NAVIGATING APPLICATIONS FOR LANDLORD’S CONSENT WITH CONFIDENCE

 

Presented at

The Property Litigation Association Annual Conference

 at Keble College, Oxford on Friday, 23 March 2018

 

by

Camilla Lamont & Miriam Seitler

Landmark Chambers

 

Camilla Lamont is a senior junior at Landmark Chambers who specialises in all aspects of property litigation but with a particular emphasis on commercial, development and property related environmental work.  Camilla is also regularly appointed as a mediator of property disputes. She has been ranked for many years as a leading junior in Chambers and Partners and Legal 500 and she has recently been named Real Estate Junior Barrister of the Year at the 2017 Chambers & Partners Bar Awards.  Commentary in the latest legal directories include the following: “She absolutely lives and breathes the case and thinks through every issue. She is very user-friendly, easy to deal with and gives very clear advice.” (Chambers & Partners 2018) “She is unbelievably bright. (Chambers & Partners 2017); “A guiding light who cuts through reams of papers to get to the nub of issues” (Legal 500 2017); “She can be firm when she needs to be and does not sit on the fence.  Her advice is pragmatic and shows a real understanding of the commercial realities faced by clients” (Who’s Who Legal: UK Bar Real Estate 2017).

 

Miriam Seitler practises in all areas of property litigation – landlord & tenant and real property.  Particular areas of interest include business tenancies, restrictive freehold covenants, landlord’s consents, leasehold enfranchisement, party walls, land registration and the Electronic Communications Code. Miriam was called to the Bar in 2015 and joined Landmark Chambers after the successful completion of her pupillage. Before coming to the Bar she graduated from Queens’ College, Cambridge with a Double First in Law and completed the BPTC at City Law School. Miriam undertook modules in Landlord and Tenant law at both Cambridge and City Law School. Most recently she has advised on and acted in forfeiture proceedings, service charge disputes and a determination for breach of covenant. Miriam has also gained extensive experience obtaining possession orders in the County Courts. She has appeared in the First-tier Tribunal (Property Chamber) and many multi-track and fast track trials in the County Court.

LANDMARK CHAMBERS

180 Fleet Street

London    EC4A 2HG

 

Tel:             020 7430 1221

Fax:            020 7421 6060

Email:         clamont@landmarkchambers.co.uk

mseitler@landmarkchambers.co.uk

 

 

 

WORSHOP PROBLEM

 

Flexible Office Solutions Ltd (“Flexible”) is the current lessee of 1-10 West End Row (“the Premises”), a stucco fronted terrace comprising 10 houses long since converted into offices.  Under a lease dated 1.1.60 (“the Lease”) the Premises were demised for a premium for a term of 125 years at a peppercorn rent.  The Lease is demised on a FRI basis.  Great Western Estate (“the Estate”) is the current landlord. Its freehold title extends to 1-20 West End Row.

 

The Lease covenants:

  1. prohibit assignment otherwise than to a respectable and responsible person with landlord’s written consent. There are no restrictions on sub-letting parts;
  2. restrict any use of the premises for unlawful purposes or in a manner so as to cause a nuisance; and
  3. prohibit any structural alterations without landlord’s written consent.

 

The Premises have at all times since the grant of the Lease been used for the provision of serviced offices.  The only previously permitted planning use was as offices.

Flexible wishes to assign the Lease to Urban Luxury Developments Subsidiary Ltd (“Subsidiary”), a wholly owned subsidiary of Urban Luxury Developments Ltd (“Urban”).  Urban has obtained planning permission to convert the Premises into 20 luxury flats and for change of use.  The development will involve structural alterations. It is intended that each flat will in turn be sold on a long lease.

Urban has taken structural engineering advice and the documentation submitted with the planning application includes design statements and engineering reports suggesting in emphatic terms that the proposed development will have no adverse structural impact on either the Premises or 11-20 West End Row.

Flexible has approached the Estate informally on a without prejudice basis but the meeting did not go well as the Estate was insistent that it would not be prepared to give consent for either the proposed assignment or the proposed structural alterations and said that any formal application made would be put into the hands of its lawyers.

 

 

 

 

 

 

 

INSTRUCTIONS FOR FLEXIBLE’S LAWYERS [GROUP A]

 

Flexible is desperate to assign as soon as possible as it has cash flow problems.  It is due a hefty premium (£25 million) from Urban if the sale agreement becomes unconditional but the premium and other terms are commercially sensitive.  Flexible requires the proceeds of sale to complete on another acquisition of more modern office space in four weeks’ time.

Flexible has entered into a contract for sale with Urban which is conditional on landlord’s consent being obtained for (i) the assignment to Subsidiary; and (ii) the structural alterations by a date in 4 weeks’ time.

There is a confidentiality clause in the conditional sale agreement that would prevent Flexible disclosing the terms of its agreement with Urban to the Estate.  Under the terms of that agreement, the lease is to be assigned to Subsidiary on completion at Urban’s request.

Urban will be funding the development and acquisition.  Urban would be more than willing to provide a parent guarantee if required to obtain landlord’s consent (and the conditional sale contract requires it to do so, if reasonably required), but it is reluctant to offer that up front.

Flexible has disclosed all of the reports which demonstrate that the structural works will be sound and considers it would be unreasonable for the Estate to incur the cost or delay of instructing additional experts to investigate.

