Break clauses and bona fide intention – how workable does a landlord’s plan have to be?

An interesting point has arisen in an unopposed lease renewal case that considered whether a landlord’s break option should be included in a new lease, to allow the landlord to occupy the premises for the purposes of its own business.

BMW sought renewal leases of its showroom at 70 Park Lane, London, which was let under four separate tenancies. 

Break option

The landlord stated that it sought a break option exercisable at any time on six months’ notice, from and including the second anniversary of the term up to and including the fifth anniversary of the term. The relevant lease was of the middle section of the showroom.

The renewal lease would have the protection of Part II of the Landlord and Tenant Act 1954 (the Act), and therefore in order to exercise the break option, the landlord would also be required to prove a ground of opposition under section 30(1). The relevant ground was s.30(1)(g) i.e., that the landlord intended to occupy the premises for the purpose of a business to be carried on by the landlord.

Given this renewal was unopposed, the question was not whether the landlord had the requisite intention now, but whether they would be able to establish ground (g) at some point in the future when exercising the break option. 

Deciding whether to incorporate a new break option into a renewal lease is a balancing act - the court’s role is not to prevent the landlord from recovering possession, but it must also ensure that the tenant is granted a reasonable degree of security of tenure.

Proving intention is a matter of evidence, and the question for the court was whether the landlord’s intention was more than just a mere thought, or the possibility of a bona fide decision to exercise a break clause if one were granted.

The landlord’s evidence was that it would run a car-related business from the premises, perhaps converting classic cars into electric and zero-emission vehicles. 

However, it was clear from witness evidence that the business plan had been imagined during the initial negotiations, when the landlord suspected the unit may be vacated. There were no documents that could be provided that related to any corporate discussions about running such a business, and no decisions had been made about precisely how the new business would work.

While a bona fide decision can still evidence intention for the purposes of ground (g), even if granting the proposed break option causes the tenant financial hardship, the judgment highlights the difference between a “sketchy and relatively unformed”, but still genuine intention to occupy the premises, and a real intention to occupy but which is speculative and vague. 

Here, the landlord’s evidence was too vague and unsupported to satisfy the test – it was not a genuine and workable decision. Balanced against the tenant’s needs, including a landlord’s break option in the renewal lease would have an effect on BMW that was deemed to be unjustified.

Valuation of adjacent units

The court then had to consider how to determine the level of rent due under the four new leases.

Under section 34 of the Act, rent is to be determined as at the date of the hearing, on the basis of market rent but disregarding (amongst other factors):

  • Any effect on rent of the fact that BMW had been in occupation of the premises; and
  • Any goodwill attached to the premises.

Other than taking into account these disregards, the ‘reality principle’ applies i.e., the lease is to be valued as it actually is at the valuation date, taking into account the factual open market. The statutory disregards only apply to the tenant’s occupation of the unit in question, not any other premises it might occupy.

This reality principle meant that BMW’s occupation of the other three adjacent units had to be taken into account, and BMW treated as a prospective bidder for a new lease – and subsequently, the fact that the premises would have particular value to BMW (as a “special purchaser”) also had to be taken into account. 

However, as valuation is a question of negotiation between willing parties, in the position of these parties, the court saw no reason to add a further percentage to reflect the “special purchaser” so long as the rent was ‘at the right level’. 

In order to sense check their workings, the judge took time to compare their conclusions with the rents previously agreed on review, which showed that the newly determined headline rent fell squarely between the proposals of the two parties. 

Impact of the decision

This decision is particularly interesting for businesses that have previously viewed the hurdle on intention to be a low bar. 

While a landlord seeking a break right may not need a fully formed and funded business plan, it must have evidence for more than what the tenant’s Counsel dubbed “speculative and opportunistic kite-flying”.

This provides welcome clarity for tenants and is a key reminder to landlords to substantiate any request for a break clause with supporting evidence.

Disclaimer

This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given. © Shoosmiths LLP 2024.

 

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