This is not just any landmark decision…

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The Supreme Court has dismissed an appeal by Marks and Spencer in relation to a lease break clause, giving a Judgment which has wider ramifications for the interpretation of contracts generally.

In 2011 Marks and Spencer exercised a break clause in the lease relating to property in Paddington, London.  M&S paid rent quarterly in advance and paid the full quarter, notwithstanding the break date was only part of the way into the quarter.

The lease terminated on 24 January 2012 and M&S subsequently claimed that it was entitled to a reimbursement for the amount of rent which would be apportioned to the period after it had vacated the premises.  Whilst there was no express clause within the lease permitting such a refund, the High Court held that the parties would not have intended for the landlord to obtain both the break penalty payment of £918,000 + VAT and the excess rent – and a term was implied into the contract allowing for reimbursement.

The Court of Appeal disagreed, finding that no such term could be implied.

The Supreme Court affirmed this view, pointing out that it is a well-established point of case law and statute that rent paid in advance could not be apportioned.   Under this principle there is no entitlement to reimbursement.  As such, the Supreme Court found that it would be wrong to infer that the landlord and tenant in this case had intended something contrary to this principle without having expressly stated it within the lease.

On a practical level, the Judgment ignores the windfall that could have potentially been obtained by the landlord: both the benefit of rent from a former tenant and rent from a new tenant for the same period.  It was held that whilst the result of the lease may have been something of an anomaly, that did not mean that it was a commercially unworkable or absurd agreement.

 

The Judgment, however, goes further and provides a welcome review of the law on implied terms in contract law.  In particular, Lord Neuberger made a number of points:

  • When considering whether a term was intended to be incorporated in the contract, the Court should consider what reasonable people in the position of the parties would have intended at the time they were contracting;
  • The fact that the parties would agree to the inclusion of the term if it had been suggested to them is not, in itself, sufficient;
  • A requirement for a term to be reasonable and equitable is almost certainly going to be satisfied if all other requirements are satisfied.

His Lordship also reiterated the previous position in case law that it is proper for a term to be implied only where it is necessary for ‘business efficacy’.  But he added that the business efficacy test involves a value judgement in which the Courts ought to consider whether a contract lacks commercial or practical coherence without the implied term.

 

In the instant case, clear drafting may well have protected M&S’s position and parties are advised to consider all eventualities when contracting.  However, if you find yourself in a contract dispute and require advice on your rights and obligations or breach by the other side, contact Tom Smith, Head of Dispute Resolution at tom.smith@forbessolicitors.co.uk or call 0800 689 0831 for further assistance.

Tom Smith

About Tom Smith

Tom is a Partner and Head of the Dispute Resolution Department at Forbes Solicitors. Tom’s blogs cover his specialisms of business disputes involving commercial contracts, shareholders, partnerships, share sales and warranties, banking issues, restrictive covenants and professional negligence.
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