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 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.

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. 

Full copy of Judgment delivered can be viewed here.

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.”

 

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.

 

 

It’s no surprise the COVID-19 pandemic has had a significant impact on retailers and the sector as a whole. As many retailers were forced to close during both lockdowns, they have been unable to keep up with their rental payments, and as customers continue to self-isolate and stay at home footfall has been significantly lower.

On the flip side, landlords have struggled too with some not receiving payments from tenants, and the loss of protection following the implementation of the Coronavirus Act 2020 (the CA 2020) means they are unable to rely on contractual rights to forfeit commercial leases by peaceable entry, or by issuing court proceedings.

Click here for the full article in The Retailer (page 42) for an overview of the changes applied to the law due to Covid-19.

To find out more, please speak to Mike Lewis. 

This is the third of several case studies that partner Mike Lewis covered in their recent talk at Heathrow Airport for 80 surveyors as part of their CPD training. The recent case of Pezaro v Bourne highlights the fact that landowners need to ensure that informal agreements between them need to be documented.

Summary

The case related to three terraced houses in Hampshire. The Claimants are the joint beneficial owners of numbers 149 and 151, and the Defendants are the joint owners of number 147.

The owner of 147 had a right of way over number 149 and 151. The Claimants saw an opportunity to obtain planning permission and develop a block of flats at the rear of all three properties.

An informal agreement was entered into between the Claimants and the previous owner of number 147, to remove the right of way. Neither of the parties took any steps to formally remove the right of way from any of the titles to the properties.

The land at the rear of the gardens was subsequently purchased by a developer on 18 October 2006 and given a new title at the Land Registry. When the previous owner of 147 was contacted to arrange the formalities to remove the right of way, it transpired that he had sold the property to the Defendants.

The Claimants argued that the verbal agreement between them and the previous owner should be enforceable against the new owners of 147 on the grounds of proprietary estoppel.

It was held in court that the right of way was still in existence and was properly registered against the titles of all three properties, as no steps were taken to remove it. The right of way was therefore enforceable.

The Claimants in this case were unable to rely on the informal agreement entered into between themselves and the previous owner of number 147. This case therefore emphasises the importance of making sure that all steps are taken to register any changes, when where the agreement is informal in nature.

Furthermore, all informal agreements should be confirmed in writing and signed by both parties at the earliest opportunity. It may also be useful to include a provision requiring one party to take the necessary steps to make any required changes.

To find out more, please contact law@sherrards.com 

The High Court in, Kettel and others v Bloomfold Ltd [2012] EWHC 1422 (Ch) granted an injunction to a group of tenants in a block of flats preventing the landlord from developing land where the tenants’ car parking spaces were located.  The Court ruled that the car parking spaces granted to the tenants as part of their long leases were easements and the tenants were entitled to an injunction preventing the landlord from carrying on the proposed development because the landlord was not entitled to unilaterally terminate the easements.

An easement is a right to use or pass over land, and not a right to possession or joint use of the land with the party that has granted the easement.  In addition, an easement cannot be claimed if its effect would be to deprive the party that has granted the easement the benefits of owning the land.  In other words, the right will not be an easement if it prevents the owner of the land in question having any reasonable use of the land.

The Tenants had been granted long leases of flats in the landlord’s existing development, which included a right to use a specific parking space.  In the leases, the landlord had reserved the right to develop its neighbouring property, even if this affected certain rights enjoyed by the tenants.  The landlord wanted to commence a new development on land which included the car parking spaces allotted to the tenants and required the tenants to accept different parking spaces elsewhere.

The Tenants sought an injunction to prevent the development, arguing that they had been granted rights to use the car parking spaces which amounted to exclusive possession, and which in turn deprived the landlord of all reasonable use of the land on which the car parking spaces were situated.  The landlord argued in return that the tenants did not have exclusive possession of the car parking spaces, and so the rights to use the car parking spaces were easements.  Therefore, the landlord further argued, if the proposed development deprived the tenants of their right to use the car parking spaces, the tenants should be awarded damages.

