UK County Court rules in favour of tenant refusing landlord break into renewal lease

BMW (UK) Limited v K Group Holdings Limited (Claim No K10CL172) is the latest decision on lease renewals under the Landlord and Tenant Act 1954 (which itself is being reviewed by Law Commission).

This decision highlights the need for landlords to demonstrate "genuine and workable" redevelopment intention when seeking a break right and for both parties to appoint genuinely independent experts without any bias in their written reports.

Dispute background

The case concerned a car showroom in Mayfair, demised under four separate leases from the landlord, K Group Holdings Limited, to the tenant, BMW (UK) Limited. These leases were the subject of the renewal proceedings under the act, comprising one main premises and three ancillary premises.

The court was asked to decide two key terms in dispute:

• whether or not the landlord should be granted an option to determine the main lease at any time between the second and fifth anniversary of the new lease; and
• the rent payable under all four new leases.

Split decision

The split decision favoured the landlord and the tenant in part. As can be common in lease renewal cases, there was not a clear "winner" or "loser".

The judge decided in favour of the landlord on one outstanding term (rent payable) and the tenant on the other (break option) and was critical of both parties regarding the independence of the expert valuation witnesses, which is an issue that occurs in many lease renewals.

Landlord's break option

It was accepted that in order to exercise the break option, the landlord would have to prove a ground of opposition under section 30(1) of the act. The landlord admitted that the only relevant ground on which it would seek to rely was ground "(g)" – namely, that the landlord would (at the relevant break date) intend to occupy the premises for the purpose of a business carried on by the landlord.

As the previous lease did not contain a landlord break option, the onus was on the landlord to demonstrate that the proposed terms were fair and reasonable between the parties.

When considering break options, the court must exercise its discretion under section 35 of the act and  try and strike a balance between granting a reasonable degree of security to the tenant and not preventing the landlord from recovering possession of the premises if one of the statutory grounds could be proved.

The court will include a landlord's break option (applying the test from previous authorities) if it can be shown that the landlord can demonstrate the possibility of a bona fide intention to operate the break clause if one is granted.

In this case, the landlord's witness contended that members of his family who controlled entities within the same group as the landlord were "inclined and looking at the possibilities" of the electric car market. It was clear from the evidence that this had been triggered by the tenant's approach to the lease renewal negotiations. The evidence was described as "sketchy" and "vague" and the landlord failed to produce any documentary evidence to suggest the possibility of it running a business from the premises in two to five years' time had any credibility whatsoever.

When weighing up the landlord's inadequate evidence alongside the dramatic effect the break clause would have on the tenant, the court found in favour of the tenant in refusing the inclusion of the landlord's proposed break clause.

Valuation evidence

It is well known that as part of the valuation process under section 34 of the act, the rent is to be determined by reference to certain "disregards", including any effect on rent of the fact that the tenant has been in occupation of the "holding".

By reason of the premises having been demised by four separate leases, all of which were being renewed, the court was required to consider the tenant as a "special purchaser". This is because the valuation experts were required (with each lease valuation) to disregard only the occupation of the relevant part of the premises demised by that lease – the tenant's occupation of the neighbouring parts of the premises under the other three leases was a factual circumstance to be taken into consideration.

All expert valuers should be aware of this particular nuance in case they encounter similar circumstances. Overall the judge considered the numerous relevant issues and determined them all in the landlord's favour setting a rent much higher than the tenant's experts proposed).

'Independent' experts

The independence of the expert valuation witnesses was criticised by the court in its judgment – something that is prevalent in renewals under the act. While both experts were either too positive or too critical of the surrounding location (to suit their respective "clients"), the court also criticised one expert for "less trying to help the court than assuming the mantle of an advocate".

Similar criticisms were raised in the decisions of W (No.3) GP (Nominee A) Ltd & W (No.3) GP (Nominee B Limited) v JD Sports Fashion Plc (Claim No.E00DE178) and in S Franses Ltd v The Cavendish Hotel (London) Ltd.

At the outset of a renewal, the parties will usually appoint their respective agents to negotiate the terms of the new leases, with rent often being the key term of interest to both parties. Even in circumstances where proceedings are issued, the vast majority of cases are negotiated and settled without ever proceeding to trial.

Therefore, the natural inclination is to continue to instruct the agents who have been undertaking the negotiations to then subsequently act as expert, on the basis that they are already familiar with the premises and that instructing an independent expert to prepare a report and give evidence at trial could increase the costs of the renewal process or undermine the current negotiation strategy -  or both.

When giving evidence, experts owe a duty to help the court on matters within their expertise, and this overrides any obligation to the party by whom they are instructed. Experts need to keep this in mind continuously when preparing reports and giving evidence, as the court will not hesitate in ascribing less value to an expert's evidence if they are seen to be too partisan.

Osborne Clarke comment

The part of the decision relating to break rights will be welcomed by tenants striving to achieve certainty of term in renewal leases to protect their businesses. Landlord's seeking to include a break option should ensure they have some credible evidence that the operation of the break clause is more than a vague possibility and is "sufficiently on the cards". Documentary evidence detailing steps taken to progress the possibility of a redevelopment or occupation of the premises by the landlord will go a long way to supporting the landlord's contention.

Both landlords and tenants should consider whether a single joint expert could be appointed to determine the level of rent payable; where that is not possible, the parties should take steps to appoint independent experts who are instructed to refrain from demonstrating any bias to the instructing party when preparing their reports and when giving evidence to the court.

As it has been nearly 20 years since the last significant review of the act, there could be wide-ranging changes to the provisions (resulting from the Law Commission review) to reflect the modern commercial leasehold market. Many are asking for changes or clarity to the provisions around "ground f" (the redevelopment opposition ground) and what is necessary to prove for redevelopment intentions, so landlords and tenants will eagerly await the consultation report which is due by December 2023.