14th September 2023 | Erin Gibbs-Charles | real estate disputes, dispute litigation, commercial property

As part of The Sherrards Training Academy, we have asked our trainee solicitors to write articles to support their learning and also to ensure they start to build on their own personal brand. This article has been fact-checked and proofread by Training Partner and Head of the Residential Real Estate, Asha Ngai. In the first of this series, we hear from Erin Gibbs-Charles.

Erin, a trainee solicitor in our Dispute Resolution team, explores the recent judgment in BMW (UK) Ltd v K Group Holdings Ltd highlighting the balancing act required in respect of a landlord’s business aspirations and a commercial tenant’s rights when negotiating break clauses in a lease.

Introduction

The realm of commercial leases is a complex landscape governed by legal provisions aimed at balancing the interests of both landlords and tenants.

One such provision that plays a pivotal role in commercial lease agreements is the break clause.

Break clauses in a commercial lease are provisions that allow either the tenant or the landlord to terminate the lease before its designated end date. These clauses offer flexibility within the lease agreement, allowing parties to adapt to changing circumstances or business needs.

However, a recent decision in the County Court highlighted the difficulties that landlords can face when seeking a break clause for their business needs in a renewal lease protected by Part II of the Landlord and Tenant Act 1954 (the Act).

BMW (UK) Ltd v K Group Holdings Ltd

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 subject to renewal proceedings under the Act and therefore, were to be granted on essentially the same terms as the previous leases.

The previous leases did not, however, contain a landlord break option. Accordingly, the onus was on the landlord to demonstrate the proposed terms were fair and reasonable and should be granted. 

If a break clause was to be included, the landlord accepted that it would have to prove a ground of opposition under s30(1) of the Act in order to exercise the break option.

HHJ Monty KC, in considering whether to grant a break clause, made it clear that the court must try and strike a balance “between granting a reasonable degree of security to the tenant on the one hand, and not preventing the landlord from recovering possession if one of the statutory grounds can be proved on the other”.

Section 30(1)(g) – Landlord’s intention to occupy the premises for the purpose of a business to be carried on by the landlord

The relevant ground in this case was ground (g), namely that on termination of the tenancy, the landlord intends to occupy the property for the purposes of a business to be carried on by the landlord.

The renewal leases themselves were unopposed and so it was for the landlord to prove that they would be able to establish ground (g) at some point in the future when exercising the break option. That is, the landlord needed to show a bona fide intention to operate the break clause if one was granted.

When giving evidence, the landlord agreed that a car business would be an entirely new business for K Group Holdings Ltd. It was further contended by the landlord’s witness that members of his family who controlled entities within the same group as the landlord were only a “little bit inclined to have a study and see the possibilities” of the electric car market. 

In this case, the landlord’s inadequate evidence and the effect the break clause would have on the tenant meant that the court found in favour of the tenant in refusing the inclusion of the landlord’s proposed break clause.

Practical considerations

This decision highlights the raising of the bar in respect of the landlord’s intention to exercise a break option, particularly where the landlord may have aspirations to start a new business venture or expand an existing one.

A landlord should ensure they can evidence a real intention that the operation of the break clause is more than a vague possibility. Therefore, evidence of any steps taken to progress the possibility of occupation for the purpose of a business would be worth documenting.

Although a complete and comprehensive business plan may not be required, the landlord should seek to substantiate any request for a break clause with supporting evidence detailing any “genuine and workable” intention to occupy the premises.

Sherrards’ Real Estate Litigation team

This article has been fact-checked and authorised by the Head of the Residential Real Estate, and Training Partner Asha Ngai. If you have any questions or thoughts, please reach out to him by clicking here.

Our Real Estate Litigation team can support you with an entrepreneurial, commercial and considered approach to break options to help you achieve your goals. Our specialist team can advise you on your options, including, where appropriate asking the court to determine the matter.

For advice and assistance, contact the Real Estate Litigation team at Sherrards.