Break Clauses: Balancing Business Aspirations and Tenant Rights
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.
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.
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 Real Estate Litigation team, and Training Partner Michael Lewis. 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.
Real Estate Litigation team and Counsel lead City Surveyors to victory in two day trial
Another successful result for Real Estate Litigation, Mike Lewis had victory in a two-day trial for a leading firm of City Surveyors against Spink (the international auction house) at Central London County Court. It was a most interesting case as to when an agent was the “effective cause” of a negotiated rent for a lease renewal.
Counsel on the case George Woodhead, Selborne Chambers stated:
“Mike and George managed the case superbly from pre-action letters to trial. They looked after our client’s interests throughout by giving astute advice and ultimately, ensuring that the necessary evidence was available and effectively presented at trial. A deserved result reflecting both our client’s hard work and Sherrards’ well-known litigation prowess.”
Mathew Bailey, Partner at Angerman Goddard Lloyd Surveyors:
“This was a fantastic result exceeding our expectations and fully justifying our decision to pursue the claim. Mike and his team provided expert advice throughout the process and George, our barrister, argued our case with the upmost skill. A great team and a great victory”
Mike Lewis, Partner:
“It was great to work with our long-standing client surveyors AGL and achieve such a fantastic result for them. The Judge accepted the significant levels of work that they had undertaken in assisting with lease negotiations and awarded the maximum remuneration. Working with Mathew Bailey at AGL was a pleasure. I have worked with Counsel George Woodhead on numerous cases and once again his support and input throughout the case was excellent and his performance at trial was outstanding.”
Recovering Commercial Rent Arrears and The Commercial Rent (Coronavirus) Act 2022 – Where Are We Now?
As detailed in our previous article, as a result of the Covid-19 pandemic the Government implemented The Coronavirus Act 2020 which, amongst other things, offered protection to Tenants of commercial premises by imposing a moratorium preventing Landlords exercising most of the usual remedies for the recovery of rent arrears. A lot has happened since then, but where we are now?
The Commercial Rent (Coronavirus) Act 2022 (“the Act”)
The moratorium imposed by the Government expired at the end of March 2022.
To prevent Landlords taking immediate action in relation to outstanding arrears, the Government implemented the Act, which offered a further period of protection to Tenants, preventing Landlords from exercising their usual remedies in relation to ‘Protected Rent Debts’, those being rents due under a tenancy between 21 March 2020 and 18 July 2021 when the business in question was subject to a closure requirement.
The Act implemented an arbitration scheme which entitled both Landlords and Tenants to refer matters to an Arbitrator to decide whether the Tenant was entitled to relief in relation to their protected rent arrears, but the deadline for the matter to be referred to arbitration was 25 September 2022.
Beyond 25 September 2022
In the event either Landlord or Tenant did not refer the matter to arbitration by 25 September 2022, all protection offered by the Act in relation to the rent arrears is lost.
The result being that a Landlord could exercise their usual remedies (as set out below) and, irrespective of the financial position that the Tenant is in as a result of the Covid-19 pandemic, it could not use is it as a defence to any claim or remedy exercised by the Landlord.
This will be welcome news for Landlords of Tenants who, despite being in strong financial positions, have refused to settle arrears on the basis that the Act afforded them protection.
Tenants still in arrears who were reliant upon the protection of the Act and did not refer matters to arbitration should be conscious of their vulnerability to any of the remedies available to the Landlord.
Options for Landlords
Now that it is “open season” in relation to commercial rent arrears, Landlords should ensure they seek advice as soon as possible in relation to the outstanding arrears. Taking steps to recover the debt sooner, rather than later, will improve the likelihood of recovery and avoid further arrears accruing which may see the Landlord recover pence on the pound in the event of the Tenant becoming insolvent.
As a brief reminder, some of the options open to Landlords are:
- Forfeiture of the Lease – however, Landlord’s will need to ensure that they have not waived their right of forfeiture in respect of the previously protected arrears before forfeiting the lease;
- Issuing Court proceedings for the recovery of the debt;
- Commercial rent arrears recovery (CRAR);
- The service of a statutory demand and the subsequent presentation of a winding-up petition; and
- Pursuing former tenants that are subject to an Authorised Guarantee Agreement and/or pursuant guarantors
If you would like any assistance in relation to issues relating to commercial rent arrears, please contact Mike Lewis of our Real Estate Litigation Team.