Black Wednesday for M&S as it loses Supreme Court Battle...

The Supreme Court unanimously rules that, in the absence of express wording in the lease, Marks and Spencer is not entitled to an apportioned refund of rent and other charges after it had exercised a break clause in its lease

The Supreme Court has today (2 December 2015) handed down its long-awaited judgment in the showdown between Marks & Spencer (M&S) and its former landlord of head office premises in Paddington. The question was whether, absent express wording, M&S could claw back around £1.1m in apportioned rent and other charges, after it had exercised a break clause in its lease which took effect part-way through a rent quarter.

The Supreme Court has now definitively confirmed, much to the relief of landlords across the country, that particularly where the parties have entered into a full and professionally drafted lease, it would be wrong for the Court to attribute to a landlord and a tenant an intention that the tenant should receive an apportioned part of the rent payable and paid in advance.

1. Re-cap of the story up to today ...

2. Issues for the Supreme Court's consideration

3. The Supreme Court's judgment in detail

4. Practical pointers

1. Re-cap of the story up to today ...

The Supreme Court's judgment brings a clear conclusion, more pleasing for landlords than tenants, to an ongoing saga which had seen the case be pushed from pillar to post in the lower courts.

The facts were that M&S had served a break notice on 7 July 2011 and had paid to the landlord the quarter's rent due on 25 December 2011 (in addition to the sum of £919,800 plus VAT which was payable as a condition of the break clause). Once the break had operated, could M&S reclaim the proportion of rent that related to the period after the break date despite there being no express provision in the lease entitling it to a refund?

Perhaps surprisingly, the first instance decision of Mr Justice Morgan in May 2013 was that there should be a refund. His reasoning was based upon the principle that a term should be implied into the lease which entitled M&S to recover these sums from the landlord. In the Judge's view, the landlord had been adequately compensated by the break premium paid by M&S when it exercised the break. Accordingly, an objective reading of the lease provisions led the Judge to the conclusion that it could not be imputed that the landlord should keep the full quarter's rent in such circumstances.

In May 2014 this decision was overturned by the Court of Appeal. Arden LJ, giving the leading judgment, stated that the landlord did not have to repay an apportioned amount of rent and other charges which related to the period after the break date and concluded that there was a high bar for importing an implied term into a contract to require a landlord to give a tenant a refund in these circumstances. She said that the starting point was that if the parties had intended to incorporate a provision for a refund, then they would have done so with express wording in the lease, which they hadn't.

The Court of Appeal re-stated the test for implication of a term set out in the Attorney General of Belize case, that is, whether the implied term would spell out in express words what the lease, read as a whole against the relevant background, would reasonably be understood to mean. Arden LJ confirmed that the courts would not imply a term into a contract unless it was necessary to give effect to the parties' express agreement.

2. Issues for the Supreme Court's consideration

Given that the Court of Appeal had restored what many commentators and landlords believed was the widely-accepted status quo, the Supreme Court surprisingly granted M&S permission to appeal in November 2014.

The issue which the Supreme Court was deciding in today's judgment was whether it was an implied term of the lease that M&S was entitled to a repayment, upon termination of the lease under a break clause, of apportioned rents attributable to the period after the break date.

Lord Neuberger, giving the leading judgment, held that save in very exceptional circumstances (for example, where the contract could not work or would lead to an absurdity) express words would be needed before it would be right for the Court to imply a term of this nature. In particular, Lord Neuberger concluded that M&S's obligation to pay the landlord a break premium to exercise the right to break, lay uneasily with the notion that a term should be implied in favour of M&S, for it to be paid an apportioned refund the following day.

Whilst the outcome of this case may only have a direct impact where the facts are similar, it was hoped that the Supreme Court would also be considering wider issues in its judgment, in particular:

What the test is for importing implied terms into a contract; and

Whether the Ellis v Rowbotham case, which for over a hundred years has determined that rent payable in advance is not apportionable, should be overturned.

3.  The Supreme Court's judgment in detail

(1) Implied terms

Lord Neuberger took, as a starting point, the 19th century cases on implication of terms (such as the "business efficacy" test set out in The Moorcock) and approved Lord Simon's summary in the Privy Council case of BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayors of the Shire of Hastings as a clear, consistent and principled approach:

"[F]or a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract."

