Breaking up is not so simple for Marks and Spencer: Commercial Leases
A recent judgement handed down by the Supreme Court involving Marks and Spencer plc (M&S) and BNP Paribas (BNP) demonstrates that getting a break clause wrong can have a significant impact on the bottom line of a business.
When it came to M&S exercising a break option in January 2012 to end their lease early, the lack of an express provision in the lease for the repayment of rent after the break date meant the retailer was unable to claim £1.1m from BNP.
A lease that contains a break option will often contain conditions that a tenant must comply with. It is important that the conditions are strictly adhered to so that a landlord cannot challenge the validity of the exercise of the break option. Any challenge of the validity of the break can lead to lengthy and expensive litigation, not to mention that the break option may be invalidated, leaving a tenant tied into the lease and having to pay rent for the remainder of the term.
Whilst in the case of M&S there was no doubt that the break option had been validly exercised, one of the conditions in the break clause required M&S to pay rent in full, and so, with rent being due quarterly in advance, M&S paid rent up until the 24 March 2012.
The terms of the break clause meant that M&S vacated the property on 24 January 2012, and so, M&S asked BNP to make a repayment for the rent paid from January to March (being £1.1m), which BNP refused to pay.
The case went to the Supreme Court where it was concluded that BNP was not obliged to repay the £1.1m. From a landlord’s perspective the key point to note from the Court’s decision is that unless there is an express provision for repayment of rent, then there is no obligation to make a repayment of rent paid after the break date.
Landlords should also take time to consider whether a tenant has complied with the break conditions. Failure to comply strictly with a break condition may invalidate a break option, thereby tying a tenant into the remainder of the lease.
Despite this judgement, tenants should not fear break options. In a challenging economic environment break options can provide flexibility to offload a rental liability where the business needs to relocate or utilise its cash elsewhere.
For further information on break clauses or for advice on a lease of commercial property contact Peter Clegg on 0843 224 7930 or email firstname.lastname@example.org