The High Court granted the injunction to the tenants.  The Court held that the tenants had not been granted exclusive possession of the car parking spaces and that the rights granted merely prevented the landlord from parking a car in the car parking spaces.  It did not prevent the landlord from doing anything else with the land, such as passing over it or laying pipes or service media beneath it for the existing block of flats.  Therefore, the landlord was left with reasonable use of the land.  However, there was no right set out in the tenants’ leases for the landlord to unilaterally vary the position of the car parking spaces.  In other words, the landlord could not on its own extinguish the easements that had been granted by granting equivalent easements to the tenants on a separate piece of land.  The landlord was entitled to temporarily obstruct the car parking spaces to carry out its maintenance obligations at the existing block of flats, but it could not extinguish the easement by requiring the tenants to park their cars elsewhere.  The Court therefore granted the injunction as an appropriate means of preventing the landlord from unilaterally terminating the easements, and the landlord was prevented from carrying out its proposed development.

This case confirms that where tenants are granted specific parking spaces within their lease, do have a legal entitlement to use the parking space.  Therefore, developers in granting new leases will need to consider and include a right to alter and indeed terminate the tenants parking rights, where there is a potential for development of that land further in the future.

To find out more, please contact Caroline Vernon. 

Break clause can greatly assist with a tenant’s portfolio management. It is a potential opportunity for the tenant to relocate to cheaper premises or renegotiate new terms and can be a valuable provision, particularly in this volatile market.

However, it is not an entirely straightforward process and there can be various conditions attached to break clauses which can be difficult to satisfy.

Ideally, you will only want one condition, that is, a condition of service of notice to break – this is often 6 months’ notice but sometimes it can be 12.

A condition with any uncertainty such as vacant possession should be avoided at all costs – every property lawyer knows the sack of coal story (more on this in a future article!)

Notice

Most break provisions do not specify a certain form of notice but some do and the tenant must comply with the terms. If no specific form of notice is mentioned, notice must be clear regarding who it is directed to, which provision it relates to and what it is intended to do.

It must be served by the date specified in the break clause and served on the right party at the correct address. The party is usually the landlord but for the avoidance of any doubt, it is usually advisable to serve a copy of the notice on the landlord’s agents and solicitors to cover all bases.

All other terms of the break must be fully complied with (e.g. paying outstanding rent by the break date) in order to have a realistic chance of breaking. The break clause should specify whether the conditions must be satisfied at the date of service of the break notice or at the break date, or both.

If there is a condition, for example, that all rents are paid, it is important to determine how the lease defines rent. If the lease provides for default interest on late rent payments, and the tenant had sometimes paid rent late, although the landlord had never demanded this interest during the tenancy, the landlord can resist the break clause by highlighting the interest “technically” due.

Seeking advice from us early on is essential to manage the process successfully, making sure the notice is properly drafted and served and that the tenant fully understands their obligations. Where there is an obligation to deal with dilapidations, an independent surveyor should also sign off works as being compliant before the break date.

When advising tenants, we always push hard to get written confirmation from the landlord that the break has been waived.

Contact Mike for more information.

In recent years, there has been a surge in articles produced on Japanese Knotweed, a highly invasive and fast growing bamboo-like plant which seems to be haunting many gardens in Britain. It was introduced to the UK in the 1820s for its ornamental qualities but has since proved to be a hot topic as it is extremley costly for landowners and developers, causing structural damage, growing between concrete and blocking drainage systems. It is nearly impossible to eradicate and requires professional Japanese Knotweed contractors who have access to very powerful weed killers.

It has now reached the point where those affected by Knotweed are applying to the courts for compensation. The latest position adopted by the courts is to provide compensation in circumstances where there has been a loss of amenity but not where homeowners claim diminution in value.

This position follows a case that has been widely circulated in the news – Williams & Waistell v Network Rail Infrastructure Ltd. In 2017, two adjoining bungalow owners brought a claim against Network Rail for allowing knotweed to spread from the railway land up to the boundary and under their properties. The knotweed had not caused any physical damage to the bungalows so there was no basis for a claim in that sense. However, the bungalow owners alleged it had caused the properties to suffer a diminution in value and had stigmatised them. Mortgage lenders are very careful and are hesitant to lend on such properties.

The pair claimed that the presence of the knotweed had encroached on their properties, interfering with their quiet enjoyment and causing a loss of amenity by reducing market value. The judge found that Network Rail’s breach of duty and failure to properly manage the situation once they had become aware of the risks, had led to damage and continuing nuisance. The court awarded each claimant £10,000 for diminution of value and £4,320 for treating the knotweed to prevent further ingress.

