And OTLhey sacrificed the Far East to protect the rest of the Empire. How far did the Germans ever make it into Egypt? Not very. They had all that OTL, but you ignore that Hitler has shown to be untrustworthy, and every time the Allies tried to buy him off he used to to get more advantages and cheat. Better to fight now. May I suggest moving it to the Writer's Forum if you actually go with Germany or her allies getting Cyprus, Gibraltar, or Malta, all very important naval bases? Might as well ask for Scapa Flow, for all the good it would do.
I just finished reading "Darkest hour", by Anthony McCarten before starting this TL. Its about the crisis in the cabinet which Churchill won. It is based on cabinet minutes and the OTL diaries. Under those circumstances Halifax and Chamberlain were ready to concede territory to preserve British independence.
Its summariced nicely here:
https://storify.com/ukwarcabinet/a-compromise-peace-lord-halifax-in-may-1940
And in more detail about concessions to Italy here:
https://en.wikipedia.org/wiki/May_1940_War_Cabinet_crisis#Halifax.27s_talks_with_the_Italians
It details: Suez, Gibraltar, Malta, Tunis, Dijbouti, Somaliland, Corfu or perhaps even Kenya or Uganda.
Its quoted from the biography of Halifax by Roberts which I unfortunately dont have. I guess a diary entry.
Now, put aside all the British patriotism and remember it is the man who IOTL suggested to discuss these terms, Halifax, backed by Chamberlain, that are in power. Churchill is out.
This, "May I suggest moving it to the Writer's Forum if you actually go with Germany or her allies getting Cyprus, Gibraltar, or Malta, all very important naval bases?" does you no credit. You failed to understand the situation as it was perceived (not the reality) IOTL, as well as the much more dire circumstances ITTL.
You might say that the Italians have not done anything, but they played their part. ITTL Britain and France is perceived as defeated by themselves, fearing for their lives, running out of food. The German and Italian demands are that they recognize defeat and the Germans want what is needed to assure they wont have to come and defeat them again. These are quite reasonable Desires for a victorious party, roblem is that it does entail the British giving up their unilateral control of World trade and hence the ability to blockade Germany and Europe. That is the med (for Italy) and it is a grip on the British sea lanes (Gibraltar and Dakar from the French).
It was quite a dissapointment, but as I read the "Darkest hour", I realized there was no way this TL would end up with the unmentionable sea mammal. Your policy would actually and it would be a fun alternative outcome.