What’s obvious to some is not obvious to all: Supreme Court espouses a conservative approach to implied terms
18 January 2016
“Rent” is what a tenant pays to occupy premises – agreed? So you might think it was “obvious” that a tenant shouldn’t pay rent for any period after the tenancy terminates – e.g. in circumstances where a tenant validly terminates the lease early. If you think that, you were in good company and indeed many landlords would voluntarily reimburse rent paid for the period after the termination date even where the lease did not expressly require this. Why? – because it was it was the right thing to do, obviously!
Unfortunately that practice wasn’t universal and the point went to the Supreme Court in the long awaited appeal in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited (and another) UKSC 72. To the surprise of many, the Supreme Court decided that this point was not obvious and refused to imply a term into a lease requiring the landlord to repay rent to M&S following valid termination of its lease, notwithstanding that M&S had paid a premium to get the break. In doing so, the Supreme Court espoused a conservative and restrictive approach as to when terms should be implied into contracts.
Facts of the case
M&S had a lease from BNP for a term expiring on 2 February 2018, with the rent payable on the usual quarter days. The lease contained a break option allowing M&S to break early on 24 January 2012 (the break date), subject to paying a premium (equating to 2 quarters’ rent). M&S exercised the option to terminate the lease on 24 January 2012. M&S paid the December 2011 quarter’s rent in full (as required by the lease) and subsequently paid the premium.
Having validly terminated the lease on the break date, M&S required BNP to repay the rent for the period from the break date to 24 March 2012. BNP refused as there was no express term requiring this. The matter went to Court. At first instance, the Court implied a term requiring reimbursement. The Court of Appeal overturned that decision and the Supreme Court upheld the Court of Appeal.
The Supreme Court decided unanimously that a term could only be implied if it was “necessary” for the proper working of the lease/contract – which wasn’t the case here. The Supreme Court accepted that the result was “capricious” in some respects (e.g. it held that M&S could have paid rent apportioned to the break date if it had paid the break premium prior to the December quarter day). Even so, it did not feel able to imply a term in such circumstances
Where does the law stand on implied terms?
In giving its judgment, the Supreme Court restated the law on implied terms and made the following key observations:
- Previous judgments established a clear and consistent approach to the law of implied terms which requires that a term will only be implied if: (i) it is capable of clear expression, (ii) it does not contradict any express term of the contract and (iii) without the term, the contract would lack commercial or practical coherence (i.e. the “business efficacy” test). These are still necessary requirements which need to be satisfied before a term will be implied.
- The process of construing a contract is different to the exercise of implying words into a contract and is governed by different rules.
- The Court has to respect and uphold the bargain as negotiated between experienced commercial parties and their solicitors. A term will not be implied into a detailed commercial contract merely because it appears fair or because the parties would have agreed it if it had been suggested to them. Those are necessary but not sufficient grounds for implying a term.
- The implication of a term is not dependent on proof of an actual intention of the parties when negotiating the contract. The correct test is to ask what reasonable people in the position of the parties would have agreed at the time at which they were contracting.
- The established law as at the date the contract was entered into will continue to inform the reasonable person’s view of the contract.
Whilst the Court expressed some sympathy with M&S, the case serves as a reminder of the tough approach taken by the Courts and the reluctance to imply terms into contracts. To quote Lord Neuberger: “it is because the implication of terms is so potentially intrusive that the law imposes strict constraints on the exercise of this extraordinary power.”
Any tenant negotiating a new lease which is to include a break option should, where possible, avoid the imposition of any conditions to the break; alternatively, where a landlord insists on the payment of rent being a condition of the break, a tenant should insist on express words of apportionment where the break date does not coincide with the end of a quarter day.