Almost all commercial leases prevent the tenant from assigning the lease without obtaining consent from the landlord. Disputes often arise and landlords, in particular, have to act quickly. The consequences of making a late decision are often no better than making the wrong decision: in either case, the landlord may end up with an undesirable new tenant or be stuck with a disgruntled existing tenant seeking damages. It is therefore important for both landlords and tenants to understand when the landlord is entitled to refuse consent.
THE LAW IN BRIEF
Any covenant restraining assignment without licence or consent is deemed to be subject to a proviso that the licence is not to be unreasonably withheld: s19(1) Landlord and Tenant Act 1927. It is not possible to contract out of this requirement by express agreement.
However, the parties are able to contract, when the lease is granted, for circumstances in which the landlord will be entitled to refuse consent: s19(1A) Landlord and Tenant Act 1927. (This only applies to new tenancies, as defined by the Landlord and Tenant (Covenants) Act 1995).
If an application for consent is made, the landlord must either give consent or provide written reasons for withholding it, within a reasonable time: s1 of the Landlord and Tenant Act 1988.
A reasonable time is to be judged by reference to what has actually happened in each individual case – so if, for example, the landlord asks for more information promptly and the tenant is slow to provide it, the landlord will be entitled to a reasonable time to consider the information after the tenant has provided it, providing that it was reasonable for the landlord to ask for that information in the first place. The time for responding will sometimes have to be measured in weeks rather than days, but even in complicated cases it should be measured in weeks and not months: Go West v Spigarolo [2003].
If the landlord complies with the duty to respond to the application within a reasonable time, but refuses consent, they cannot later rely on any grounds other than those put forward in the written notice: Footwear Corporation v Amplight Properties Ltd [1999]. If the landlord refuses on one of the grounds set out in the lease, this cannot be challenged. However, if the landlord refuses on a ground which is not set out in the lease, it all turns on whether it was reasonable for the landlord to withhold consent on those grounds. Equally, if consent is given subject to conditions, those conditions must be reasonable; otherwise the landlord will be in breach of their duty.
Reasonableness is to be judged by reference to the impact on the landlord’s reversion and the rights which the landlord enjoys under the lease. It is a question of fact, in each case, depending on all the circumstances whether consent has been reasonably refused, though general guidance can be found in the Court of Appeal’s decision in International Drilling Fluids v Louisville Investments (Uxbridge) [1986]. That guidance remains good law, except that the burden of proving consent was reasonably withheld now rests with the landlord, rather than with the tenant: s1(6) of the 1988 Act. In principle, the Equality Act 2010 imposes another layer of regulation since it prevents landlords from ‘discriminating’ against tenants when deciding whether to grant consent. But, in practice, it is quite difficult to envisage circumstances where a refusal to consent would only be invalidated by the anti-discrimination legislation.
Examples of circumstances in which it will often be reasonable to refuse consent include where the assignee will become entitled to enfranchise or where it will acquire statutory protection; similarly, where the proposed assignee is a business competitor of the landlord. Conversely, where a landlord’s reason for refusing consent is to obtain some collateral advantage (for example, by changing the lease terms so as to secure an increase in the sums payable or a change in the user covenant) the refusal will usually be unreasonable. Other cases fall somewhere in-between: where the landlord refuses consent because of breaches of covenant, it will all depend on the degree of seriousness of the breach and whether or not the landlord’s position is prejudiced by the assignment. Note that if the landlord does not respond to the application because it is seeking to preserve its rights to forfeit for a once-and-for-all breach, the refusal is likely to be reasonable.
If the refusal to consent is unreasonable, the tenant is entitled to assign without consent, but the safer course (for the assignee) is for the tenant to apply to the Court for a declaration that the landlord’s refusal of consent is unreasonable and that the tenant is entitled notwithstanding the refusal to make the proposed assignment. Such a declaration can be sought from either the County Court or the High Court by way of Part 8 proceedings. The parties will not always want to wait that long, however, and a sufficiently confident tenant may decide to assign without first seeking a declaration. In addition, there is nothing to stop the parties from seeking to resolve their dispute through arbitration, expert determination or any other means of alternative dispute resolution.