Flexible thinks the Estate is seeking to oppose the assignment for its own commercial gain in order to get Urban to bid for the Estate’s adjoining premises which are on the market.

 

FLEXIBLE Lawyers – Points to think about:

  1. How would you pitch the applications for consent? What tone do you want to adopt? What documents would you provide up front?  How might you anticipate any issues that you think might arise? What leverage do you have against the Estate in progressing the application for consent?
  2. How will you respond if the Estate seeks disclosure of the terms of the proposed assignment? How will you respond if the Estate requires access to the Premises to carry out an inspection?
  3. What will you do if the Estate seeks an undertaking in costs in a sum you consider to be extortionate or unreasonable?
  4. How will you respond if the Estate queries the financial standing of Subsidiary?
  5. What grounds do you think that the Estate might seek to base a refusal of consent on? What grounds might you have to challenge the lawfulness of any such refusal of consent?
  6. What remedies might your client have if the Estate refuses consent? Would/ could you seek Urban’s cooperation to progress the application in any way?

 

INSTRUCTIONS FOR THE ESTATE’S LAWYERS [GROUP B]

 

The Estate has a number of objections to the applications.  Although it is well aware of Urban’s growing reputation and commercial success in undertaking a number of high profile developments, Subsidiary is a newly incorporated and non-trading company.  Its accounts reveal that it has assets of £500,000 but also a large inter-group loan in the same amount payable to Urban on demand.  The Estate has an estate wide policy (which has never yet been challenged) of refusing applications for assignment to non-trading subsidiaries.

The Estate wants full details of the terms of the proposed assignment, including the premium to be paid, the source of the funding for the acquisition of the Lease and the development as well as the terms of the sale agreement.  It believes that a substantial premium would be payable which would exhaust all of Subsidiary’s assets.  It also admits that it secretly wants to know how much Urban is prepared to pay for the Lease because it is marketing its own freehold title to 11-20 West End Row.  If the deal between Urban and Flexible fell apart, it would expect Urban to be interested in acquiring 11-20 West End Row instead.

The Estate is not really concerned about any structural issues but it wants to carry out an inspection of the Premises and to instruct a structural engineer to carry out an appraisal as to the possible impact of the alterations on the structural integrity of the Premises as well as its retained estate at 11-20 West End Row.  It wants Flexible to pay the professional fees which it says will cost it about £8,000.   It believes that Flexible may be under considerable pressure to obtain consent under the sale agreement and wishes to exploit any opportunities to delay making a decision on the application.

The Estate fundamentally objects to the conversion of the Premises into flats and subsequent use for residential purposes because it is concerned that it might find itself on the wrong end of a collective enfranchisement claim.

 

ESTATE Lawyers – Points to think about:

  1. How might you respond to the applications when you receive them? What tone should you adopt?  What duties is the Estate under?
  2. What information might you require and on what basis might you legitimately request it? How will you respond if Flexible refuses to provide information you have requested?
  3. How are you going to handle the request for an undertaking in costs that your client wants? What if Flexible refuses on the basis that the costs are not reasonably incurred or reasonable in amount?
  4. On what grounds might you justify a refusal of consent? How should these be expressed?  What are their respective merits? Would they stand up to scrutiny by the court?
  5. If you rely on a number of grounds, might any bad ones invalidate the others?
  6. What action might be taken against your client if it is held to have unreasonably withheld consent?

 

 

Notes for distribution after the workshop

 

An outline of the statutory restrictions and obligations

 

  1. Section 19(1) of the Landlord and Tenant Act 1927 provides:

In all leases whether made before or after the commencement of this Act containing a covenant condition or agreement against assigning, underletting, charging or parting with the possession of demised premises or any part thereof without licence or consent, such covenant condition or agreement shall, notwithstanding any express provision to the contrary, be deemed to be subject—

(a) to a proviso to the effect that such licence or consent is not to be unreasonably withheld, but this proviso does not preclude the right of the landlord to require payment of a reasonable sum in respect of any legal or other expenses incurred in connection with such licence or consent

 

  1. Section 19(2) of the Landlord and Tenant Act 1927 provides:

 

(2) In all leases whether made before or after the commencement of this Act containing a covenant condition or agreement against the making of improvements without a licence or consent, such covenant condition or agreement shall be deemed, notwithstanding any express provision to the contrary, to be subject to a proviso that such licence or consent is not to be unreasonably withheld; but this proviso does not preclude the right to require as a condition of such licence or consent the payment of a reasonable sum in respect of any damage to or diminution in the value of the premises or any neighbouring premises belonging to the landlord, and of any legal or other expenses properly incurred in connection with such licence or consent nor, in the case of an improvement which does not add to the letting value of the holding, does it preclude the right to require as a condition of such licence or consent, where such a requirement would be reasonable, an undertaking on the part of the tenant to reinstate the premises in the condition in which they were before the improvement was executed.

 

 

 

  1. Section 19(3) of the Landlord and Tenant Act 1927 provides:

(3) In all leases whether made before or after the commencement of this Act containing a covenant condition or agreement against the alteration of the user of the demised premises, without licence or consent, such covenant condition or agreement shall, if the alteration does not involve any structural alteration of the premises, be deemed, notwithstanding any express provision to the contrary, to be subject to a proviso that no fine or sum of money in the nature of a fine, whether by way of increase of rent or otherwise, shall be payable for or in respect of such licence or consent; but this proviso does not preclude the right of the landlord to require payment of a reasonable sum in respect of any damage to or diminution in the value of the premises or any neighbouring premises belonging to him and of any legal or other expenses incurred in connection with such licence or consent.

