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Woodfall Landlord & Tenant Bulletin

2016

Case Comment
Marks and Spencer Plc v BNP Paribas
Philip Sissons
Subject: Landlord and tenant. Other related subjects: Contracts
Keywords: Apportionment; Break clauses; Business tenancies; Implied terms; Rent;
Repayments
Case: Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015]
UKSC 72; [2015] 3 W.L.R. 1843 (SC)

*W.L.T.B. 1Introduction
In Marks and Spencer Plc v BNP Paribas [2015] 3 W.L.R. 1843, the Supreme Court determined
that a tenant who has paid a full quarterly instalment of rent prior to the valid exercise of a
break clause is not generally entitled to recover any part of that rent when the break takes
effect. In doing so the court affirmed the decision in Ellis v Rowbotham to the effect that rent
made payable in advance cannot be apportioned as to time. Of wider significance, however,
are the observations made by the court, in particular Lord Neuberger, as regards the proper
test to be applied where a party contends that a term should be implied into a contract. In
explaining the earlier reasoning of Lord Hoffman in A-G of Belize v Belize Telecom Ltd [2009] 1
W.L.R. 1988, his Lordship has provided some welcome clarity to the law of implied terms.

The facts of M&S v BNP Paribas

M&S was the tenant pursuant to four commercial leases, each of which contained a break
clause allowing M&S to terminate the lease on 24 January 2012 by giving six months' prior
written notice. It was a pre-condition to a valid exercise of the break that there were no
arrears of rent and that the tenant had paid the landlord, BNP Paribas, a break premium
equivalent to one year's rent. In each case the lease provided that the rent was payable
"yearly and proportionately for any part of the year by equal quarterly instalments in advance"
on the usual quarter days.1
On 7 July 2011, M&S served a break notice to determine the lease on 24 January 2012. On 19
July 2011, the landlord invoiced the tenant for its share of the insurance rent premium under
Sch.5 ("the insurance rent") in respect of the year from 1 July 2011, in the sum of 14,972.85
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plus VAT, which the tenant duly paid.

*W.L.T.B. 2 Shortly before 25 December 2011, the tenant paid the landlord the rent due on
that date in respect of the quarter from that date up to and including 24 March 2012, the day
before the next quarter day, thereby ensuring the pre-condition attached to the break clause
regarding payment of rent was satisfied. On or about 18 January 2012 the tenant also paid the
sum of 919,800 plus VAT, representing the break premium. As a result of these payments,
the break notice served on 7 July 2011 was effective, and the lease determined on 24 January
2012.
On 3 September 2012, more than eight months after the expiry of the lease, the landlord
served on the tenant a service charge certificate in respect of the services provided in the
calendar year 2011. This showed that the cost of the services had been less than the estimate,
and the landlord credited the tenant with its excess payment.
The principal issue between the parties at trial was whether the tenant was entitled to be
refunded a sum equal to the apportioned basic rent in respect of the period 24 January 2012
(when the lease expired) and 25 March 2012, given that the claimant had paid the basic rent
(in the sum of 309,172.25 plus VAT) on 25 December 2011 in respect of that period even
though the Lease had expired on 24 January 2012.
At first instance, Morgan J held2 that the tenant was entitled to recover the overpayment. The
landlord was obliged to repay an apportioned part of the rent paid on 25 December 2011
pursuant to an implied term. The judge considered that the suggested implied term was both
necessary to give business efficacy to the lease and, with reference to the judgment of Lord
Hoffman in the Belize Telecom case (considered in further detail below) was obviously what
the parties meant as judged from the words used in the lease.
The Court of Appeal allowed the landlords' appeal.3 Lady Justice Arden considered that there
was no basis for implying the term contended for by the tenant. The parties would have been
aware, at the time that they were negotiating the lease, that it was possible that the tenant
would "overpay" in respect of part of a rental quarter falling after the successful operation of
the break clause. If the lease did not make express provision for recovery, then there was no
reason to imply a right to repayment.
The tenant appealed to the Supreme Court contending that there should be implied into the
lease a term that, if the tenant exercises the right to break and the lease consequently
determines on 24 January, the landlords ought to pay back a proportion of the basic rent paid
by the tenant due on the immediately preceding 25 December, being apportioned in respect of
the period 24 January up to and including the ensuing 24 March 2012.

