A tenant might believe that if a leased property becomes surplus to its requirements it is able to assign or sublet to another party without difficulty. This is not necessarily the case. Often the landlord will have the right to refuse the assignment or sub-letting.
In the next edition of our series of essential guides for the in-house lawyer, we provide practical guidance to landlords and tenants who are required to deal with applications to assign or sublet.
What are the statutory duties?
The Landlord and Tenant 1988 Act ("the 1988 Act") imposes duties in relation to the grant of a licence to assign, underlet, charge or part with possession. It does not apply to other applications for a landlord's consent (e.g. a consent to change use or carry out works (see Landlord and Tenant Act 1927)).
The landlord's duties under the 1988 Act are: (1) a duty to give consent except where reasonable not to; (2) a duty to give written notice of the decision; and (3) a duty to pass on applications for consent to the appropriate people.
When do the statutory duties apply?
The 1988 Act statutory duties apply where (a) the lease includes a covenant by the tenant not to assign, underlet, charge or part with possession without the consent of the landlord or another person and (b) that covenant is qualified to the extent that consent is not to be unreasonably withheld.
If a lease does not expressly state that consent is not to be unreasonably withheld, it is likely that section 19(1) of the Landlord and Tenant Act 1927 ("the 1927 Act") will imply the requisite qualification into the lease anyway.
The duties arise when a written application for consent is made by the tenant to the landlord or other relevant person and it has been properly served in accordance with the provisions of the lease or in accordance with section 23 of the 1927 Act.
Who do the statutory duties apply to?
The duties are imposed on landlords and on any other person who may be required under the terms of the alienation covenant in the lease to consent to a proposed transaction. This could include a superior landlord and a mortgagee.
What happens if a landlord fails to comply with the statutory duties?
A tenant can:
1. Seek remedies in tort for breach of statutory duty including damages, and where appropriate, an injunction.
2. Apply to court for a Declaration that the landlord is unreasonably refusing consent.
3. Act without the landlord's consent – if the landlord has unreasonably withheld consent then the act would be lawful. If not, then the tenant might be liable in damages and the lease would be liable to forfeiture.
When is it reasonable to withhold consent?
This will be a question of fact depending on the circumstances of the case. In determining whether consent has been refused unreasonably, the following principles provide guidance:
|Where a landlord's conduct might be deemed to be reasonable||Where a landlord's conduct might be deemed to be unreasonable|
|Landlord is entitled to be satisfied that the financial position of the assignee is sufficient to be able to pay the rent and comply with the lease covenants (British Bakeries (Midlands) v Michael Testler & Co )||Superior landlord unreasonably refuses consent and landlord also refuses consent. (Vienit v Williams & Son (Bread Street) )|
|Where a landlord reasonably requires a guarantor, it is reasonable for the landlord to request confirmation that a proposed guarantor is good for guaranteeing the rent and that it is good to meet all its contingent liabilities (Mount Eden Land Ltd v Towerstone Ltd )||Perceived diminution in value of the reversion if the landlord has no intention of selling the reversion (Ponderosa International Development v Pengap Securities )|
|Proposed assignee's business does not accord with the landlord's tenant-mix policy so long as the policy is known to tenant and is a rational one (Moss Bros v CSC Properties ). Also consider the effect of the Competition Act 1998 (Land Agreements Exclusion Revocation) Order.||Existence of minor breach or dispute of covenant (Beale v Worth )|
|Refusal of consent to assignment to prevent security of tenure arising (Cowan v Beaumont Property Trust Ltd )||Requirement of a direct covenant from undertenant will not always be reasonable (Balfour v Kensington Gardens Mansions Ltd )|
|Reason to believe that the proposed assignee will commit substantial breaches of covenant (International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd )||Landlord is not entitled to refuse consent to an assignment on grounds that have nothing whatsoever to do with the relationship of landlord and tenant (International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd )|
What if the tenant is already in breach of covenant?
Unfortunately for the landlord, this does not necessarily mean that it will be reasonable to refuse consent. Whether a landlord is justified in withholding consent will depend upon whether the landlord reasonably perceives the breach to be a serious one, whether the breach is likely to be remedied and whether his position will be prejudiced by the proposed transaction.
For example, a minor breach of a repairing covenant in a 125 year lease with 119 years of the term unexpired was held not to entitle the landlord to withhold consent (Straudley Investments v Mount Eden ). However, where there is a serious breach of the repairing obligation a landlord might be entitled to refuse consent (Orlando Investments v Grosvenor Estates ).
Nor does a tenant's breach enable the landlord to decline to deal with the tenant's application. If the landlord is concerned about potentially waiving its right to forfeit, any correspondence with the tenant should be marked "without prejudice to any accrued right to forfeit".
