2020-02-17
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Break clauses and overpayment of rent

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Posted by Mary Rouse on 26 July 2013

Mary Rouse - Property Litigation Lawyer
Mary Rouse Partner

Following the case of Avocet Industrial Estates LLP v Merol (2011), tenants have taken an increasingly cautious approach to compliance with break clause conditions requiring payment of rent and other sums due.

Avocet Industrial Estates LLP v Merol

In Avocet, the court decided that a tenant had failed to satisfy the break condition which required all rent to be paid up to date on the determination date. This is because it had failed to pay interest that accrued following some historic late payments of rent. This was despite there being no demand for payment from the landlord. The sum due for interest was £130; the failure to pay this nominal sum was enough to prevent the valid exercise of the break and meant that the tenant was liable for a further £300,000 worth of rent over the remainder of the lease.

It is therefore no surprise that tenants have approached conditional breaks with even greater trepidation than previously. Many tenants have chosen to overpay the landlord when exercising a conditional break with a view to ensuring that any sums found to be due unexpectedly, or that have been overlooked or miscalculated, are covered. Some tenants have overpaid by sums such as £10,000; bearing in mind potential liability should the break not be validly exercised, this is understandable, even if there is a risk that the monies will not be repaid.

Marks & Spencer PLC v BNP Paribas Securities Services Trust Company (Jersey) Limited

The recent case of Marks & Spencer PLC v BNP Paribas Securities Services Trust Company (Jersey) Limited (2013) has provided tenants with some comfort that overpayments will need to be refunded by the landlord. The conditions of the break in this case were that the tenant must not be in arrears of rent and also that it must pay a specified sum as a premium. The tenant took the cautious approach and paid the full quarter’s rent. This was even though the break notice expired mid-quarter, there was an apportionment clause and the landlord’s invoice was only for the apportioned amount.

The judge decided that although the tenant’s case for a repayment based on restitution for unjust enrichment failed, he was prepared to imply a term into the lease that the overpayment would be returned. There is however a danger in taking too much comfort from this decision; there is still real uncertainty as to the circumstances in which an implied term will be found.  

The judge was also of the view that only an apportioned payment need be made (rather than the full quarter’s rent paid and then reimbursement) in circumstances where the break clause is unconditional and that as a consequence, following service of a valid break notice, termination of the lease is certain.

Tenants remain well advised to be cautious and to take a commercial view; in most break scenarios it will be worth taking a risk that any overpaid rent will not be repayable, in the interests of ensuring the break is validly exercised.

The Marks and Spencer case also highlights the lack of a basis for reclaiming overpaid monies on grounds of unjust enrichment. There is no cause of action for the repayment of sums that are overpaid other than perhaps for the quarter’s rent and service charge. Sums that are paid on a purely cautionary basis, just in case sums have been overlooked or miscalculated are unlikely to be repayable by the landlord. This is because there is no ‘mistake’ or duress which can be a basis for repayment; paying under protest does not change that. There is also no implied term as the lease is highly unlikely to envisage these supplemental overpayments. One possibility may be that the landlord has expressly agreed to repay and so the cause of action will be based on a breach of that agreement by the landlord. It will usually however be difficult to show the landlord did agree to repay; we have already seen from the case law that landlords have no obligation to be helpful in these situations.

Advice to tenants

The practical advice to tenants must therefore remain to exercise caution when looking to comply with break conditions. However perhaps overpayments in the future will not be so generous as they might have been if the tenant was working on the basis that overpayments would be returned. It is also worth a tenant re-visiting break payments made in the last six years to check whether any overpayments made should be refunded in the light of the Marks & Spencer case.

Court of Appeal decision

The Court of Appeal has since reversed the decision of the High Court in the controversial case of Marks and Spencer plc v BNP Paribas Securities Trust Company (Jersey) Ltd - see the update here.

About the author

Mary Rouse

Partner

Mary is an experienced property litigation lawyer.

Mary Rouse

Mary is an experienced property litigation lawyer.

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