Apportionment of rent on the termination of a lease

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At first sight it may appear odd that M&S was driven to relying upon an implied term to recoup
its payment. Why, it might reasonably be asked, should a tenant ever be obliged to pay rent in
respect of a period of time after the lease has ended? The answer involves the combination of
somewhat antiquated common law rules as to the apportionment of rent with the construction
of lease provisions regarding reservation of rent and the operation of a break clause.
The starting point is the common law principle that rent cannot be apportioned in respect of
time. This principle probably derives from the traditional concept of rent as a service rendered
by tenant to landlord, as opposed to the modern conception of rent as a payment which the
tenant is bound to pay in return for use of the land; see United Scientific Holdings v Burnley
Borough Council [1978] A.C. 904, Woodfall, para.7.001.
Whatever its origins, the common law principle means that if a lease under which rent was
payable in arrears was forfeited (or came to an end prematurely for some other reason) the
landlord lost the right to recover the rent due on the rent day following that determination.
Therefore, the tenant was not obliged to pay rent for a period during which the lease had
continued. In the case of rent payable in arrears, Parliament remedied this situation through
the Apportionment Act 1870, which provides, by s.2, that all rents and other periodical
payments should be considered as accruing from day to day and are apportionable in respect
of time accordingly.
However, in Ellis v Rowbotham [1900] 1 Q.B. 740, the Court of Appeal held that the 1870 Act
did not apply to rent made payable in advance. It follows that under a standard modern
commercial lease, which usually makes rent payable in advance on the usual quarter days, the
tenant is generally liable to pay the whole of the quarterly rent even if the lease is determined
before the next quarter day, whether by forfeiture or the operation of a break clause; see
Canas Property Co Ltd v KL Television Services Ltd [1970] 2 Q.B. 433, Capital and City
Holdings Ltd v Dean Warburg Ltd (1988) 58 P. & C.R. 346; [2007] B.P.I.R. 1, Woodfall,
para.7.045.1.
It is, however, always a question of construction of the particular lease in question whether
the tenant remains liable to pay the entirety of the rent if the lease is terminated before the
end of the period to which it relates.
In M&S, the tenant was obliged to pay the rent "yearly and proportionately for any part of the
year by equal quarterly instalments in advance". By the time the case reached the Supreme
Court, it was common ground between the parties that if the term of the lease expired
*W.L.T.B. 3 by effluxion of time between quarter days, this wording would only require the
tenant to pay a final instalment of rent apportioned up to the date of expiry. However, at first
instance, Morgan J held that this could not be the result where the break clause was exercised.
As at 25 December 2011, when the quarterly rent fell due, the parties could not be sure that
the lease would end on the break date, due to the need to comply with an additional pre-
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condition. The tenant did not seek to challenge that aspect of the decision on appeal.
The Supreme Court invited the tenant to argue that Ellis v Rowbotham should be overruled so
that rent payable in advance could also be apportioned as to time. However, in the end, the
court approved the decision in Ellis. Lord Neuberger reasoned that it was a relevant
consideration that the decision had stood for well over 100 years and had been followed and
applied in a number of cases. Even absent of those considerations his lordship regarded the
reasoning of Smith AL and Romer LJJ in Ellis as correct because (i) the mischief that the 1870
Act was concerned to correct related solely to rent in arrears, and (ii) rent paid in advance
could not be said to be "accruing from day to day" unlike rent in arrears.
As a result of these principles, it has long been the understanding of practitioners that where a
pre-condition to the operation of a tenant's break clause requires that there are no arrears of
rent on the break date, it is usually necessary (subject always to the proper construction of the
particular break clause and reservation of rent) to pay the whole of the rent falling due on the
immediately preceding quarter date (see Woodfall, para.17.291). As a result of the affirmation
of Ellis v Rowbotham, the decision in M&S does not alter this position.