What happens if the landlord does not comply with their duty to respond within a reasonable time? The landlord cannot put forward any reasons justifying a refusal of consent (because there was no written notice and therefore no reasons in the written notice), and will be unable to defend themselves against a claim for a declaration that consent has been unreasonably withheld:Footwear. The importance of the written notice providing reasons for a refusal within a reasonable time cannot be overstated. The effect is almost the same as if the statute said in terms that if written reasons justifying a refusal are not provided within a reasonable time, consent is deemed to have been given but, in one respect, the position is worse than it would be if consent were deemed to have been given: a landlord who fails to serve a written notice within a reasonable time has not actually consented to the assignment and may, as a result of s4 of the 1988 Act, also be liable in damages.
A tenant wishing to claim damages has to prove that the landlord’s unreasonable refusal to consent caused it loss. A typical example is where the proposed assignee walks away and the tenant is left liable for the rent and business rates. In such cases, the courts have awarded the tenant damages to compensate it for those losses. However, the courts have also awarded exemplary damages in appropriate cases. The sums in question are not trifling: the Court of Appeal recently upheld a decision to award a tenant over £180,000 in statutory damages in Singh v Dhanji[2014].
So, what can landlords and tenants do to avoid disputes when licence to assign is sought – or at least, to avoid being in the wrong if a dispute arises?
GENERAL TIPS FOR TENANTS
- Check the lease terms: it is best to know at the beginning of the process if the potential assignee does not meet any requirements specified in the lease under s19(1A) of the 1927 Act. In those circumstances, the landlord has no obligation to consent at all. That does not mean that the application should not be made, but it should inform how the tenant responds if the landlord says no, or seeks some collateral advantage or payment as a condition of granting consent.
- Make the application: it is, perhaps, obvious, but it is worth stressing that the tenant will be in breach of covenant if it assigns without seeking consent, even if the landlord could not possibly have objected if asked: mistakes and forgetfulness are no defence if the assignment is made before the request for consent. Remember that the landlord’s statutory duty to respond is only triggered by a written application. Make sure that you also check the lease for any provisions about how and where to serve the application and that you retain proof of service. If the lease makes no such provision, then the application will be treated as served if it is served in accordance with s23 of the Landlord and Tenant Act 1927. It is prudent to send a copy of the application to any agents or lawyers known to be acting for the landlord, too.
- Present the assignee in the best light possible: provide all useful information that a landlord might reasonably ask for, up front, when the application is made. This might usefully include information about the assignee’s business and what it intends to use the premises for, its accounts (or, if none are available, a business plan which will demonstrate an ability to meet the financial obligations under the lease), references from former landlords, banks and/or accountants, and, where appropriate, company details. If the potential assignee does meet any criteria specified under s19(1A), demonstrate that this is so.
- Offer to meet the landlord’s reasonable and proper costs by giving a solicitors’ undertaking. If you want to limit the undertaking to a particular amount, consider what work is likely to be involved in considering the application, and try to make the maximum amount reasonable so as to avoid a dispute about whether the undertaking offered is sufficient. Costs are expenses incurred in relation to the grant of the licence to assign, primarily legal costs, though costs of other experts could in principle be recoverable, for example, surveyor’s costs. But what if the landlord has in-house solicitors? Can it require the tenant to contribute to its ‘costs’, or would this fall foul of the prohibition on fines in s144 of the Law of Property Act 1925? The authors are not aware of any authority which directly addresses this question, so it must be open to doubt.
- Tell the landlord what you consider to be a reasonable time frame for a response and why. If you want a speedy decision, it is wise to put down a marker early on (though of course the time frame may have to be revised in light of subsequent events). Equally, let the landlord know if you are likely to suffer loss as a result of a delay.
- If no response is received in time, do not do anything to create an estoppel preventing you from relying on the failure to respond. Any ongoing correspondence after this date should, ideally, say in express terms that the tenant’s view is that a reasonable time for providing consent has passed (so the landlord cannot now advance any reasons for refusing consent) and the tenant’s rights to commence proceedings are reserved.