Tenants also need to be careful. In Crestfort Ltd v Tesco Stores Ltd , the Court demonstrated its creativity when faced with a tenant who had deliberately sub-let in breach of covenant and granted a mandatory injunction requiring the surrender of the sub-lease.
Key points for a landlord
Has the tenant served the application correctly?
The tenant must serve the right person at the right address and in the way prescribed by the lease.
If the lease is silent, the application must be served in accordance with section 23 of the 1927 Act, namely:
1. In writing
2. If the relevant person is an individual, either personally, by recorded delivery or by leaving it at the last known place of residence in England and Wales
3. If the relevant person is a company, to the secretary or other proper officer at the principal office of the company.
Are there any other individuals or entities which the landlord should pass the application to?
One of the landlord's statutory duties is to pass on any application for consent to anyone whose consent is needed under the lease and to do so within a reasonable period of time.
This duty exists whether or not the landlord's consent is required under the lease.
The identity of a superior landlord may change so it should be checked against Land Registry official copies. If a landlord fails to deal with an application in time because the superior landlord has changed then the liability for damages will fall on the landlord (not the superior landlord).
Is there any further information that the landlord requires before being able to make a decision?
A landlord is entitled to know the true nature of the transaction and may need to obtain further documentation or information in respect of the potential tenant in order to make a decision. For example, it is usual to request business accounts and references (see below).
If the landlord requests further information but obtains an incomplete or unsatisfactory response from the tenant, then the landlord might consider seeking to protect itself from any criticism that it is delaying matters (see below). This can be done by advising the tenant that it is aware of its obligations under the 1988 Act, that it appreciates a decision must be communicated with reasons and within a reasonable time but that it is unable to do so at present for stated reasons. The landlord might then indicate that if the tenant fails to give further information, then the landlord will be forced to give a decision but it may be influenced by the degree to which the tenant has co-operated in giving information.
How long has the landlord got to respond?
The relevant time will begin when the application for consent is communicated to the landlord (see Go West v Spigarolo ). However, a landlord is entitled to information regarding the true nature of the transaction and to be given sufficient information. Therefore, in certain cases, the relevant time does not start until this information has been provided to the landlord.
The landlord must respond to the tenant's application within a reasonable time. The definition of a reasonable time is a question of fact in each case. However, it will generally be measured in terms of days or weeks rather than months (see also NCR v Riverland Portfolio ). As a good working rule, a period of 14 days is often considered reasonable by the Courts – although in straightforward matters a reasonable time may even be less than this. If a landlord makes repeated unreasonable requests for information, the time period may expire even though the landlord claims not to be able to make a decision.
Is it possible to give consent by mistake?
Yes; very easily in fact. A letter headed "subject to licence" or "subject to contract" will not prevent a court from holding that consent has been given if the content can be construed this way. The wording "in principle" is equally dangerous. (Alchemy Estates Ltd v Astor and another ). The wording of any response is crucial since consent can be deemed to have been given by the most innocent of wording.
Corresponding with the tenant
Landlords should carefully word any correspondence with the tenant in relation to consents so that they cannot be accused of delaying matters, unreasonably withholding consent or having given consent when they didn't intend to.
Key points for a tenant
The tenant should check the lease before making the application so that it is absolutely clear on what grounds the landlord is able to validly object.
If the lease is a post 1 January 1996 lease, then it will often contain conditions which the parties have agreed are reasonable for the purposes of the Landlord and Tenant (Covenants) Act 1995.
The tenant should check whether the landlord provided it with any information or regulations on the grant of the lease as to the information it will require before considering an application.
As a rough rule of thumb, the tenant should, if it is able, provide three years audited accounts for the proposed assignee/undertenant together with up to date management accounts and references from professional advisors and trade references for the payment of the rent and compliance with the lease terms. If the proposed assignee's covenant is weak, then extra security may be offered such as a guarantor or a rent deposit.
Make and serve the application
The tenant must be certain that it has made the application in accordance with the requirements set out in the lease and that it is served on the correct person.
What if the landlord withholds consent?
The tenant should check whether the landlord has given it written notice of the decision within a reasonable time. If consent is refused, then the landlord should have specified the reasons for the refusal within the written notice.
If the tenant considers that the landlord's refusal is unreasonable then it might: (a) seek remedies in tort for breach of statutory duty; (b) apply to court for a declaration that the landlord is unreasonably withholding consent; or (c) act without the landlord's consent. If the tenant chooses the latter course of action and it is later held that the landlord was reasonable, the tenant may be found to be in breach of covenant.
Landlords and tenants need to be aware of the statutory duties imposed by the 1988 Act. If there is any doubt, then legal advice should be sought promptly.