Break Clauses and Tenant Refunds

Break clauses are a common feature in both residential and commercial leases, giving either the landlord or the tenant the ability to bring the lease to an end earlier than its full term. While the mechanics of serving a valid break notice are often discussed, another area that can also cause conflict is what (if any) refund the tenant is entitled to upon the exercise of a break clause.

Rent Refunds

If a landlord exercises a break clause and the lease ends partway through a rental period, tenants will usually have paid rent in advance. The question then is: are you entitled to a refund for the unused period?

The answer depends on the wording of the lease:

• Older leases often state that rent is payable without apportionment. This can mean that if the break date falls mid-quarter, the tenant is not automatically entitled to any refund of the rent already paid.
• More modern leases increasingly include provisions requiring landlords to refund rent for the period after the break date, ensuring fairness where a break is exercised.

The leading authority on this issue is the Supreme Court decision in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another [2015] UKSC 72). In this case, the tenant argued that it should receive a refund of rent paid for the period after the break date. The Court held that no such right exists unless the lease expressly provides for it, and it would not imply a repayment obligation into the lease.

In practical terms, this means that tenants should not assume they will be able to recover rent for the period after a break date unless there is clear wording in the lease allowing for repayment.

The circumstances in which a clause will be implied into a lease are very limited. Normally, terms will not be implied just because it would be reasonable to do so, but only if it is necessary because the contract would not make sense without the implied term. It is even harder to imply such terms in a ‘business to business’ contract (such as a commercial lease). The case of Arnold (Respondent) v Britton and others (Appellants) [2015] UKSC 26 established that the courts are very reluctant to rescue two commercial entities from what might later be perceived as a ‘bad bargain’.

Service Charges

Service charges are another area of uncertainty. Like rent, these are often paid in advance on account, with a balancing payment or credit made once actual costs are known.

If the lease comes to an end partway through a service charge period:

• The tenant may be entitled to a pro rata refund of any overpayment.
• Alternatively, if service charges are reconciled annually, the tenant should receive a refund for any overpayment once the final accounts are prepared, even if this happens after they have vacated.

Once again, whether or not the tenant is entitled to a rebate on the service charge will depend very much on the wording of the lease.

In the Marks & Spencer case referenced above, the lease clearly intended the service charge to be apportioned because of the following:

• It was payment for an ongoing service.
• There was reference within the lease to it being “a fair proportion” and
• The lease allowed for an advance overpayment to be credited back to the tenant.

Conversely, the Court did not allow the payment of insurance rent to be dealt with in the same way. This is despite the fact that this too is arguably payment for a service (i.e. the provision of insurance). Instead, the Court found that this ought to be treated in exactly the same way as rent, for which no rebate was allowed. The reason given by the Supreme Court was that it was defined within the lease as a single annual sum, specifically reserved as rent, with no provision for apportionment and it became fully due and payable in advance.

Practical Steps for Tenants

• Check the lease carefully: whether or not you are entitled to a refund depends almost entirely on the precise drafting.
• Ask for clarity early: if you know a break is being exercised, request confirmation from the landlord about how they will deal with rent and service charge refunds.
• Keep records: retain proof of payments made, as these will be needed if you later have to pursue a refund.

Contact our Property Disputes solicitors today

Break clauses and their consequences are not always straightforward, and misunderstandings about refunds are common. At Ashtons Legal, our property team can provide clear, practical advice on what you are entitled to, and where necessary, work on your behalf to recover any sums owed.

If you would like tailored advice on your lease or support in resolving a dispute, please contact our  Property Litigation team today by calling 0330 404 0768, using our online enquiry form or emailing Annabel Mayer at Annabel.Mayer@ashtonslegal.co.uk.