Procurement · 16 February 2016

Tenants could lose thousands thanks to Supreme Court ruling

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Landlords will be able to keep overpayments made by tenants that enforce break clauses unless a contract stipulates they are entitled to a refund.

Small business owners renting commercial property could lose out on potentially thousands of pounds following a Supreme Court ruling addressing lease break clauses, an expert property lawyer has warned.

According to associate director for lease advisory at property consultancy Lambert Smith Hampton, Damien Gee, the landmark ruling clarifies the confusing area at the root of many disputes between commercial tenants and landlords, and will work in favour of landlords from now on.

Break clauses enable small business tenants, who frequently are not able to commit to the inflexibility of long-term leases, to review the terms of rental agreements mid-contract. The recent Supreme Court ruling will entitle landlords to keep any overpayments made by tenants that use break clauses unless a contract specifically stipulates that they are entitled to a refund.

“Most businesses pay their rent at least one month in advance, so there are now thousands of mid-contract companies that cannot avoid losing money,” said Gee.

The decision comes following a legal dispute between retailer Marks & Spencer and former landlords BNP Paribas Securities Services Trust, in which Marks & Spencer demanded a refund of thousands of pounds worth of withheld rent that was paid in advance of a lease break date.

Despite there being no specific terms in the lease that would allow Marks & Spencer to be reimbursed, the judge in the original trial ruled in favour of the retailer, before a court of appeal overturned the decision. The Supreme Court upheld the judgement that lease agreements should contain very clear wording, with a term related to the period following a break date specifically agreed by both parties at the time a contract is created, to allow a commercial tenant a refund of rent paid in advance.

Gee advised small business owners to seek professional opinion before signing new tenancy contracts. “Firms that don’t seek professional advice before signing a new lease could become trapped in contracts that are weighted against commercial interests,” he said.

A contentious issue between landlords and tenants for years, Gee suggested that the decision to overturn the original ruling on lease break clauses came as a shock to many commercial property stakeholders.

“Had Marks & Spencer been successful, it could have opened the floodgates for businesses to seek pro-rata refunds from former landlords where rent was paid in full beyond a break notice, in accordance with lease obligations.”

Gee went on to say: “When handled correctly, break clauses present an opportunity for occupiers because they can trigger a re-negotiation of lease terms and rent reduction. This highly complex legal case demonstrated the potential pitfalls associated with lease break clauses.”

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ABOUT THE EXPERT

Fred Heritage was previously deputy editor at Business Advice. He has a BA in politics and international relations from the University of Kent and an MA in international conflict from Kings College London.

HR