumstances which led up to the parties entering into the settlement agreement. I can find nothing in those circumstances which would lead to any different interpretation of the clear language used. It might be said that it was a little odd for the Claimant to pay a substantial sum to the Defendants in settlement of the Defendants’ claims at a time when the Claimant was minded to assert its own substantial claims against the Defendants. Whether that is so or not, in my judgment, it is not possible to get out of the language of the settlement agreement anything which prevents the Claimant asserting its entitlements in this case.

The result is that the Claimant is entitled to be repaid part of the sums earlier paid in relation to Basic Rent, Car Park Licence Fee and insurance and that the Claimant may become entitled to be paid a sum in relation to earlier payments of service charge.