Recovery pursuant to an implied term

In M&S there was no dispute that the break had been validly operated. M&S had undoubtedly
ensured that there were no outstanding rent arrears. The question for the court was, instead,
whether M&S could recover the "overpayment" pursuant to an implied term.
In considering this question, the court took the opportunity to re-examine the general
principles underlying the implication of contractual terms and, in particular, to revisit the
observations made by Lord Hoffman in the Privy Council decision, A-G of Belize v Belize
Telecom Ltd [2009] 1 W.L.R. 1988 (see Woodfall, para.11.079).
In the Belize Telecom case, Lord Hoffman noted that the test for an implied term had been
formulated in a variety of different ways. Lord Neuberger in M&S summarised the varying
statements of principle to be found in the authorities as follows:
"There have, of course, been many judicial observations as to the nature of the requirements
which have to be satisfied before a term can be implied into a detailed commercial contract.
They include three classic statements, which have been frequently quoted in law books and
judgments. In The Moorcock (1889) 14 PD 64, 68, Bowen LJ observed that in all the cases
where a term had been implied, "it will be found that the law is raising an implication from
the presumed intention of the parties with the object of giving the transaction such efficacy as
both parties must have intended that at all events it should have'. In Reigate v Union
Manufacturing Co (Ramsbottom) Ltd [1918] 1 KB 592, 605, Scrutton LJ said that " A term can
only be implied if it is necessary in the business sense to give efficacy to the contract'. He
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added that a term would only be implied if "it is such a term that it can confidently be said that
if at the time the contract was being negotiated' the parties had been asked what would
happen in a certain event, they would both have replied: "Of course, so and so will happen; we
did not trouble to say that; it is too clear.' And in Shirlaw v Southern Foundries (1926) Ltd
[1939] 2 KB 206, 227, MacKinnon LJ observed that, "Prima facie that which in any contract is
left to be implied and need not be expressed is something so obvious that it goes without
saying'. Reflecting what Scrutton LJ had said 20 years earlier, MacKinnon LJ also famously
added that a term would only be implied "if, while the parties were making their bargain, an
officious bystander were to suggest some express provision for it in their agreement, they
would testily suppress him with a common "Oh, of course!""'
In the Belize Telecom case, Lord Hoffman, having noted these various formulations and the
five stage test suggested by Lord Simon of Glaisdale in BP Refinery (Westernport) Pty Ltd v
Shire of Hastings (1977) 180 C.L.R. 266, 282-283, went on to identify an underlying theme in
an attempt to state a general principle.
"The Board considers that this list [from BP v Shire of Hastings] is best regarded, not as series
of independent tests which must each be surmounted, but rather as a collection of different
ways in which judges have tried to express the central idea that the proposed implied term
must spell out what the contract actually means, or in which they have explained why they did
not think that it did so. The Board has already discussed the significance of "necessary to give
business efficacy' and "goes without saying'. As for the other formulations, the fact that the
proposed implied term would be inequitable or unreasonable, or contradict what the parties
have expressly said, or*W.L.T.B. 4 is incapable of clear expression, are all good reasons for
saying that a reasonable man would not have understood that to be what the instrument
meant.
There is only one question: is that what the instrument, read as a whole against the relevant
background, would reasonably be understood to mean"
Thus, Lord Hoffman suggested that the process of implying terms into a contract was part of
the exercise of the construction, or interpretation, of the contract. As Lord Neuberger noted at
para.24 of his judgment in M&S this suggestion was interpreted by both academic lawyers and
judges as having changed the law by diluting the requirements which must be satisfied before
a term will be implied by importing a test of reasonableness as contrasted with necessity or
obviousness.
Lord Neuberger was at pains to stress that this was not the case, stating in terms, that "the
law governing the circumstances in which a term will be implied into a contract remains
unchanged following the Belize Telecom case." His Lordship emphasised that the judgment in
that case ought not to be interpreted as meaning that reasonableness alone is a sufficient
ground for implying a term. Rather:
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"the notion that a term will be implied if a reasonable reader of the contract, knowing all its
provisions and the surrounding circumstances, would understand it to be implied is quite
acceptable, provided that (i) the reasonable reader is treated as reading the contract at the
time it was made and (ii) he would consider the term to be so obvious as to go without saying
or to be necessary for business efficacy."
Lord Neuberger's second observation on Belize Telecom was addressed to the suggestion that
the implication of terms was an aspect of the process of construction. His Lordship accepted
that in implying a term, the court was seeking to ascertain what the parties had agreed, but
stressed that this involved different considerations from the process of construction as that is
generally understood:
"it is fair to say that the factors to be taken into account on an issue of construction, namely
the words used in the contract, the surrounding circumstances known to both parties at the
time of the contract, commercial common sense, and the reasonable reader or reasonable
parties, are also taken into account on an issue of implication. However, that does not mean
that the exercise of implication should be properly classified as part of the exercise of
interpretation, let alone that it should be carried out at the same time as interpretation. When
one is implying a term or a phrase, one is not construing words, as the words to be implied are
ex hypothesi not there to be construed; and to speak of construing the contract as a whole,
including the implied terms, is not helpful, not least because it begs the question as to what
construction actually means in this context.
Until one has decided what the parties have expressly agreed, it is difficult to see how one
can set about deciding whether a term should be implied and if so what term. This appeal is
just such a case. Further, given that it is a cardinal rule that no term can be implied into a
contract if it contradicts an express term, it would seem logically to follow that, until the
express terms of a contract have been construed, it is, at least normally, not sensibly possible
to decide whether a further term should be implied."
Lords Sumption and Hodge agreed with Lord Neuberger's judgment, which therefore
represents the ratio of the decision. In any case, Lords Carnwath and Clarke also expressed
the view that Belize Telecom did not involve any watering down of the test for an implied term,
albeit that they were less inclined to criticise Lord Hoffman's judgment as potentially creating
confusion.
In terms of the result in the M&S case, their lordships were unanimously of the view that there
was no basis for implying a term obliging the landlord to repay the rent falling due after the
break date. All of the members of the court approved the following reasoning of Lord
Neuberger:
"neither the common law nor statute apportions rent in advance on a time basis. And this
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was, correctly, generally understood to be the position when the deed and the lease were
negotiated and executed. The [tenant's] argument, by contrast, is that a term should be
implied into the lease that the basic rent payable in advance on 25 December 2011 should
effectively be apportioned on a time basis. The fact that the lease was negotiated against the
background of a clear, general (and correct) understanding that rent payable in advance was
not apportionable in time, raises a real problem for the argument that a term can be implied
into the lease that it should be effectively apportionable if the lease is prematurely determined
in accordance with its terms.

