A property expert has warned that small companies could be set to lose thousands of pounds when reviewing their commercial property lease.
Many others could unwittingly be caught out when signing a new lease as a result, warns Damien Gee, associate director for lease advisory at Lambert Smith Hampton.
A landmark ruling regarding lease break clauses means that a once grey area at the centre of many tenant/landlord wrangles has now been clarified and will work in the favour of landlords rather than tenants.
Gee says that as many businesses don’t want to commit to long-term leases, break clauses allow them to review the arrangement mid-contract.
‘The ruling now means that, if businesses have made any sort of overpayment when they use the break clause, their landlord is entitled to keep it unless their contract expressly 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 companies mid-contract, that cannot avoid losing money as a result.’
The ruling has come as a result of a long-running legal dispute was between Marks & Spencer and former landlords BNP Paribas Securities Services Trust, which centred on the retail giant demanding a refund of thousands of pounds of rent paid for the period following their lease break date, which was being withheld by their landlord.
In the original trial, the judge found in favour of the retailer, despite there being no express term in the lease that would allow M&S to be reimbursed.
However, the Court of Appeal overturned the decision and the Supreme Court upheld the judgment, maintaining that leases must contain very clear wording with an express term – a term that is specifically agreed by both parties at the time the contract is made – to allow the tenant a rent refund of rent paid in advance, which relates to the period following the break date.
Gee says that this was a highly complex legal case that has once again demonstrated the potential pitfalls associated with lease break clauses.
The issue has been a bone of contention between landlords and tenants for many years and it surprised many in the commercial property world when the original ruling was overturned by the Court of Appeal, he continues.
‘Had M&S been successful, it could have potentially opened the floodgates for businesses to seek pro-rata refunds from former-landlords where they paid rent in full beyond a break notice, in accordance with their lease obligations. Landlords can now finally breathe a sigh of relief.’
Gee says that, when handled correctly, break clauses present a great opportunity for occupiers because they can trigger a re-negotiation of the lease terms and a rent reduction.
‘However, following the new ruling, if businesses don’t seek professional advice before signing a new lease they could become trapped in contracts that are weighted against their interests,’ he adds.
Further reading on commercial property