Where a dispute as to the reasonableness of any such sum has been determined by a court of competent jurisdiction, the landlord shall be bound to grant the licence or consent on payment of the sum so determined to be reasonable.

 

  1. Section 1 of the Landlord and Tenant Act 1988 provides:

(1) This section applies in any case where—

(a) a tenancy includes a covenant on the part of the tenant not to enter into one or more of the following transactions, that is—

(i) assigning,

(ii)underletting,

(iii)charging, or

(iv)parting with the possession of,

the premises comprised in the tenancy or any part of the premises without the consent of the landlord or some other person, but

(b) the covenant is subject to the qualification that the consent is not to be unreasonably withheld (whether or not it is also subject to any other qualification).

(2) In this section and section 2 of this Act—

(a)references to a proposed transaction are to any assignment, underletting, charging or parting with possession to which the covenant relates, and

(b)references to the person who may consent to such a transaction are to the person who under the covenant may consent to the tenant entering into the proposed transaction.

(3) Where there is served on the person who may consent to a proposed transaction a written application by the tenant for consent to the transaction, he owes a duty to the tenant within a reasonable time—

(a) to give consent, except in a case where it is reasonable not to give consent,

(b) to serve on the tenant written notice of his decision whether or not to give consent specifying in addition—

(i)if the consent is given subject to conditions, the conditions,

(ii)if the consent is withheld, the reasons for withholding it.

(4) Giving consent subject to any condition that is not a reasonable condition does not satisfy the duty under subsection (3)(a) above.

(5) For the purposes of this Act it is reasonable for a person not to give consent to a proposed transaction only in a case where, if he withheld consent and the tenant completed the transaction, the tenant would be in breach of a covenant.

(6) It is for the person who owed any duty under subsection (3) above—

(a)if he gave consent and the question arises whether he gave it within a reasonable time, to show that he did,

(b)if he gave consent subject to any condition and the question arises whether the condition was a reasonable condition, to show that it was,

(c)if he did not give consent and the question arises whether it was reasonable for him not to do so, to show that it was reasonable,

and, if the question arises whether he served notice under that subsection within a reasonable time, to show that he did.

 

  1. Section 144 of the Law of Property Act 1925 provides:

In all leases containing a covenant, condition, or agreement against assigning, underletting, or parting with the possession, or disposing of the land or property leased without licence or consent, such covenant, condition, or agreement shall, unless the lease contains an express provision to the contrary, be deemed to be subject to a proviso to the effect that no fine or sum of money in the nature of a fine shall be payable for or in respect of such licence or consent; but this proviso does not preclude the right to require the payment of a reasonable sum in respect of any legal or other expense incurred in relation to such licence or consent.

 

  1. When assessing the reasonableness of withholding consent for alienation, the following principles apply – see International Drilling Fluids v Louisville Investments (Uxbridge) [1986] Ch 513:

 

1.The purpose of a covenant against assignment without the consent of the landlord, such consent not to be unreasonably withheld, is to protect the landlord from having his premises used or occupied in an undesirable way, or by an undesirable tenant or assignee;

 

2.As a corollary to the first proposition, a landlord is not entitled to refuse his consent to an assignment on grounds which have nothing whatever to do with the relationship of landlord and tenant in regard to the subject matter of the lease;

 

3.The onus of proving that consent has been unreasonably withheld is on the tenant;[1]

 

4.It is not necessary for the landlord to prove that the conclusions which led him to refuse to consent were justified, if they were conclusions which might be reached by a reasonable man in the circumstances;

 

5.It may be reasonable for the landlord to refuse his consent to an assignment on the ground of the purpose to which the proposed assignee intends to use the premises, even though that purpose is not forbidden by the lease;

 

6.While a landlord need usually only consider his own interests, there may be cases where there is such a disproportion between the benefit to the landlord and the detriment to the tenant if the landlord withholds his consent to an assignment, that it is unreasonable for the landlord to refuse consent;

 

7.Subject to the propositions set out above, it is, in each case, a question of fact, depending on all the circumstances, whether the landlord’s consent to an assignment is being unreasonably withheld.

 

  1. The following two principles are also applied:

 

It will normally be reasonable for a landlord to refuse consent or impose a condition if this is necessary to prevent his contractual rights under the lease from being prejudiced by the proposed assignment or sublease;

 

It will not normally be reasonable for a landlord to seek to impose a condition which is designed to increase or enhance the rights that he enjoys under the lease.[2]

 

What information is a landlord entitled to require in order to consider the application?  

 

  1. As a general rule the landlord is “entitled to be told what is in substance the true nature of the transaction to which he is asked to assent”: Fuller’s Theatres and Vaudeville v Rofe [1923] AC 435. In that case the Privy Council held that a landlord was entitled to know the details of the terms of the sub-letting.

