Showroom lease renewal – adjoining premises

If your business has adjoining premises, you should be mindful about potentially having to pay a premium rent on renewal. A recent case involving BMW (BMW (UK) Ltd v K Group Holdings Ltd (28 July 2023) provides an example of what to look out for.

BMW’s London Park Lane showroom is comprised of four separate parts, each held under separate leases. The contractual terms of all four leases expired at the same time on 27 May 2022 and BMW was keen to retain its presence on the second highest value site on the Monopoly board, so applied to renew all four leases. The landlord – a property investment company – did not oppose the renewals but did seek to include a break clause in its favour in each of the leases, operable at any time after the second anniversary of the commencement of the new term on six months’ notice. The break clauses were to apply if the landlord could demonstrate that it wanted to occupy the premises for the purposes of its own business (under section 30(1)(g) of the Landlord and Tenant Act 1954 (the 1954 Act)). So, although this was an uncontested renewal, the landlord was seeking to use the potential that this could apply to improve its position, arguing that a break clause would give the flexibility to occupy the premises for its own business in the future.

However, BMW was not prepared to agree to this, so the matter came before the Central London County Court. The court ruled that these break clauses were not legitimate provisions for the landlord to push for. There was no realistic prospect that a property investment company would have a legitimate need to occupy premises adapted for use as a car showroom. So, no such break clauses would be included – so far, so good for BMW.

But the County Court judgment also covered the question of whether BMW’s occupation of three other adjacent premises should be disregarded when setting the rent for each of the four renewal leases. Under the 1954 Act the tenant’s occupation of the premises in question is disregarded when setting the new rent. But should the tenant ‘s occupation of adjoining premises be similarly disregarded? The court’s answer was no. BMW’s occupation of adjoining premises was a fact and could not be disregarded. The result was that BMW’s status as a “special purchaser” in relation to each part of the building for which a renewal lease was to be granted lifted the level of rent it needed to pay in each of the four new leases – so in practice BMW ended up having to pay a premium rent under each of the leases at the flagship location.