To these judicial observations, and drawing on later case law, Lord Neuberger added his own helpful comments:

The implication of a term was "not critically dependent on proof of an actual intention of the parties" when negotiating the contract – rather the question is one of what notional reasonable people would have agreed in the position of the parties at the time at which they were contracting.

A term should not be implied into a detailed commercial contract merely because it appears fair or because the Court considers that the parties would have agreed it if it had been suggested to them.

A requirement that a term is reasonable and equitable will not usually, if ever, add anything – if a term satisfies the other requirements, it is likely that it is inherently reasonable and equitable.

As suggested in the Attorney General of Belize case, business efficacy and obviousness can be alternatives in that only one of them needs to be satisfied, although in practice it would be rare for only one of these requirements to be satisfied.

If approaching the implication of a term by reference to the officious bystander requirement, it is "vital to formulate the question to be posed by [him] with the utmost care".

Necessity for business efficacy involves a value judgment. The test is not one of "absolute necessity" rather a term can only be implied if, without the term, the contract would lack commercial or practical coherence.

Lord Neuberger also re-affirmed the formulation of the test for implication of a term as set out in the Attorney General of Belize case (that is, "is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?") provided that:

the reasonable reader is treated as reading the contract at the time it was made; and

he would consider the term to be so obvious as to go without saying or to be necessary for business efficacy.

Lord Carnwath, giving a separate judgment, was keen to point out that the Belize case was not simply an expression of the views of Lord Hoffman alone, as has been implied by some academic commentaries, but a unanimous judgment of the Privy Council as a whole. Belize should not be read as a watering down of the traditional and highly restrictive approach to implication of terms (i.e. that of necessity) and that the Supreme Court would need very good reasons for treating the judgment as less than authoritative.

(2) Apportionment of rent - Ellis v Rowbotham

Lord Neuberger declined to overturn the Ellis v Rowbotham case which had "stood for well over 100 years, and has been followed and applied in a number of first instances and Court of Appeal decisions without any expressions of doubt as to its correctness".

He agreed that the Court of Appeal in that case had been correct to decide that the Apportionment Act 1870 did not apply to rent payable in advance, given that (i) the 1870 Act was concerned to correct mischiefs related solely to rent in arrear and (ii) rent paid in advance could not be said to be "accruing from day to day" (as required by the 1870 Act) unlike rent in arrear.

Commenting on the approach that the Supreme Court would take to interpretation of statutes, Lord Neuberger said that he would find it difficult to accept that the Supreme Court could properly rule that a statute had a meaning which the Court thought was simply wrong, however long that meaning had been assumed to be correct. Furthermore, where the Supreme Court had real doubt as to the meaning of a statute, the Court should favour the meaning which has been generally assumed to be correct for a long period, especially where that assumption is a judicial decision. These approaches were, however, unnecessary to decide in the current case since His Lordship considered that the Court of Appeal 115 years ago in Ellis was correct in its interpretation of the 1870 Act.

4.  Practical pointers

Clear guidance has been given to both landlords and tenants that, if either party wants a provision within a contract, then it needs to be spelled out. If tenants want to negotiate a lease with an apportionment clause to entitle it to repayment where a break clause is operated to end the lease part way through a quarter, then this will need to be set out expressly.

Parties, particularly sophisticated entitles advised by professional lawyers, should not rely on the courts readily to imply terms into their contracts. There is a tough test. It is not the court's role to adjust bargains to make them fair or watertight for the parties. As already emphasised this year by Arnold v Britton, contracts, including leases, are entered into every day that turn out to benefit or prejudice one party or another more than either might have expected at the outset, or which do not anticipate a future event with which the contract fails to deal. The courts do not step in to fill the gaps in the contract unless this is actually necessary to give the contract business efficacy.

For more information please contact Matthew Bonye, Partner and Head of Real Estate Dispute Resolution or Matthew Weal, Associate, Real Estate Dispute Resolution at Herbert Smith Freehills LLP.