Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd & Anor [2015] UKSC 72

Marks and Spencer paid a full quarter's rent in advance before exercising a break clause mid-quarter. It sought repayment of the apportioned rent for the post-termination period. The Supreme Court dismissed the appeal, refusing to imply such a term, and restated the principles for implying terms into contracts.

Facts

Marks and Spencer plc (‘M&S’) was the tenant under four sub-underleases of floors in The Point, Paddington Basin, granted by BNP Paribas Securities Services Trust Company (Jersey) Ltd and another as landlords. Each lease was for a term ending 2 February 2018, with Basic Rent payable quarterly in advance on the usual quarter days.

Clause 8 contained a tenant’s break clause exercisable on 24 January 2012, conditional upon (a) no arrears of Basic Rent at the break date (clause 8.3) and (b) payment of an additional £919,800 plus VAT on or before that date (clause 8.4). A related Deed provided that, if the tenant did not break, the landlords would pay £150,000 credited against the March 2012 rent.

M&S served a break notice on 7 July 2011. It paid the full quarter’s rent due on 25 December 2011 (£309,172.25 plus VAT) covering up to 24 March 2012, and paid the £919,800 plus VAT on 18 January 2012. The lease duly determined on 24 January 2012. M&S sought repayment of the apportioned Basic Rent for the period 24 January to 24 March 2012, together with apportioned sums for the Car Park Licence Fee and insurance rent.

Morgan J ([2013] EWHC 1279 (Ch)) found for M&S; the Court of Appeal ([2014] EWCA Civ 603) allowed the landlords’ appeal.

Issues

The central issue was whether a term should be implied into the lease requiring the landlords to repay the apportioned rent attributable to the period between the break date and the next quarter day. This required the Supreme Court to revisit the principles governing the implication of terms into contracts, in particular the proper interpretation and status of Lord Hoffmann’s reasoning in Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988.

Arguments

Appellant (M&S)

M&S argued that rent paid in advance was referable to occupation during the forthcoming quarter, so retention by the landlords of rent for a period after determination would be a windfall. It relied on the words ‘yearly and proportionately for any part of a year’ in the reddendum, the capricious distinction depending on whether the £919,800 was paid before or after 25 December 2011, and the contention that Belize had relaxed the implication test toward ‘reasonable necessity’.

Respondents (Landlords)

The landlords emphasised the detailed and professionally drafted nature of the lease, the express provisions in clauses 8.3, 8.4 and the Deed dealing comprehensively with payments connected to the break, and the longstanding rule that rent payable in advance is not apportionable. They submitted that Belize did not dilute the traditional tests of necessity and obviousness.

Judgment

The principles for implying terms

Lord Neuberger (with whom Lord Sumption and Lord Hodge agreed) reviewed the classic statements in The Moorcock, Reigate v Union Manufacturing, Shirlaw v Southern Foundries, and Lord Simon’s five conditions in BP Refinery (Westernport) Pty Ltd v Shire of Hastings. He approved Sir Thomas Bingham MR’s analysis in Philips Electronique, quoting:

The courts’ usual role in contractual interpretation is, by resolving ambiguities or reconciling apparent inconsistencies, to attribute the true meaning to the language in which the parties themselves have expressed their contract. The implication of contract terms involves a different and altogether more ambitious undertaking: the interpolation of terms to deal with matters for which, ex hypothesi, the parties themselves have made no provision. It is because the implication of terms is so potentially intrusive that the law imposes strict constraints on the exercise of this extraordinary power.

Lord Neuberger made six observations on Lord Simon’s summary: (i) implication does not depend on the actual intention of the parties but on notional reasonable people in their position; (ii) reasonableness and fairness, while necessary, are not sufficient; (iii) the requirement of being reasonable and equitable adds little; (iv) business necessity and obviousness may be alternatives; (v) the officious bystander question must be formulated with care; and (vi) business necessity is a value judgment — a term may be implied if without it the contract would ‘lack commercial or practical coherence’.

Crucially, Lord Neuberger held that Belize Telecom should not be read as having relaxed the traditional tests, and that Lord Hoffmann’s observations should be treated as ‘a characteristically inspired discussion rather than authoritative guidance on the law of implied terms’. Construction of express terms and implication of terms are distinct exercises; ordinarily express terms must be construed first.

Application to the lease

While there was force in M&S’s points — particularly the apparently capricious result depending on timing of payment of the £919,800 — these were outweighed by countervailing factors. The lease was a full, professionally drafted commercial document. Clauses 8.3, 8.4 and clause 4 of the Deed showed the parties had directed their minds to payments connected with the break.

Decisively, the lease was negotiated against a clear and longstanding legal background that rent payable in advance is not apportionable in time. Ellis v Rowbotham [1900] 1 QB 740 (holding that the Apportionment Act 1870 does not apply to rent payable in advance) was approved. The rule confirmed in Canas Property Co Ltd v KL Television Services Ltd [1970] 2 QB 433 and Capital and City Holdings Ltd v Dean Warburg Ltd (1988) 58 P & CR 346 — that a landlord forfeiting mid-quarter retains the entire advance rent — applied equally to break clauses. Lord Neuberger concluded that, save in a very clear case, express words would be required before a term to apportion advance rent could be implied.

The same reasoning applied a fortiori to the Car Park Licence Fee, and to the insurance rent (an annual one-off sum, with no provision for apportionment, and which it was not shown was unreasonable to take out annually).

Concurring judgments

Lord Carnwath agreed with the result but considered that Belize Telecom remained authoritative and represented a ‘valuable and illuminating synthesis’; properly understood it did not relax the traditional tests. Lord Clarke also agreed, clarifying that while implication can be regarded as part of construction in a broad sense, the test of necessity is not watered down — reasonableness alone is insufficient.

Implications

This decision is the modern leading authority on the implication of terms into contracts in English law. It reaffirms the traditional, restrictive approach: a term will only be implied if it is necessary for business efficacy or so obvious it goes without saying, and the test is not satisfied by mere reasonableness or fairness. Lord Sumption’s formulation — that a term may be implied if without it the contract would lack ‘commercial or practical coherence’ — provides a useful articulation of the necessity requirement.

The judgment clarifies that construction of express terms and implication of terms are conceptually distinct exercises, and that ordinarily the express terms must be interpreted first. It corrects perceptions that Belize Telecom had loosened the law, though (as Lord Carnwath and Lord Clarke emphasise) Belize remains a useful synthesis when properly understood.

For property practitioners, the decision is of considerable practical significance. It confirms that, in detailed professionally drafted commercial leases, rent paid in advance under a break clause is not refundable absent express provision. Tenants exercising break clauses must be alert to the timing of payments and ensure express apportionment provisions are negotiated. The decision applies equally to break clauses and forfeiture, and the longstanding rule in Ellis v Rowbotham on the Apportionment Act 1870 is reaffirmed. The judgment also implicitly cautions that some unfairness arising from non-apportionability does not justify judicial intervention by implied term where commercial parties have allocated risk through careful drafting.

Verdict: Appeal dismissed. The Supreme Court held that no term could be implied into the lease requiring the landlords to repay the apportioned Basic Rent, Car Park Licence Fee or insurance rent for the period after determination of the lease by exercise of the break clause.

Source: Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd & Anor [2015] UKSC 72