 

  1. However, the landlord may not be entitled to the same level of detail in respect of consent for assignment. In Kened v Connie Investments (1995) 70 P & CR 370, the Court of Appeal held that the landlord was not entitled to details of the assignment or any premium or reverse premium paid. The Court accepted that the landlord is entitled to be informed of “anything which bears upon the giving of his consent”, including anything in the assignment that “would affect him”. The Court even recognised the ability of the terms of the assignment, including the premium, to diminish the assignee’s financial resources and hence his ability to comply with the covenants in the lease. However, the Court stated the landlord’s normal concern with an assignment would be the identity and character of the assignee and therefore a landlord would not normally be entitled to be provided with details of the assignment. The case was distinguished from that of consent for sub-letting; on an assignment the relationship between the landlord and the assignee would be governed by the terms of the lease, not those of the assignment.

 

  1. However, the opposite result was reached in the recent Scottish decision of Homebase Ltd v Grantchester Developments (Falkirk) Ltd [2015] CSOH 49. In that case the landlord had withheld consent as a result of the tenant’s refusal to provide information as to whether it had agreed with the proposed assignee to make any payment by way of rent subsidy or reverse premium. The Court held that the refusal of consent by the landlord was reasonable; it was well established that the payment of a rent subsidy or reverse premium may affect the rental value of the property. Concerns for the rental value of the subject property were not regarded as a collateral matter. It was sufficient that the payment of a rent subsidy or reverse premium might reasonably affect the landlord’s decision whether or not to grant consent.

 

  1. Given Flexible’s time constraints, it will need to move quickly. Flexible should anticipate requests for information by the Estate and give as many relevant documents as it is able to upfront. Flexible’s hands are somewhat tied because of the confidentiality terms of the conditional sale agreement.

 

  1. Flexible could go back to Urban to seek to get permission to disclose certain pieces of information. If it cannot obtain such consent it will therefore need to rely on the reasoning in Kened to justify not providing the detailed terms of the agreement with Urban and the terms of the assignment. The facts can be distinguished from Homebase where the landlord’s concern that justified seeing the terms of assignment was the impact of a reverse premium on the rental value. In contrast, in this case, as in Kened, the landlord’s concern is the ability of the premium to diminish the assets of Subsidiary. In Kened this was held to be insufficient to justify insisting on seeing the terms of the assignment.

 

  1. Flexible should contend that such requests, as far ranging as they are, are oppressive and irrelevant and warn the landlord that unreasonable requests for information would be treated as tantamount to an unreasonable refusal.

 

  1. The Estate should focus on the precise documents it wants and should be prepared to articulate/ justify such a request as being relevant to its consideration of the application. For example, it should say that it has concerns as to Subsidiary’s ability to pay rent/ comply with covenants if its assets are depleted by the purchase and therefore it wishes to understand what Subsidiary’s financial position will be post assignment.   To counter this, Flexible may seek to address the Estate concerns in other ways, such as by simply referring to the fact that the premium will be paid by Urban (if that information does not fall foul of any CSA term). The Estate should avoid any suggestion that it is employing delaying tactics/ pursuing a collateral purpose by simply making blanket requests for categories of documents which may well be confidential or otherwise commercially sensitive.

 

  1. In terms of other documents, Flexible should anticipate a request for bank references and accounts and provide these upfront. The same applies to documents and reports relevant to the proposed alterations and their likely impact.

What is the position on costs?

 

 

  1. A landlord is entitled to charge a reasonable sum for costs it incurs in consenting to the underletting: Dong Bang Minerva (UK) v Davina [1995] 1 E.G.L.R. 41. This is regardless of whether the lease specifically provides for this or not: Holding & Management (Solitaire) Limited v Norton [2012] UKUT 1. The sum charged must itself be reasonable in order for the withholding of consent on the non-payment of the sum to be reasonable.

 

  1. Note that in relation to a lease of a dwelling, any sum charged is likely to be considered a variable administration charge within the meaning of Schedule 11 to the Commonhold and Leasehold Reform Act 2002 as being “an amount payable by a tenant as part of or in addition to the rent which is payable, directly or indirectly, (inter alia) for or in connection with the grant of approvals under his lease.”

 

  1. In Proxima GR Properties Ltd v McGhee [2014] UKUT 0059 Martin Rodger QC stated, at [36] and [37]:

 

although many applications for consent to sub-let residential property will be entirely routine, some applications will give rise to more work than others. The approach taken by most landlords (including those for whom E&M acts as agent) is to charge a standard fee, but care should be taken to ensure that any such standard fee is not an inflated or unreasonable fee for a routine and unobjectionable application. It is necessary to consider the work required to deal with a particular application. The evidence relied on by the appellant suggests that that is not the approach it takes and that it applies the same standard fee of £95 whether the work involved takes 3 hours or 10 hours

 

 

 

The burden of proving that a fee claimed by a landlord as a condition of granting consent was reasonable falls on the landlord by virtue of s.1(6)(b) of the 1988 Act. In Bradmoss Ltd [2012] UKUT 3 (LC) the Tribunal (George Bartlett QC, President) considered a landlord’s claim that administrative work taking two hours and legal work taking one hour were required to process an application for consent and that a fee of £135 was justified. The Tribunal held that in the absence of any information as to what had actually been done, by whom and how long it took, it was not satisfied that a fee at that level was justified or that consent could reasonably have been refused in the event that the tenant had refused to pay it. The Tribunal substituted a fee of £40 plus VAT as the amount payable. For the reasons I have already given I would respectively suggest that, an unreasonable fee having been demanded, the tenant had in fact become entitled to underlet without the need to obtain the landlord’s consent at all and therefore without the need for the payment of any fee.