Network Rail sought to challenge this decision at the Court of Appeal. The original judgment was upheld but it is important to highlight that the Court of Appeal based their decisions on different reasons to those given by the judge last year. The court determined that the parties affected could not succeed in a claim solely for private nuisance as a result of diminution in value. They could, however, be successful in a claim for nuisance caused by encroachment of the knotweed because of a reduced ability to enjoy the amenity of their respective properties.

To find out more information, click here to contact Michael Lewis. 

Partner Mike Lewis, examines the blue Manchester v North West Ground Rents Ltd case where the landlord was in breach of its repairing covenant. This is the first of several case studies he covered in his recent talk at Heathrow Airport for 80 surveyors as part of their CPD training.

Being the largest skyscraper outside London, Beetham Tower is Manchester’s most iconic building. It’s 47 stories comprise of a Hilton Hotel, and residential apartments. The external part of the building is made up of a mixture of single and double glazed shadow box units (SBU’s). However, questions were raised when the windows started to fall out!

The Landlord of the building, North West Ground Rents Limited purchased the freehold reversion of the building from Carillion Construction Ltd for £400,000 in 2010. The lease for the hotel was granted to Blue Manchester Ltd for a premium of £60 million. Under the terms of hotel lease, the Landlord covenanted to keep the common parts “in good and substantial repair and when necessary as part of repair to reinstate replace and renew where appropriate…”. The parties agreed that the external face of the building (including the frame and SBUs) were within the common parts.

In 2014, it was discovered by Carillion that the sealant holding the SBU’s into place was starting to fail. As a result, and as a temporary measure, they screw-stitched pressure plates to the frame panels, to hold the 1,350 SBU’s in place. This temporary fix was not meant to last for more than three years pending a full investigation. However, in 2018, Carillion went into liquidation, and no solution had been found.

The tenant bought a case against the landlord for specific performance, seeking to compel the landlord to carry out the works under the repairing covenant in the lease.

The landlord disagreed with the claim – it argued that although the external façade of the building was its responsibility, it had already taken sufficient steps to comply with its repairing obligation.

The Court had to consider whether the external façade of the building was in disrepair – and it was held that it was. Because the stitch plates were only meant to be in place for three years, whilst a permanent solution was found, meant that the SBU’s were not in “good and substantial repair”. The SBU’s were only able to be regarded as safe if a full investigation and report had been commissioned from a qualified consultant, and this had not been done. The landlord was therefore in breach of its repairing covenant and the landlord was required to repair the SBUs by arranging for their like-for-like replacement.

The recent case of Blue Manchester Ltd v North West Ground Rents Ltd is interesting because it is not often that an order will be granted for specific performance, requiring compliance with a repairing covenant in a lease. Even though steps had been taken to ensure the SBU’s were fixed, this was only a temporary measure, and the Court felt no sympathy for the landlord. Even though the costs for the repairing works were not proportionate to the premium paid for the freehold reversion, the responsibility for inherent, or design and construction defects was with the landlord under the terms of the lease.

To find out more, please contact Michael Lewis. 

Following the UK’s decision to leave the EU, the medicines regulator, the European Medicines Agency (EMA), decided to relocate from its Canary Wharf premises to Amsterdam. The EMA tried to bring their lease at to an end, maintaining that the 25 year lease, granted in October 2014, would be ‘frustrated’ by the potential withdrawal of the UK from the EU.

Key to the court rejecting their argument was the length of the lease (25 years), the absence of a break clause and the ability to assign and underlet the premises.

The court’s decision would clearly have had a significant impact, if it had gone the other way.  Whilst it has prevented the floodgates opening for now, it is also unlikely that this is the last we will hear of this type of argument.  Some commentators have suggested that, where parties can show a common purpose to the signing of the lease, specifically it being dependent on the UK remaining within the EU, judges may have a more sympathetic ear. The EMA have sought leave to appeal …. watch this space.

This was the one of two cases covered by Michael Lewis, head of property disputes at Sherrards, and Ben Walters who were guest speakers at a recent CPD training day run by South of England Surveyors for over 100 surveyors based on the south coast.

To find out more, please contact Mike Lewis.