The Supreme Court has had a busy 2015, delivering some landmark decisions on a range of subjects. It has recently been drawing the legal year to an close with a judgment handed down in relation to a dispute between Marks & Spencer and its landlord over the terms of its leases of some offices in Paddington. At this point it is easy to move on; assuming a case about the break clause in a lease has nothing to do with running businesses generally. Certainly property lawyers have been dedicating lots of column inches to the impact of the decision for leases, and the effect on tenants exercising their rights to exit a lease early. However, in the same vein as the Parkingeye v Beavis case [reported by Greg Standing in last month’s Motor Finance] this case is really one about the meaning of contracts, or more specifically what happens when the contracting parties take a different view of what they think the contract says, or ought to say. That said, a little context will help put the decision of the Supreme Court into some setting, and ought to guide how businesses conduct their contract negotiations going forwards.
Marks and Spencer PLC v BNP Paribas Securities Services Trust Company (Jersey) – the facts:
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- Marks & Spencer had leases of four floors of offices in a building known as The Point. For the point which was the focus of the court’s decision it was accepted that all four leases contained the same provision, giving M&S the right to bring the lease to an end early by giving the landlord formal notice, and upon payment of a substantial premium (nearly £900,00 in all) prior to the expiry of that notice.
- M&S triggered the right by serving correct notices and paying the premium sum due, but:
- The end-date of the lease fell part way through a rental period. Most leases require rent for the whole period, usually quarterly, to be paid in advance at the start of each rental period. M&S had to argue (because there was no specific provision dealing with the point in the lease itself) that there should be ‘implied’ a term into the lease entitling them to a refund of certain advance payments for the period from the date of expiry of the notice to the end of the relevant rental period (itself a substantial six-figure sum). The essence of their arguments was that:
– You could ‘stretch’ the meaning of other clauses in the lease to create that outcome; or
– If not the case, then this was what the parties had intended should happen – M&S were already paying once for the ‘privilege’ of breaking the lease (by paying the premium); why should the landlord receive a windfall for a period when the tenant wasn’t actually in occupation? - The landlord’s counterarguments were equally simple:
– It was widely accepted (by lawyers, not necessarily their clients) that there is no ‘automatic’ entitlement to a refund of payments made in advance; the only statute which specifically addresses this point being held to apply only to payments in arrears, and therefore:
– If the tenant had wanted such a refund then it was free to have specifically included (or at least negotiated) to have such a term in the leases before they were signed.
The decision
Ultimately the court came down on the side of the landlord, but in doing so took the chance to comment generally on the issues of implying terms into contracts (including a specific endorsement of a decision from a few years earlier which sets the current benchmark for these issues). Boiled down, a couple of key practical and negotiating points come out of the judgements as follows:
A court should be loath to imply terms into an agreement, unless it is absolutely clear that they need to do so for the contract to actually work. That will be particularly the case where the parties are sophisticated entities taking professional advice on the terms of their contract. The court will start from the point that the deal which is recorded in the agreement is the deal that the parties intended to strike.
In a similar vein courts should be reluctant to imply terms, just because they are ‘fair’. Or to put it another way (and this is the author’s opinion I hasten to add), if we were able to go back in time to the point of negotiations and ask the specific question of the parties: ‘Do you want the rent payment to be apportioned for the period up to the end of the current rental period?’ the answer would probably/possibly have been ‘yes’. That would be what was the ‘right’ outcome (after all, the landlord was already getting a hefty payment – equivalent to a year’s rent) in all the circumstances and was probably what would have been the intended commercial position. But courts are not in the fairy godmother business (panto season or not), we live in a commercial world, and they expect contracting parties to go into their contracts with their eyes open. And if they get it wrong they’ll have to face the music accordingly.
Overall this decision sits quite neatly with the one in Parkingeye, or more particularly the ugly sister case that makes up part of the same appeal, Cavendish Square Holding BV v Makdessi.
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By GlobalDataThis was also about penalty clauses but in a different commercial context. Rather than a parking ticket this involved a $44m ‘default’ provision in a complex share sale agreement. The default clause (which enabled the buyer of a company to withhold the final instalments of the price) would be triggered if the sellers ‘did’ certain things. The ‘doing’ involved not setting up in competition with the business they had just sold. One of the sellers was caught and the buyer invoked the clause (which also forced the sellers to hand over their remaining shares at a knock-down price). The seller tried to argue the clause was a penalty because the effect of price deduction meant that the buyers gained well in excess of what they might otherwise have got had they sued for breach of contract.
The Supreme Court there took the same view as it did here – by and large men and women of business should take contracts as they find them, not try to argue for legal wriggle outs to escape the effect of what a contractual provision actually says.
Marcos Toffanello is a professional support lawyer at Birketts LLP