 

  1. A landlord must be prepared to justify the sum charged and also demonstrate that it is not collateral to the purpose of the covenant: see [39]:

 

Given that the purpose of the covenant is to protect a landlord from having his premises occupied in an undesirable way or by an undesirable tenant, it may not be used as a source of profit for landlords or their managing agents. While it is reasonable for a landlord to grant consent to an underletting on condition that the tenant reimburse its reasonable expenses of considering whether to grant consent, including administrative expenses, it is not reasonable to treat the requirement to obtain consent as an opportunity to charge a fee unrelated to the costs of the routine enquiries or administrative tasks which are appropriate in most cases.

 

  1. Following the decision in 1 West India Key Ltd v East Tower Apartments Ltd [2016] EWHC 2438, there was some concern that a charge for an unreasonable sum could make the entire withholding of consent unreasonable, regardless of whether the landlord had other reasonable reasons for refusing consent. In that case the High Court had held that a fee of £1,250 for landlord’s legal fees for consent for assignment of three leases was unreasonable. £350 only was considered a reasonable sum. The unreasonable charge vitiated the landlord’s two reasonable reasons for refusal – lack of provision of bank references and request for inspection.

 

  1. However, the Court of Appeal has since reversed that decision: see [2018] EWCA Civ 250. A mixture of good and bad reasons for refusal will not automatically invalidate the refusal. The decisions in British Bakeries (Midlands) Ltd v Michael Testler & Co Ltd [1986] 1 EGLR 64 (Peter Gibson J) and BRS Northern Ltd v Templeheights Ltd [1998] 2 EGLR 182 (Neuberger J) were authority for that proposition. Good reasons will not be infected by bad reasons if the former are freestanding and not dependent on the bad reasons.

 

  1. However, if the good reasons are merely “makeweights” and not of causative value, this will not be sufficient. The decision to refuse may become “infected” and therefore unreasonable. As Lewison J stated at [42]:

 

the question is whether the decision to refuse consent was reasonable; not whether all the reasons for the decision were reasonable. Where, as here, the reasons were free-standing reasons each of which had causative effect, and two of them were reasonable, I consider that the decision itself was reasonable.

 

  1. Again, given the time pressure on Flexible, it would be prudent to give an undertaking for reasonable costs upfront. If the Estate demands an unreasonable sum the refusal on this ground will not be reasonable.

 

 

What about the position on inspection? 

 

  1. In 1 West India Key Ltd v East Tower Apartments Ltd [2016] EWHC 2438 in the High Court, and not reversed on appeal on this point, it was held that the landlord was reasonable in its refusal based on the tenant’s refusal to allow inspection. The landlord had insisted on an inspection by a surveyor, at a cost of £350, in order to ascertain whether the covenant against alterations or repair covenants had been breached.

 

  1. Henderson J considered it reasonable despite the fact that there was no specific provision in the lease for inspection on an assignment and there was no reason to suspect there had been breaches of covenant requiring an inspection. He also concluded it was reasonable for a surveyor to be used because an inexpert inspection would not suffice for the purpose.

 

  1. Flexible would be well advised to agree to an inspection of the premises. Although Urban has instructed its own experts to inspect, it is reasonable for the Estate to take its own advice on this matter.

 

  1. However, if the Estate do not have genuine concerns about structural integrity and are instructing an expert for a collateral purpose, perhaps to cause delay, this will not be reasonable. In any case, the sum sought for inspection must itself be reasonable – it may be difficult to justify the figure of £8,000.

 

Can the landlord refuse on the basis of non-fulfilment of the conditions precedent?

 

  1. In respect of leases granted before 1.1.1996 (“old tenancies”), terms in the lease providing for what would be a reasonable refusal of consent or in what circumstance a landlord can refuse consent will fall foul of section 19(1) and would be void. This is subject to the exception of conditions precedent to an application: if the covenant is drafted such that the tenant must fulfil certain conditions before it can apply for consent in the first place, this will not be void: Bocardo v S&M Hotels [1980] 1 WLR 17.

 

  1. The burden of proof to show satisfaction of a condition precedent is on the tenant: Allied Dunbar Assurance v Homebase [2002] 27 EG 144.

 

  1. In Level Properties Ltd v Balls Brothers Ltd [2007] EWHC 744 a provision requiring guarantors for all corporate assignees was upheld as a valid and enforceable condition precedent to the right to assign arising. Similarly, in TCG Pubs Ltd v The Girdlers Company [2017] EWHC 772, Mann J took the same view about a provision requiring a guarantor for any assignee.

 

  1. Here the Lease covenant, on its true construction, only permit assignments to “respectable and responsible persons”. Therefore, the Estate will be justified in refusing consent absolutely (whether or not it would otherwise be reasonable in so doing) if Flexible cannot satisfy the burden of showing that Subsidiary is a “respectable and responsible person” in the first instance.

 

  1. A company can be a “respectable and responsible person”. Respectable focusses on the behaviour of the company in carrying on its operations whereas the concept of responsibility refers to its ability to pay rent and comply with the lease covenants.  See Woodfall at 11.142.   This inquiry will be heavily fact dependent.   In Re Greater London Properties’ Lease [1959] 1 W.L.R. 503 the fact that a subsidiary owed an inter-group loan to its parent that exceeded its assets did not prevent the subsidiary being held to be responsible where it was trading at a profit and had spent the loan on the acquisition of fixed assets: on the facts there it was held that the parent was very unlikely to demand repayment of the loan.

