As many people think about returning their itchy Christmas jumpers, some are wondering why, when it comes to property, refunds are not always available for unwanted and unused services. That’s because the Supreme Court recently decided that Marks & Spencer (appropriately) was not entitled to a refund of rent paid in advance when it broke its lease part way through a rent quarter.
It was a decision that has struck many people as being unfair. Why, after all, should the tenant be forced to pay the full rent when it will only use the property for part of the time? But there are a number of reasons why this was the right decision, and also the fairest one too.
Marks and Spencer had several leases of a building in London which were granted for around 12 years from 2006. They had the right to break on 24 January 2012 provided that, on the break date, there were no arrears of rent and they had paid a penalty.
M&S paid the rent for December 2011 in full in the normal way, and then paid the penalty. As a result the leases came to an end in January 2012. So they had paid rent through to March but would not get any benefit from the final two months’ money.
No refunds, no exchanges
M&S argued that for the landlord to retain money when the tenant received no benefit would be unfair and prejudicial. They pointed out that if the lease ended in the normal way, rather than by a break, they would only have had to pay up to the expiry date, and asked the court to ‘imply’ a term that the break would be treated in the same way. Many people looking at M&S’s position tend to sympathise. And the Supreme Court agreed that, on the face of it, these were good points.
But if you pause to look at the background, it’s easy to see why this wouldn’t have been the right result:
- The ghost of Christmas past. The killer point was that the established legal position, when the lease was granted, was that rent paid in advance could not be apportioned. Lawyers up and down the country were advising their clients that rebates were not available, or at least could not be guaranteed. This is what the two sides would have thought when they signed the leases. So to complete the deal without spelling out that a refund was, in fact, intended creates the strong impression that the two sides were happy with the usual approach.
- M&S had agreed to pay a break premium to the landlord. So why would the two sides intend for the tenant to pay a large sum to the landlord, only for the landlord to immediately pay money back to the tenant? How could the court be sure that the premium hadn’t been negotiated with this in mind, and reduced to offset the unused rent?
- M&S were specifically required to pay all rent as a condition of the break. Why hadn’t the two sides spelled out that only the apportioned part needed to be paid, if that’s what was intended? What’s more, M&S would have received a rent credit if they hadn’t broken the leases. So the two sides had planned the payments to be made quite carefully, but said nothing about a refund.
- The leases were comprehensive, professionally drafted documents, entered into by savvy and well-advised operators. They were also later reviewed and re-stated. Yet nothing was ever said about what would happen to the rent after the break date.
So, although it may appear that M&S had to pay for something it didn’t get, looking at the deal as a whole the court’s decision was right.
The take away point is about ‘implied terms’ (that is, when can you assume there is an additional contract term that has not been specifically drafted?). While courts can and will imply terms, there is a high hurdle and the Supreme Court took the opportunity to clarify the law. They said it’s not enough that the term should be fair and reasonable. The term must be either necessary for ‘business efficacy’ or so obvious that it goes without saying. Unfortunately for M&S, their proposed refund was neither (and they didn’t even get vouchers).