A Supreme Court decision means that tenants paying a full quarter's rent in advance to ensure that they validly serve a break notice will not be entitled to a refund for the period after the break in relation to which they are not in occupation - unless, of course, the lease provides for it.

Background

Having served notice on the landlord pursuant to a break clause to determine the lease on 24 January 2012, the tenant paid the rent due for the full December 2011 to March 2012 quarter. About a week prior to the break date, the tenant paid an additional specified sum required as a condition of the break. The break conditions having been satisfied, the lease term ended on 24 January 2012. The tenant then sought repayment of the monies paid in advance, insofar as these related to the period after the break date.

Following conflicting decisions in the High Court and Court of Appeal, the Supreme Court ultimately decided in favour of the landlord.

Unwelcome news for tenants

The Supreme Court held that a term requiring a landlord to repay rent paid in advance, in respect of a period beyond the date of termination following the exercise of a break clause, would not be implied into the lease in question.

In terms of the law relating to implied terms, the court held that:

  • The test for an implication of a term remains whether or not it is necessary to give business efficacy to the contract;
  • A term will only be implied if it satisfied the test of business necessity or it is so obvious that it goes without saying;
  • The phrase "necessary" in this context means whether or not the contract would lack commercial or practical coherence without the implied term;
  • A term will not be implied into a contract where it "lies uneasily" with the express terms of the contract;
  • The law on apportionment was confirmed, such that rent payable in advance is not apportionable under the Apportionment Act 1870.

Comment

The Supreme Court decision preserves and restates fundamental principles of property law in relation to break clauses in commercial leases as well as clarifying the legal position regarding implied terms in contracts.

This clear statement of the law and the certainty it brings will be welcomed by the landlord community, as it will prevent tenant challenge to the many breaks that have been exercised over past few years.

The case has also highlighted the need for clear and carefully worded contracts. The test for the introduction of an implied term into a contract is not easy to fulfil. Unless a term is so obvious that it goes without saying, it is best to include it within the contract.

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