 

  1. Delegates may potentially hold differing views as to whether or not Subsidiary satisfies the definition of a “respectable and responsible” person. However, one cannot simply consider Subsidiary in isolation without also considering the relationship with Urban, the parent and any wider group.  It is not enough to simply point to the fact that it is newly incorporated.

 

  1. The Lease here was granted before the Landlord and Tenant (Covenants) Act 1995 which in respect of “new tenancies” allows the landlord and tenant to agree in advance the grounds on which consent can be withheld and the conditions which can be imposed. In such cases the inquiry will focus on the express terms of the lease included for the purpose of s.19(1A) of the LTA 1927.

 

What about the reasonableness of refusing on basis of lack of financial standing of Subsidiary?

 

  1. If a guarantor is proposed by the tenant, the landlord must consider the financial standing of the assignee and the guarantee together: Venetian Glass Gallery v Next Properties [1989] 2 EGLR 42.

 

  1. However, it was held in Warren v Marketing Exchange for Africa [1988] 2 EGLR 247 that where there is “grave doubt” about the assignee’s ability to pay the rent, the offer of a parent guarantor will not necessarily cure the problem. Approval was given to the view that “an assignment to a totally insubstantial company, even though backed by a guarantee, is quite a different thing to an assignment to a satisfactory and responsible tenant”. The assignee subsidiary was considered insubstantial here because the company was newly incorporated and had been dormant for some years since incorporation.

 

  1. On the other hand, there is case law to suggest that it is unreasonable to insist on a parent guarantee where the assignee is a subsidiary of a prosperous company: Re Greater London Properties’ Lease [1959] 1 W.L.R. 503. In that case it was considered improbable that the parent would allow the subsidiary to default on its debt of £215,000. The court stated:

 

Theoretically, of course, it is possible that the demand might be made. A demand might, at any moment, be lawfully made to this subsidiary for payment of the whole of this large sum but, since the company is a subsidiary of the creditor, as a practical matter, it seems to me quite out of the question that any such demand would be made. The holding company, Allied Bakeries Ltd., can have no interest but to keep this company going as part of its trading activities, and it is quite unthinkable that as a practical matter the subsidiary company is going to be brought to an end suddenly by a demand for this debt. Such a position seems to me quite unrealistic, although, no doubt, a perfectly clear point can be argued on the basis of the accounts by treating the figures as a theoretical exercise without any regard to probable facts.

 

  1. Flexible would be advised to offer a parent guarantee from Urban early on. This would then require the Estate to consider the financial standing of Subsidiary and Urban together. Although the parent guarantee may not necessarily be sufficient, it will certainly help. Flexible can also argue that Urban is highly unlikely to insist on payment of the loan and therefore the guarantee goes beyond what could reasonably be required by the Estate.

 

Can the Estate impose a policy on all applications?

 

  1. The Estate cannot apply an estate-wide policy without considering each application on its own individual merits. In Oriel Property Trust v Kidd (1949) 154 EG 500 it was held that the landlord had unreasonably withheld consent where it had applied a policy of refusing consent for all assignments because it had a waiting list of its own for occupation of the property and adopted a policy that tenants were not allowed to choose their own successors.

 

  1. The Estate cannot apply their policy of refusing consent to assignment to any non-trading subsidiary. The Estate will need to consider the application for consent on its own merits, taking into account the relationship between the Subsidiary and Urban and the financial standing of both.

 

What about the Estate’s concerns about the proposed use of the Property?

 

  1. A landlord can withhold consent if he reasonably objects to the use to which the proposed assignee intends to make of the premises. This is even so if the proposed use is not prohibited by the terms of the lease: Premier Confectionery (London) Co v London Commercial Sale Rooms [1933] Ch. 904. For example, where a landlord was concerned that the proposed manner of trading from the restaurant premises would detract from the premises and the surrounding property, the landlord was reasonable in refusing consent: Tollbench v Plymouth City Council [1988] 1 EGLR 79. In particular, where a landlord has moral objections to the proposed use, refusal is likely to be justified.

 

  1. Similarly, where the landlord reasonably apprehends that the proposed use will breach the user covenant in the lease it will normally be reasonable to withhold consent: Ashworth Frazer v Gloucester City Council [2001] 3 W.L.R. 2180, HL. However, refusal on this basis will not necessarily be reasonable; each case is fact dependent. A landlord cannot object on the basis that it would be technical breach of the user covenant only, without a substantive objection to that proposed use.

 

  1. However, where the lease permits only one specific use and the proposed use falls within that use, it is not legitimate for the landlord to refuse consent on the ground of the proposed use: International Drilling Fluids v Louisville Investments (Uxbridge) [1986] Ch. 513.

 

  1. The Estate does not seem to have objections to the proposed use beyond the risk of enfranchisement that this might present. In any event, the proposed use is not prohibited by the terms of the lease – the lease prohibits only unlawful purposes or use so as to cause a nuisance. Without any suggestion that there would be a breach of the user clause or any other objection based on user, the Estate is unlikely to rely on proposed use alone as a ground for refusal.

 

 

Can the landlord refuse on the basis that the proposed change of use would entitle the assignee to enfranchise?

