BMW (UK) Ltd v K Group Holdings Ltd

Judgment was recently handed down in the lease renewal case of BMW (UK) Ltd v K Group Holdings Ltd. This case considered some topical issues in respect of the Landlord and Tenant Act 1954 (“1954 Act”).

BMW, the tenant, leased four units at 70 Park Lane, London. BMW occupied parts of the ground floor and the basement of the building. There was no opposition to the grant of the new leases, however the parties had not agreed a landlord’s break clause and the amount of the renewal rent. 

A procedural issue of admitting late witness statements also arose in the proceedings, with the judge refusing the tenant permission to rely on three witness statements. 

This case is helpful in showing how the Courts are likely to treat landlord’s request for break clauses and valuation of rent, and it also serves as a cautionary tale as to the consequences of failing to comply with Court orders during 1954 Act proceedings.

Landlord’s break clause

In the proceedings, the landlord sought the right to determine the lease of the central showroom on six months’ notice at any time between the second and fifth anniversary of the term. The reason for this was because the landlord wanted to use that specific unit for the purposes of running its own business in the future. 

It was accepted that if the break clause was included and served, that the landlord would have to prove a ground of opposition under section 30(1) of the Act – being that on termination of the tenancy, the landlord intends to occupy the holding for the purpose of a business. If that ground was proven, the tenant would be entitled to statutory compensation when it vacated following termination of the renewal lease.

The judge had to consider whether the evidence available satisfied the test that the landlord’s intention to run its own business from the premises was ‘a real possibility’. He acknowledged there is a difference between a landlord’s intention which is relatively uninformed but genuine, and on the other hand, a real intention but one which is speculative. Ultimately, on the facts of this case, the judge held that the test was not satisfied and a landlord’s break clause would not be included in the lease renewal.

Rent

The parties were a long way apart on the headline rent for the four units, with the tenant’s expert suggesting rent in the bracket of £76-£100 per square foot and the expert for the landlord suggesting a rent of £228 per square foot.

The judge summarised the principles to be applied under s.34 of the 1954 Act when deciding on the renewal rent amount. These included:

1. The valuation date is the date of the commencement of the new tenancy (3 months after the final determination of the proceedings). 
2. The ‘reality’ principle applies – meaning that the property is to be valued as it actually was at the valuation date.
3. In open market valuation, the willing buyer is a hypothetical person, however he nevertheless reflects reality, which is what the market conditions are for that property at that specific time.
4. Where the real tenant actually occupies the premises other than the holding that is being valued, then that tenant’s occupation must be taken into account (for example, they may pay more than any other prospective tenant). Likewise, if the holding has particular value to an occupier of an adjoining premises, so that they would pay more than another prospective tenant, this must also be taken into account.
5.  The statutory disregards under s.34 must be applied to that specific unit in question, not any other units. 

The judge also considered comparables of other car showrooms in the area. On this point, each side’s expert valuer drew different conclusions about (1) the relative desirability of Park Lane and Berkeley Square and (2) the conclusions to be drawn from the comparable evidence. The tenant’s expert’s view was that Park Lane was not as prestigious as Berkley Square, and attracts a lower rent, whereas the landlord’s expert was of the view that Park Lane was as good if not better and should attract a rent broadly equivalent to that being paid by Lotus in Berkeley Street/Piccadilly (being the most recent car showroom transaction in Mayfair).

The judge spent some time considering other car showrooms in the area, such as the Lotus and Rolls Royce showrooms and an anticipated Aston Martin Berkeley Square showroom. In this respect, the judge concluded that neither the rent paid by Lotus nor the anticipated rent to be paid by Aston Martin (approximately £228 psf) represented a true comparable for the premises. This was due to the fact that the Berkeley cluster area had become more popular amongst higher end manufacturers and that new entrants are prepared to pay well over the historic market price for this area. 

On the other hand, when considering the Park Lane comparables, the judge felt that the Park Lane area did not command the same level of rent as that paid by Lotus in the Berkely cluster area. The judge considered the Bentley, Ferrari and Rolls Royce showrooms in the area, where rents ranged between £112 - £129 psf, as well as the fact that the 70 Park Lane premises were ‘genuine flagship premises’. 

The landlord’s expert additionally raised the point that the tenant was a special purchaser who was likely to pay a higher rent than another prospective tenant for one of the four units if it was vacant. The judge however did not agree with this point and noted that the type of valuation they were dealing with was a question of a negotiation between a willing landlord and a willing tenant, where the landlord wants the highest possible rent and the tenant wants the lowest possible rent. The judge noted that in this scenario, it is a question of negotiating the price between reasonable persons in respect of a unit which is vacant and available to let. Eventually, there would be an agreement between the parties after the negotiations, and the agreed rent would depend on the strength of the parties’ respective arguments.

Ultimately, after considering the facts and the comparables, the judge decided that a headline rent of £126 per square foot was appropriate in the circumstances.

Witness statements

The tenant was refused permission to rely on three witness statements during the proceedings.

One witness statement (from the tenant’s former head of corporate real estate) had been served late in breach of a Court order. The judge refused relief from sanctions, noting that no good reason had been put forward for the breach of the court’s previous order, and that the breach was serious and significant.

The other two witness statements were from individuals concerning the marketing of the premises on either side of 70 Park Lane. The tenant wanted to rely on this evidence under the Civil Evidence Act 1995 without calling the witnesses to attend the hearing. This however again was in breach of the court’s previous order which had been made at the pre-trial review, which stipulated that the makers of the witness statements that the parties intended to rely on had to attend the hearing for cross examination unless their attendance was dispensed with by agreement. The judge held that this previous order was clear, and unless there was agreement between the parties that a witness need not attend, any evidence could not be admitted.

Landlords and tenants should take note; it just goes to show that if proceedings have been filed with regard to a lease renewal, it would be wise not to assume any ongoing without prejudice negotiations will result in a completed lease and the proceedings disposed of before any hearing is reached. In making this assumption, parties run the risk of not complying with court orders or directions in a timely and efficient manner, which are likely to have serious consequences if the matter proceeds to a hearing.