Following our earlier article highlighting the county court's decision in B&M Retail v HSBC Pension Trust (UK) Ltd, the county court has again been asked to address the question as to whether a landlord should be entitled to include a break clause in its favour on lease renewal. Unlike in the B&M Retail case however, where the landlord was seeking to establish an intention to redevelop its property, the landlord in this case asserted that it would require the property for the purpose of operating its own business at the relevant break date.  The court was also asked to determine the rent for the renewal leases, considering amongst other issues, whether the tenant was a "special purchaser" for these purposes.

The decision on the break clause serves as another useful reminder for landlords and tenants alike of the test a court will apply when faced with the request for a landlord's break and of the evidential hurdles a landlord will be required to overcome to satisfy the court of its intentions.  

The rent determined by the court highlights a particular nuance of which expert valuers should be aware. 

The Facts

The case concerned a property on Park Lane comprising a single car showroom with ancillary office space, spread over a number of units, which was let to the tenant, BMW, under four leases.

The leases were subject to renewal proceedings under the Landlord and Tenant Act 1954 (1954 Act).  There was no dispute over whether the tenant was entitled to a renewal of the leases under the 1954 Act, however, the parties had been unable to agree the terms of the new leases, and the court was asked to determine the remaining terms, including the rent.  Under section 35 of the 1954 Act, the terms of the new tenancy “may be determined by the court; and in determining those terms the court shall have regard to the terms of the current tenancy and to all relevant circumstances.”   

The most significant issues to be determined by the court were:

• whether the new lease of the main unit should contain a landlord's break clause; and
• what rent should be payable under each new lease.

It was accepted that, if the landlord wished to exercise a break right, it would need to prove one of the grounds for opposition set out in section (30) (1) of the 1954 Act.  In this case, the landlord stated it expected to rely on the ground contained  within section 30 (1) (g), having an intention to occupy the property for the purpose of a business to be carried on by it, at the break date.

The landlord's managing agent gave evidence that the landlord intended to operate its own car business from the property and asserted that they would be able to demonstrate "a full and evidenced specific intention" to do so at the relevant time, so as to bring them within the provisions of section 30 (1) (g).

The Decision

The court concluded that the presence or absence of a break clause would significantly affect the rents payable, so they dealt first with the question as to whether a landlord's break right should be included.

The court referred to the test endorsed by the Court of Appeal, in JH Edwards and Son Ltd v Central London Commercial Estates Ltd [1984] 2 EGLR, which provided that the decision as to whether a landlord's break should be included, requires a balance between the tenant being granted a reasonable degree of security and the landlord being able to recover possession, if one of the statutory grounds can be proved.

The court said that in order to rely on section 30 (1) (g) as a ground for opposition, the landlord must show a "possibility of a bona fide decision to operate a break clause if one be granted."

It was found to be significant in this case that there was not a single document relied upon by the landlord which demonstrated a bona fide intention to operate its own business from the property, which would allow it to rely on the grounds of opposition under section 30 (1) (g).   There were no corporate resolutions nor any correspondence presented by the landlord to this effect and the court found their evidence to be "vague" and "unsupported."  This undermined their argument and failed to convince the court of their bona fide intention.    

The court also looked at the effects the inclusion of a break would have on the tenant and on balance, rejected the landlord's contention that the new lease should contain a landlord's break clause.

With regards the determination of the rent, the parties' experts were significantly apart in their valuations.  The court applied the presumption of reality to the determination of the rent, ruling that, since the property demised in this instance was split over four leases, all of which were being renewed, the tenant was effectively a "special purchaser" by reason of its occupation of adjoining premises.  The court considered numerous other arguments put forward by the experts and, finding in the landlord's favour, set the rent closer to the valuation of the landlord, at a much higher rent than the tenant's expert's valuation. 

Commentary

Whilst this is a county court decision and each case will turn on its facts, this case is a useful reminder for landlords of what a court will look for when asked to consider the inclusion of a landlord's break in a renewal lease.   A landlord should always ensure that they have evidence which corroborates that there is a real possibility that the break will be exercised by them.  Where there is an absence of credible evidence, it is clear that a landlord will have difficulty in satisfying the court of its intentions. For tenants seeking certainty in the term of their renewal leases the decision will be welcomed.   

The decision on the rent is a reminder that the tenant's occupation of neighbouring premises is a factual matter which will be taken into consideration when the court is asked to set the rent.