 

  1. The orthodox position is that a landlord is acting reasonably in refusing consent to an assignment that would entitle the assignee to statutory right to enfranchise. In Norfolk Capital Group Ltd Capital v Kitway [1977] 1 QB 506, the assignor was a company so was not entitled to enfranchise under the Leasehold Reform Act 1967. The proposed assignee was an individual and therefore would be so entitled after a sufficient period of residence. The Court accepted that the inevitable detriment that enfranchisement would have on the landlord’s proprietary and financial interests made it reasonable to refuse consent.

 

  1. Similarly, in Bickel v Duke of Westminster [1977] 1 QB 517, the assignor held the property as an investment and therefore did not occupy it as their residence so were not entitled to enfranchise under the Leasehold Reform Act 1967. The proposed assignment was to an individual who would consequently acquire the rights to enfranchise. Again, it was held that the landlord’s refusal on the basis of this risk was reasonable. Reliance was placed by Lord Denning on the fact that “much financial loss” would be suffered by the landlord.

 

  1. However, these authorities must be contrasted to the more recent cases on the point. In Mount Eden Land Ltd v Bolsover Investments Ltd [2014] EWHC 3523 (Ch), the current use was as an office building. The tenant proposed certain alterations to convert the office building into residential flats. Residential use was not prohibited by the lease. On an application to the landlord for consent for the proposed alterations, the landlord refused on a number of grounds including that the tenant would thereby become entitled to collectively enfranchise. The Court of Appeal agreed with the judge at first instance that this was not a reasonable basis of refusal. The possibility of enfranchisement was considered wholly speculative, dependent on whether long leases were granted or not and the requisite number of lessees coming together to make the enfranchisement claim.

 

  1. The earlier authorities were distinguished. The Court reasoned that Norfolk Capital and Bickel had been decided under the 1967 Act under which landlords did not receive fair compensation for enfranchisement. In contrast, the 1993 Act provided proper compensation. Further, the leases in those earlier cases were significantly shorter; the lease in Mount Eden v Bolsover was for 999 years from 1913 and therefore the reversion was of much less value.

 

  1. The same conclusion was reached in Hautford v Rotrust Nominees, HHJ Collender QC in the Mayors and City of London Court, unreported, 11 August 2016. The tenant applied for consent to a planning application to convert to residential use. The lease permitted residential use, subject to the need for planning consent. The earlier case law was distinguished on the basis that those cases concerned leases commencing prior to 1967:

 

the case law on which Rotrust relies to establish a settled principle that consent will be withheld reasonably if it is to prevent enfranchisement is properly explained by the fact that the leases in those cases were entered into before the 1967 Act was passed. This lease was different. In leasing the property without a restriction on any part of the buildings’ use for residential purposes, the lessor must have known that there was a real prospect that a successful claim to enfranchise could be made by a qualifying tenant

 

  1. The lease in Hautford commenced in 1985 for a term of 100 years. It was held that the purpose of the covenant requiring consent for a planning application to be made was not to enable the landlord to restrict the use of the premises. The landlord was unlawfully attempting to obtain a collateral purpose not contracted for under the lease. It was considered that if the landlord had wanted to prevent enfranchisement it could have restricted the permitted user.

 

  1. Here, the lease is relatively short (as compared to the 999-year lease in Mount Eden v Bolsover). Further, the prospect of enfranchisement can be described as more than speculative because the intention is to sell each flat on a long lease. For that reason, the facts can be distinguished from Bolsover. In addition, the term of the lease here commenced prior to the enactment of the Leasehold Reform Act 1967 and the Leasehold Reform Housing and Urban Development Act 1993. The reasoning of Hautford cannot be applied. When this lease was entered into it would not have been known that a future use might lead to statutory entitlement to enfranchisement. The lease cannot have anticipated that and restricted it. It seems likely, therefore, that the Estate would be reasonable in refusing consent on this basis.

 

What about the perceived impact of alterations?

 

  1. The test of reasonableness for alterations can be found in Iqbal v Thakrar [2004] 3 EGLR 21:

(1) The purpose of the consent is to protect the landlord from the tenant effecting alterations and additions which damage the property interests of the landlord.

 

(2) A landlord is not entitled to refuse consent on grounds which have nothing to do with his property interests.

 

(3) It is for the tenant to show that the landlord has unreasonably withheld his consent to the proposals which the tenant has put forward. Implicit in that is the necessity for the tenant to make sufficiently clear what his proposals are, so that the landlord knows whether he should refuse or give consent to the alterations or additions.

 

(4) It is not necessary for the landlord to prove that the conclusions which led him to refuse consent were justified, if they were conclusions which might be reached by a reasonable landlord in the particular circumstances.

 

(5) It may be reasonable for the landlord to refuse consent to an alteration or addition to be made for the purpose of converting the premises for a proposed use even if not forbidden by the lease. But whether such refusal is reasonable or unreasonable depends on all the circumstances. For example, it may be unreasonable if the proposed use was a permitted use and the intention of the tenant in acquiring the premises to use them for that purpose was known to the freeholder when the freeholder acquired the freehold.

 

(6) While a landlord need usually only consider his own interests, there may be cases where it would be disproportionate for a landlord to refuse consent having regard to the effects on himself and on the tenant respectively.

 

(7) Consent cannot be refused on grounds of pecuniary loss alone. The proper course for the landlord to adopt in such circumstances is to ask for a compensatory payment.

 

(8) In each case it is a question of fact depending on all the circumstances whether the landlord, having regard to the actual reasons which impelled him to refuse consent, acted unreasonably.

