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Stephen Jourdan KC appears in 1954 lease renewal

On 28 July 2023, HHJ Monty KC gave judgment in BMW (UK) Ltd v K Group Holdings Ltd. This was a 1954 Act claim relating to four leases of four units of premises at 70 Park Lane with a total area of 15,634 sq ft. The units were occupied together by the tenant, BMW, as a car showroom.

The issues addressed in the judgment were the rent, whether there should be a landlord’s break in one of the leases, and the judge’s reasons for refusing to allow the tenant to rely on three witness statements.

Stephen Jourdan KC appeared for the landlord, leading Thomas Jefferies, instructed by Matthew Spring of Payne Hicks Beach.

The rent

The Judge said that there was no disagreement as to the principles to be applied under s.34 and he took them from Stephen’s skeleton. They can be summarised as follows:

  • The valuation date is the date of commencement of the new tenancy, which is 3 months after the final determination of the proceedings including time allowed for any appeal. The court must thus determine the rent as at the date of the hearing, making any appropriate allowance for any changes that may occur between the hearing and the commencement of the new tenancy.
  • The “reality principle” applies. Save insofar as is specifically required by the disregards in section 34 of the Act, the holding under each lease is to be valued as it actually was at the valuation date. In a statutory open market valuation based on a hypothetical transaction things are to be taken as they are in reality on the valuation date, except to the extent that the instrument postulating the hypothetical transaction requires a departure from reality. Counter-factual directions must be given effect to but no further than their terms make strictly necessary.
  • In an open market valuation, the willing buyer or willing tenant is an abstraction, a hypothetical person, but he also reflects reality in that he embodies whatever was actually the demand for that property at the relevant time. Although the transaction is hypothetical, there is nothing hypothetical about the open market in which it is supposed to have taken place. The concept of the open market involves assuming that the whole world was free to bid, and then forming a view about what in those circumstances would in real life have been the best price reasonably obtainable.
  • Where in reality the real tenant occupies premises other than the holding being valued then that occupation must be taken into account, and if they would be a prospective lessee of the holding, on the assumption that it was vacant and to let, their bid must be taken into account. If premises have particular value to the occupier of the adjoining property, so that they would pay more than anyone else, that additional value must be reflected in an open market valuation.
  • In applying section 34 to a unit, the statutory disregards only apply to that unit, not the other units. Therefore in valuing one unit held under one lease, any effect on rent of the occupation of the that unit by BMW or of improvements made by BMW to that unit falling within s.34(2) must be disregarded. But the same is not true in the case of the other three units – no counter-factual assumption applies to them. The valuation must be undertaken having regard to the actual physical condition and use of those other units.

The experts were far apart on the rent. Both experts provided alternative valuations depending on whether a landlord’s break clause was included in the lease of the central unit. The tenant’s expert also provided alternative valuations reflecting other issues. Before the trial began, their highest valuations were:

Landlord’s expert:       £2,347,500 p.a.

Tenant’s expert:          £ 810,600 p.a.

The landlord’s expert referred in his reports to the fact that BMW was a special purchaser who would pay a higher rent than anyone else for one of the units if it was vacant. The tenant’s expert did not. At the start of his evidence, the tenant’s expert said he wanted to increase his valuations by specified percentages to reflect the fact that BMW was a special purchaser who would pay a higher rent than anyone else for one of the units if it was vacant.

The Judge said that this was not the right approach to a special purchaser bid:

“[131] … I agree with Mr Jourdan that it is wrong to assess value to an ordinary bidder and then add a special purchaser uplift. I was taken to Gajapatiraju v The Revenue Divisional Officer, Vizagapatam [1939] AC 303, and IRC v Clay [1914] 3 KB 466 for the principles to be followed where there is a special interest, but it seems to me that the real position is rather more prosaic.

[132]    This type of valuation is really a question of a negotiation between a willing landlord and a willing tenant, where the landlord wants the highest possible rent, and the tenant is a long way below, at the lowest possible rent. This is, as Mr Jourdan put it, a question of “higgling” (I would have said “haggling”, as I always thought “higgling” inferred an element of sharp practice, but it does not much matter) between reasonable persons in the position of these parties where one unit is vacant and to let. There would be an agreement between the parties after the higgling – where the parties’ agreement would be on the spectrum would depend on the strengths of their respective arguments.”

The Judge analysed the comparables, where the rents per square foot for ground floor car showroom space ranged from £49 psf to £228 psf. He concluded that the appropriate rate to use was £126 psf.

He then considered a number of other issues that needed to be determined in order to assess the rent and determined them all in the landlord’s favour.

The result was an aggregate rent of £1,411,956 p.a.

The landlord’s break clause

The landlord sought the right to determine the lease of the central showroom unit on 6 months notice at any time between the second and fifth anniversary of the term. The landlord said it might want to run its own business from that unit.

The Judge explained the test that he considered he should apply as follows:

“[43] … I have no doubt that there is a difference between, on the one hand, a landlord’s intention which is sketchy and relatively unformed but nonetheless genuine, and, on the other hand, a real intention but which is speculative and vague. It strikes me as a matter of evidence. Is there evidence that persuades me, on balance of probabilities, that the landlord’s intention in relation to the business Mr Khaireddine describes is (to use some of the phrases from the authorities) “sufficiently on the cards” or “genuine and workable” such that it amounts to “a possibility of a bona fide decision to operate a break clause if one be granted”?

He said in para 45: “… it is a question of whether such an intention is more than just a mere thought which has not matured into a genuine and workable decision.”

On the evidence, he held that test was not satisfied.

The refusal to allow the tenant to rely on three witness statements

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

One was from BMW’s former head of corporate real estate and related to the issue of who had paid for certain improvements. This had been served late and the Judge refused relief from sanctions.

The other two were from individuals concerning the marketing of the premises on either side of 70 Park Lane. BMW wished to rely on their evidence under the Civil Evidence Act 1995 without calling them. But this was in breach of an order which had been made at the pre-trial review that: “The makers of witness statements on which the parties intend to rely shall attend for cross-examination unless their attendance is dispensed with by agreement.”

The Judge held this order was clear. Unless there was agreement between the parties that a witness need not attend, they must attend and if they did not, their evidence should not be admitted.

A copy of the judgment can be downloaded here

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