The recent case between Marks and Spencer (M&S) v BNP Paribas , which is now under appeal, has taught us one thing. That times are changing when it comes to paying back tenants any rent that they have overpaid.
It has long been the case under current English law that when a tenant exercises a break clause to leave a property before the lease expires, that they are not entitled to any refund of rent that’s been paid in advance. That is unless it is expressly provided for in the lease.
But tenants are fighting back to reclaim their overpaid rent, as the recent case between M&S and BNP has shown. BNP, like many landlords, requested quarterly rental payments in advance to ease any financial risk of a property suddenly being left empty because of a break clause agreement. However, as BNP recently discovered, landlords can no longer assume that this money is theirs to keep.
In the case of M&S, M&S served a break clause upon BNP to end the lease on 24 January 2012 however, as M&S paid rent quarterly their rental payments took them up to 23 March 2012; two months after they were due to leave the building.
Under old case law the courts would have sided with BNP and M&S would not have been due a refund for overpayment as their lease had not expressly stated that right. But on this occasion the judge ruled that an implied term of overpayment should have been considered in the lease because a reasonable person would think that any overpayment of rent and other charges would be repayable in such circumstances.
In the M&S case, the lease included a ‘break penalty’ clause - a penalty payment if the break clause is applied and the tenant leaves the premises before the official lease expires - as well as the obligation that rent should be paid up to the date of the break clause. The repayment of overpaid rent may have been considered a fair or appropriate exchange for having to pay a ‘break penalty’ clause.
Therefore, it’s worth considering leaving any ‘break penalty’ out of a lease. It may remove the incentive for tenants to remain in a premises until the lease expires but removing it may reduce the risk of having to pay back overpaid rent.
Commercial landlords should also consider an express term in the lease that no repayment of overpaid sums is available if a break date falls within a quarterly rent payment.
The law is changing when it comes to overpaid rent. Commercial landlords can no longer assume that this money will provide the financial security they need against a break clause.
It’s important that both tenant and landlord set out terms clearly in a lease, check break clauses and any associated conditions, and stand strong when negotiating to give the best return when renting property.
I will certainly be keeping an eye on the appeal decision on the case between M&S and BNP as it could set a precedent for future lease agreements and landlord/tenant rights.