The BMW Park Lane lease renewal – Landlords need to get their arguments in gear.

A landlord’s proposal to occupy premises for the purposes of its own business was not “sufficiently on the cards” to warrant the inclusion of a break option in a renewal lease.  The Court also had to have regard to the “reality principle” in determining the appropriate rent.

BMW applied to renew four separate leases of its large showroom at 70 Park Lane in London’s west end, comprising a former branch of HSBC bank, a piano bar at basement and mezzanine levels, the central showroom, and a former Porsche showroom.

Break Option

Whilst not opposing the renewal of the leases, K Group Holdings Limited (“KGH”) argued for the inclusion of break options in its favour.  There was some apparent uncertainty over BMW’s commitment to remaining in Park Lane: in June 2022 it had moved out of other leased premises in the vicinity; at 56-59 Park Lane where it showcased its electric range of vehicles, and 77 Park Lane, where its Mini showroom was.  KGH asserted that it was considering occupying the central showroom itself for the purposes of a new business of converting upscale and classic cars to electric and zero-emission vehicles.

The Court noted that it was required to strike a balance between granting a tenant a reasonable degree of occupational security, and not preventing a landlord from recovering possession if one of the statutory grounds for opposition could be proved.  Whilst KGH’s proposed “own occupation” (ground (g) of Section 30(1) of the Landlord and Tenant Act 1954) was for a proposal for a wholly new venture, the Court drew guidance from authorities where a landlord proposed redevelopment of the subject premises in the near to medium-term future (ground (f) of Section 30(1)):

“In cases where a landlord is unable to show that he is immediately in a position to effect a desired reconstruction of the land comprised in the tenancy, if there is a real possibility (as opposed to a probability) that the premises in question will be required for reconstruction during the continuance of the proposed new tenancy, it is right to include in the terms of the new tenancy a break clause which will enable such reconstruction to take place.  It is not the policy lying behind Part II of the 1954 Act to permit the rights of the tenant under the new tenancy to stand in the way of reconstruction and redevelopment of commercial property” (National Car Parks Ltd -v- The Paternoster Consortium Ltd [1990] 1 EGLR 99).

Accordingly, KGH needed to show a bona fide decision or intention to operate a break clause if one were granted.  The inclusion of a break clause would need to reflect the probability or likelihood or possibility of its own occupation in the near future, and the intention would need to be bona fide even if that intention were not immediately realisable.  Counsel for BMW suggested that KGH’s stance was no more than “speculative and opportunistic kite-flying”.  The judge held that there was a difference between, on the one hand, a landlord’s intention which is sketchy and relatively uninformed but nonetheless genuine and, on the other, a real intention but which is speculative and vague.  On the evidence available, the judge was not satisfied that KGH’s intention was “sufficiently on the cards” such that it amounted to a possibility of a bona fide decision to operate a break clause if one be granted.  KGH’s intention was “just a mere thought which has not matured into a genuine and workable decision”.

Accordingly, the break right was not included by the Court.

Rent

The second important aspect of the Court’s decision was in relation to the rent that would be payable under the four new leases (without break clauses).  The parties were a long way apart.  BMW suggested that the appropriate rent was in the region of £76-£100 per square foot.  KGH’s counter-proposal was for a rent of £228 per square foot.

In calculating the new rent in accordance with Section 34 of the 1954 Act, the Court must disregard the fact that the tenant has been in occupation, any goodwill by reason of the carrying on of the tenant’s business, and any effect by reason of improvements.  However, the Court must still have regard to the “reality principle” – where in reality the tenant occupies premises other than the holding being valued, then that occupation must be taken into account.  Put another way, if premises have particular value to the occupier of the adjoining property, so that they would pay more than anyone else, that additional value must be reflected in an open market valuation (Inland Revenue Commissioners -v- Clay [1914] 1 KB 339).  So, the Section 34 disregards would apply to one particular unit at 70 Park Lane, but not the other units.  That principle gave rise to the concept of BMW being a “special purchaser” when valuing any particular unit, because BMW would be regarded as already being in occupation of the other units.

The Court spent a great deal of time considering many comparables, both in Park Lane and in the nearby “Berkeley Square cluster” and was critical of the parties’ experts for being either too positive or too critical of those comparables, to suit their respective clients.  Indeed, one of the experts was accused of “less trying to help the court than assuming the mantle of advocate”.  The Court also placed great weight on the concept of the hypothetical purchaser, and the resulting open market negotiations (what one Counsel described as “higgling”), where the parties’ agreement would be on a spectrum of rents, dependent on the strengths of their respective arguments.  The judge concluded that the appropriate rent was £126 per square foot for the ground floor premises, and a 50% discount of that rent for the basement premises.  He then ignored any percentage uplift in those headline rents to reflect BMW as a special purchaser, because he felt that the rent was already at the right level as a result of the notional ”higgling”.

FSP commentary

For those hoping to oppose a lease renewal on the basis of a proposed redevelopment, or intention to occupy for their own business, it is important that they can demonstrate to the Court a subjective firm and bona fide intention and must also pass the objective assessment of the realistic prospects of implementing the intention that is held.  The same tests need to be satisfied if the landlord does not formally oppose renewal but seeks the flexibility of a break option to be exercised in the near to medium term.

Expert valuers are reminded of the need to avoid appearing partisan, as well as the “reality principle” and the potential for a tenant to be regarded as a “special purchaser”.  In the BMW case the valuation experts were required to disregard only its occupation of the relevant part of the premises demised by its specific lease, and BMW’s occupation of neighbouring parts of 70 Park Lane was a factual circumstance which had to be considered..