Motor Matters - Leasehold premises: potential hidden costs

Published: 05/04/2016

With franchise holders, it will often be practical to trade from a site by way of a leasehold relationship rather than outright ownership. If negotiated properly, this will provide for an early exit by way of a break clause if business needs change. However, the recent case of Marks and Spencer plc v (1) BNP Paribas Securities Services Trust Company (Jersey) Limited (2) BNP Paribas Securities Services Trust Company Limited [2015] UKSC 72 served as a timely reminder of the need to clearly understand whether any additional costs will inadvertently arise as a consequence. No longer can a tenant rely on ‘the norm’ being implied later into the life of the lease if it becomes contentious.

As tenant, Marks and Spencer sought to exercise a break option under their lease. The break was conditional upon there being no arrears of rent at the break date and a down payment of a sum equal to one year’s rent being made to the landlord. Marks and Spencer, being a strong tenant, were able to comply with both of these pre-requisites and successfully exercised their break in order to exit the lease.

As the break date fell in the middle of a quarter and the lease provided for rent to be paid in advance on the usual quarter dates, Marks and Spencer sought repayment of the ‘overpayment’ element of their rent, along with additional insurance and parking charges. While many would argue that nowadays this is common business practice, fundamentally, it was not expressly provided for in the lease.

The Supreme Court ruled that it was not appropriate to imply a term into a lease that entitled a tenant to a refund of rent which had been paid in accordance with the express terms of the lease. The court clarified that terms could only be implied into a lease where either one of two stipulations is met:

  1. Where the term promotes business efficacy - i.e. is the term necessary to make the agreement work the way that the parties intended at the time it was entered into?; or
  2. The term is so obvious that is goes without saying that the parties intended it at the time the agreement was entered into.
Serving as a further warning, the court confirmed that a term should not be implied into a detailed commercial contract such as a lease merely because it appears fair or one considers that the parties would ordinarily consent to its inclusion.

To summarise, when acquiring new leasehold premises where an early exit may be necessary or important, tenants should investigate to be sure that there are no hidden costs in doing so. This due diligence is likely to impact upon the suitability of premises and may save thousands of pounds later into the life of the lease.

The content of this article is for general information only. For further information regarding leasehold premises, please contact Melissa Loucas. Law covered as at April 2016.

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