In this blog we look at the circumstances when it may be reasonable for a landlord to refuse consent to an assignment, and in particular when consent is refused because the value of the landlord’s interest in the property may be diminished as a result.
A common issue that arises in the context of landlord consent is whether it is reasonable for a landlord to refuse consent if the value of a landlord’s interest in the property (the ‘reversion’) is diminished as a result. The usual approach is that this consideration is only relevant if the landlord is in fact intending to sell, however, the effect of the Landlord & Tenant (Covenants) Act 1995 (ITCA 1995) must also be considered, so too the finances of the landlord (particularly where any lending facility is secured on the property). General statutory duties in connection such matters are also set out in the Landlord and Tenant Act 1988 (LTA 1988)
Case Law on reasonableness of Landlord consent
There is a well established body of case law setting out the principles that deal with the reasonableness of consent. The main starting point is the Court of Appeal’s decision in Drilling Fluids -v- Louisville Investments (1986) Ch.513 (although this case was decided before the statutory framework referred to above). The main principles established by the case are:
• The purpose of a restriction on rights to assign or sub-let is to protect the landlord from having its property used or occupied in an unreasonable way by an undesirable tenant or assignee;
• The landlord is not entitled to refuse consent on grounds that have nothing whatsoever to do with the relationship of the landlord and tenant (in relation to the subject matter of the lease);
• It is not necessary for the landlord to prove the conclusions which might be reached by a reasonable person in the circumstances;
• It may be reasonable for the landlord to refuse consent on the ground of the purpose for which the proposed assignee intends to use the premises, even though that purpose is not forbidden by the lease;
• Although the landlord need usually only consider his own interest, 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 consent, that it is unreasonable for the landlord to refuse consent;
• Subject to the above, it is in each case a question of fact depending on all circumstances, whether the landlord’s consent to an assignment is being unreasonably withheld.
One common area for refusing consent is where the landlord is concerned about the proposed assignee’s financial standing. In this regard, the case law supports the proposition that the landlord is entitled to sufficient information to judge the covenant strength of the proposed tenant. Generally, it is fairly well established that a reasonable landlord would be concerned about the proposed tenant’s ability to meet the obligations under the lease as they arise, and that if the information supplied casts doubt on the tenant’s ability to do so, it would be reasonable to refuse consent.
It has been held that even where an original tenant remains liable to pay the rent and perform the covenants in the lease, the landlord can reasonably refuse consent and decline to rely on the original tenant’s liability, if to do so would lower the market value of the Landlord’s reversion, and the landlord does intend to sell the reversion (Ponderosa International Development and Pengap Securities (Bristol) ) (1EGLR66). The Judge in that case distinguished the earlier Drilling Fluids case on the basis that in that case, there was no prospect or need for the landlord to sell, whereas in the Ponderosa case, the landlords needed to sell.
In Ponderosa, the landlord was entitled to take into account the impact on the value of the reversion, despite the continuing liability of the original tenant following assignment. The Judge rejected an argument that because market forces were unreasonable, the landlord was therefore unreasonable in taking such forces into account. The Judge accepted that the landlord had to live within the reality of the market (however unreasonable this may be).
Impact on the Tenant
The general principle is that the landlord is entitled to consider only its own interest, except for cases where the detriment to the tenant is so disproportionate to the benefit to the landlord that it is unreasonable for the landlord to withhold consent. It should be sufficient is a reasonable person in the landlord’s position would consider the request as damaging to its property interest (even if others may take a different view).
Although it is a question of fact in each case whether the Landlord is being unreasonable in withholding consent, in the context of the impact of a proposed assignment on the Landlord’s reversion, a Landlord can generally refuse consent:
• If financial information supplied suggests that the proposed tenant will not be able to perform the obligations under the lease (the continuing liability of the original tenant can be disregarded); and
• The proposed assignment would lower the value of the Landlord’s reversion; and
• The Landlord is intending to sell the reversion.
We do however recommend that landlords take specialist legal advice in relation to any application for consent received from a tenant. If you require any such advice, please contact our Commercial Property Team.