The lease is a very full and carefully considered contract, which includes express obligations of
the same nature as the proposed implied term, namely financial liabilities in connection with
the tenant's right to break, and that term would lie somewhat uneasily with some of those
provisions.
*W.L.T.B. 5
Save in a very clear case indeed, it would be wrong to attribute to a landlord and a tenant,
particularly when they have entered into a full and professionally drafted lease, an intention
that the tenant should receive an apportioned part of the rent payable and paid in advance,
when the non-apportionability of such rent has been so long and clearly established. Given
that it is so clear that the effect of the case law is that rent payable and paid in advance can
be retained by the landlord, save in very exceptional circumstances (e.g. where the contract
could not work or would lead to an absurdity) express words would be needed before it would
be right to imply a term to the contrary."

Conclusion
Whether or not one is persuaded by the suggestion that Belize Telecom did not represent a
departure from the previous authorities, the clarification as to the basis for the implication of a
contractual term is welcome. As the academic criticism of that decision had suggested, Lord
Hoffman's judgment (at least on one interpretation) opened the door to the implication of
terms on a much lower, reasonableness threshold. M&S appears to have closed that door,
reinstating a more orthodox approach.
As for the outcome of the case, again, the reinstatement of the principles established in Ellis v
Rowbotham and subsequent cases brings a welcome certainty. It is now clear both what a
tenant exercising a break clause between quarter days must do to ensure the break is
effective and also what a draftsman must include in future leases in order to ensure a tenant
can recoup any overpayment which it is necessary to make to exercise the break.
Nevertheless, it is difficult not to feel some sympathy for the tenant. Whilst it is of course true
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to say that the result could easily have been avoided by including an express term in the
lease, it is perhaps unfair to suggest that the principle of no apportionment was so well
established and widely known that it is telling that no such express provision was made.
It remains the case that there is no obvious reason why a landlord should obtain the windfall
of an overpayment in the absence of an express agreement to that effect, particularly where
there was express provision for a break premium. Whilst the reasoning in Ellis may be sound
on its own terms, and there are obviously good policy reasons for not overturning that long-
standing decision, the result of the case and others that will follow appear to be dictated by a
largely historical distinction between rent payable in advance and rent payable in arrears which
does not, it is respectfully suggested, provide a particularly principled basis for a landlord to
retain a significant overpayment.
W.L.T.B. 2016, 1(Feb), 1-5

1.

I.e. 25 March, 24 June, 29 September and 25 December; see Woodfall, para.7.063.

2.

[2013] EWHC 1279.

3.

[2014] EWCA Civ 603.

2016 Sweet & Maxwell and its Contributors

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