This post focuses on three recent UK Supreme Court decisions – Marks and Spencer plc v BNP Paribas Services Trust Company (Jersey) Limited [2015] UKSC 72, Cavendish Square Holding BV v Talal El Makdessi, and ParkingEye Limited v Beavis [2015] UKSC 67. The latter two cases related to the same legal principles.
Marks and Spencer
This case concerned the treatment of rent payable quarterly in advance under a commercial lease and what happens when a tenant (Marks and Spencer) exercises their right to end the lease early.
The difficulty that arose was that in order to effectively break the lease early, Marks and Spencer had to have complied with certain obligations in the lease, including ensuring that their rent was up to date on the break date. The break date was 24 January 2012, which fell early in the relevant rent payment quarter (25 December to 24 March). Having therefore paid rent in advance up to 24 March 2012, Marks and Spencer were perhaps understandably aggrieved at essentially paying their landlord for two months of occupation (February and March) that they did not have the benefit of. There was no express provision in the lease that dealt with this issue.
The court at first instance found in Marks and Spencer’s favour, but this was reversed on appeal to the Court of Appeal. Marks and Spencer appealed to the Supreme Court.
The Supreme Court dismissed their appeal, and held that given the general understanding that parties must have had regarding the lack of apportion-ability of rent paid in advance, it was not appropriate to imply a term into the lease to allow Marks and Spencer to recover a pro rata share of the rent that they paid in advance.
The problem sounds quite fact sensitive, but owing to the relevant sections of the lease in question are fairly common, the judgment will have far reaching consequences. One does have some sympathy for Marks and Spencer, who were caught between a rock and a hard place – if they did not pay the quarter’s rent in advance, they could not effectively break the lease.
Cavendish Square, ParkingEye
These two cases are not factually similar – in Cavendish Square, the argument arose in relation to a share purchase agreement with respect to a Middle Eastern company; in ParkingEye, the dispute concerned an £85.00 car parking charge. Notwithstanding these differences, the cases related to the common law rules regarding penalty clauses in contracts. ParkingEye also looked at the Unfair Terms in Consumer Contracts Regulations 1999.
Prior to these cases, the law regarding penalty clauses remained more-or-less as stated in the 1915 case of Dunlop Pneumatic Tyre Co Limited v New Garage and Motor Co Limited. In Cavendish, the court was not complimentary of the development of the area of law since then, referring to it as an “ancient, haphazardly constructed edifice which has not weathered well...”
The new statement of the test, and accordingly guiding principle as to whether a penalty clause will be enforceable, is whether the “impugned provision is a secondary obligation which imposes a detriment on the contract breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation.”
In Cavendish Square, the court held that the test for a penalty clause was not engaged owing to the fact that the disputed provisions of the share purchase agreement were primary obligations, and treating them as invalid would affect the whole contract.
In ParkingEye, the court held that the penalty clause rule is engaged, but that the £85.00 was not a penalty. An interesting point is that the court was clear that the “legitimate interest” of the innocent party (in this case, the landowners and ParkingEye) was to dissuade motorists who might use the car park for a over-long periods of time. The court also had regard to the level of the charge, the practice elsewhere in the UK, the use of the car park, and the fact that there were signs located in the car park drawing motorists’ attention to the charge.
One of the justices held that the appeal would have succeeded under the 1999 Regulations, but the majority of the court disagreed.
Summary
These two cases provided the Supreme Court an opportunity to re-examine the law concerning penalty clauses, which are generally applicable in contract law (e.g. not just applying to share purchase agreements and private car parks). The reformulated test in Cavendish Square should provide guidance for solicitors engaged in drafting, revising, or litigating in relation to contracts that contain these types of clauses. How the guidance is applied in future, however, remains to be seen.
This article is for general information only. Nothing in this article should be taken as legal advice. If you have any queries on the content of this article please contact us.
