As someone in a rather similar position, this is a bit frustrating to hear. My only helpful advice would be that you could try calling different dealers around you to see if anyone is more receptive to your situation.
Now, for my griping:
I am not a lawyer but I am perplexed how BMW could require a paid
update to software in order to test a warranty threshold. In my (non-lawyer) mind, I would think if you approached BMW to say, essentially, "my car is no longer meeting the conditions we agreed upon when I bought it" it is their obligation to say that you are either a) wrong (hopefully specifying a reason why), or b) correct, but they will "remedy it". I can understand having to pay the dealer for their time and effort if there is nothing actually wrong, but can't fathom how they could say "we can't even test this thing that is covered under warranty from the original purchase until you pay us for an upgrade... that was not stipulated in the original purchase."
Sadly, I'm guessing that's covered in their fine print legalese somewhere, so... please pay them so I don't have to
and report back!
Between this and the connected services 3G cutoff, it's like BMW is going out of their way to piss off as many people as possible!