- If the landlord does respond within a reasonable time and withholds consent, consider carefully the reasons that are put forward and whether these can sensibly be challenged. Again, any correspondence which invites the landlord to reconsider should make it clear that this is without prejudice to the tenant’s right to take proceedings based on the prior unreasonable refusal.
- If you issue proceedings, consider carefully who the relevant parties should be: if you are seeking a declaration that consent has been unreasonably withheld and the consent of both the landlord and the head-landlord is required then they will both need to be joined. Equally, if the assignment has not yet been completed, then any claim will probably have to be brought by the assignor rather than by the intending assignee.
GENERAL TIPS FOR LANDLORDS
- Check whether the application includes a costs undertaking: if none is given, request it before doing further work. Note that the landlord may make a charge where it is reasonable to do so even if the lease contains no specific provision for this: Holding & Management (Solitaire) v Norton [2012].
- Undertake a preliminary assessment of the merits of the application:
- Check the lease terms: if the agreed terms are not met by the potential assignee, you are entitled to refuse, even if this would otherwise be unreasonable.
- Consider any other possible grounds for refusal. Are you simply trying to preserve the value of the reversion and/or your existing rights under the lease, or are you seeking to secure an uncovenanted advantage?
- Pass on the application to any superior landlord and retain proof of service: if a question arises about whether the application was properly passed on then you (as the sender) have the burden of proof. But note that you are not entitled to refuse consent simply because your own landlord does so unreasonably: Vienit v W Williams & Son (Bread Street) [1958].
- Acknowledge receipt promptly. (Ordinarily this should be within days, not weeks.) At the same time:
- If the costs undertaking offered is not sufficient, inform the tenant, giving reasons. But, do not delay commencing work on the basis that a limited amount is not likely to suffice – work up to the limit offered by the tenant while negotiating a further sum.
- Inform the tenant if any further information is needed before you can decide whether to give consent. Remember that the landlord has a statutory duty to give consent, except where it is reasonable to withhold it – so if a reasonable person would ask for more information in order to consider the application, rather than rejecting it out of hand, further information should be sought. But don’t ask for more information for the sake of it, or as a way of obtaining more time: if the information isn’t reasonably required to deal with the application then the landlord will not be allowed any additional time to consider it.
- Try to secure the tenant’s agreement as to a reasonable time scale, so that you know how much time you have to respond. If the tenant has set a time scale in its application, explain if you do not consider that time frame to be realistic.
- If the tenant does not provide any requested information promptly, remind them that you cannot deal with the application until the information is provided.
- Respond within a reasonable time. If you want to refuse, it is better to respond giving all the reasons you can, than to hold off replying while one of several potential reasons is investigated. If no reply is served in time, a deemed consent will occur. But, if a bad reason is included in a notice which also contains good reasons, the bad will not invalidate the good, provided the good reasons are genuine reasons, not makeweights, and the bad reason does not bear on the good reason.
- Make a decision and let the tenant know what it is: it may sound obvious but it is easy to get caught up in a lengthy exchange of informal correspondence. Don’t mistake that for an actual decision. Time will only stop running once you have notified the tenant of your decision, so make sure it is clear from the correspondence when the actual decision is being made and what it is.
- Remember that the consent itself must be given within a reasonable time, not just a decision in principle: so if consent is only to be given when a formal licence is executed (and note that care is needed to bring this about effectively: see Mount Eden Land Ltd v Prudential Assurance Co Ltd (1997)), you must actually execute the licence within a reasonable time too. The authors suggest that this should be a matter of days after the decision notice is given, unless there is something very complex about the terms, though plainly much depends on the tenant’s lawyers if terms are being negotiated. The important thing is to deal with all correspondence promptly.
By Stephanie Tozer and Ciara Fairley, barristers, Falcon Chambers.
E-mail: tozer@falcon-chambers.com; fairley@falcon-chambers.com.
HAS THERE BEEN AN UNREASONABLE REFUSAL OF CONSENT?
The authors recommend working through the following questions on the facts of each case:
- What is a reasonable time for written notice of the decision to be given?
- Was written notice given within that time?
- Were the grounds for refusal, or conditions for grant, put forward in the notice reasonable (or agreed in the lease)?
- If there were no grounds or conditions specified, is the tenant estopped from relying on this failure?