 

  1. In that case it was held that the landlord was entitled to refuse on the basis of concerns about the structural integrity of the proposed alterations. It was not for the landlord to have to grant consent subject to a condition about structural integrity. The landlord was required only to consider the application as made by the tenant.

 

  1. If the Estate has genuine concerns about structural integrity then it is entitled to reasonably refuse on that ground. Even if detailed reports had been provided, the Estate is likely to be acting reasonably in seeking its own professional advice as to the potential impact to assure itself that the views expressed in the reports obtained by the tenant are sound and almost inevitably such professional is likely to request an inspection.

 

  1. If the Estate requests an inspection then Flexible would be ill advised to refuse. It should facilitate inspection at an early stage and take the point that given the work already done by its own experts, it should not take the Estate long (or cost too much) to obtain a second opinion to satisfy itself. Flexible should provide upfront all of the technical reports/ surveys it has obtained.

 

  1. The burden will lie with the tenant to show that refusal on this ground is not reasonable.

 

Collateral purpose

 

  1. A landlord is not entitled to refuse consent purely for its own collateral uncovenanted advantage. The landlord is entitled to protect its own contractual rights under the lease but not increase its rights under the same. For example, in Mount Eden Land Limited v Straudley Investments Limited (1997) 74 P. & C.R. 306, the landlord consented to sub-letting on the condition that the sub-tenant’s deposit be held jointly by the landlord and the tenant. This was regarded as an illegitimate attempt on the part of Mount Eden to improve their position under the terms of the headlease”.

 

  1. The general rule is that bad reasons given in notices do not invalidate good reasons as set out above. However, the Estate will need to take some care to ensure that any “prima facie” good reasons for refusal given in their decision letter are not subsequently challenged as being mere makeweights on the grounds that the real reason for refusing consent was in fact an intention to sell 11-20 West End Row to Urban. This collateral purpose has the potential to infect other reasons given by the Estate that would otherwise prima facie be good if actually operative.

 

  1. It is therefore important for legal advisers to deal head on with any collateral purpose being potentially pursued by the client. The client must be told that such collateral purpose does not constitute good reasons for witholding consent and that any attempt to delay for tactical purposes may well put it in breach of its duties and open it up to a claim in damages.  The landlord would be well advised to focus on its better grounds/ reasons for withholding consent.  Ultimately an inquiry into the reasons why consent has been withheld is one of fact and if the matter becomes litigious the client’s employees and agents are likely to face cross examination as to their true motivations for refusing consent.  Likewise the question of whether a landlord has withheld consent reasonably is a question of fact.  It is not the job of the lawyer to dream up reasons why consent might be withheld legitimately.   The lawyer’s role is to advise as the legal principles and the strategic considerations.  You do not want to be sitting behind counsel when your client responds to a question in cross examination as to why a particular ground for refusal was included in a decision letter by answering that you told him/ her to include it.

 

  1. The Estate will be bound by the reasons for refusal expressly cited in the decision letter (and even then only if they were actually operative reasons) and so it cannot refer later in court to reasons that were not set out in writing even if they were operative. The decision letter should be drafted including as much detail as possible as to the reasons why consent is being refused.  It must be in writing.  The time allowed for a decision to be made is highly fact dependent but will usually be measured in weeks not months.

 

What remedies does Flexible have if it considers the Estate is withholding consent unreasonably?

 

  1. A tenant has three possible remedies for unreasonable withholding of consent.

 

  1. First, the effect of an unreasonable refusal is that the proviso is lifted so the tenant is entitled to assign or carry out alterations without the need for the consent. However, it can be risky to assign/alter without consent in this scenario. If the landlord is later found to have been reasonable in withholding consent, the tenant will be in breach. This may not be an option open to Flexible because Urban is likely to have made its acquisition conditional on the landlord actually providing its written consent and Urban is unlikely to want to take the risk of going ahead regardless.

 

  1. Second, the tenant would be wise to seek a declaration that the landlord has unreasonably withheld consent before assigning without consent. A declaration can be sought by way of summary judgment. An expedited hearing might be preferable if there is doubt as to the ability to satisfy the summary judgment test. If there is minimal dispute of fact, a Part 8 claim would be appropriate. Declarations can be sought in the County Court – Landlord and Tenant Act 1954, section 53(1). Realistically this is unlikely to be an option here unless Urban agrees to extend the longstop on the SCA to allow time for an application to be pursued.

 

  1. Third, in certain circumstances damages are available. Where the landlord has breached a statutory duty under section 1 of the 1988 Act (alienation only) the tenant’s claim is a tortious one. The burden will be on the tenant to show that it has suffered loss as a result of the breach of duty. In an appropriate case exemplary damages might be payable, such as where the landlord has deliberately pursued a collateral purpose and or delaying tactics.

 

 

 

 

14th March 2018

© C Lamont; M Seitler 14.3.18

 

This paper is made available for educational purposes only. The views expressed in it are expressed by the author purely to stimulate and promote debate.  The contents of this paper do not constitute legal advice and should not be relied on as such advice.  The author and Landmark Chambers accept no responsibility for the accuracy or continuing accuracy of the contents.

 

 

 

[1] This has since been reversed by section 1(6) of the Landlord and Tenant Act 1988.

[2] See Mount Eden Land v Straudley Investments (1996) 74 P&CR 306

Leave a Reply