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Tuesday 24th March 2009
Most modern property leases give tenants great flexibility in lease disposal – and the landlord cannot refuse a reasonable request. But what constitutes reasonableness?
by Beverley Vara
26 March 2009
Typical lease length is both a matter of fashion and property sector, but generally office properties still have reasonably long leases with periodic rent reviews. This can be a huge advantage for a tenant since it takes away the time and costs associated with the lease renewal process and provides certainty.
However, a tenant's plans can sometimes change, particularly when economic conditions alter, and a lease can become surplus to requirements. Can the tenant then dispose of the lease?
Unless a lease contains a restriction, a tenant is free to deal with his lease in any way he wishes. This is good for tenants in terms of flexibility, but unattractive to landlords who want to protect their investment by having a suitable tenant.
Accordingly, most modern leases will contain provisions allowing a tenant to dispose of its lease, but only if the landlord consents. Typically both assignment and surrender of the property are permitted, subject to the landlord's prior written consent (not to be unreasonably withheld or delayed).
When can a landlord refuse consent and what is "reasonable"? Fortunately there is an enormous amount of law to assist in answering this.
The starting point is s19 of the Landlord and Tenant Act 1927, which provides that if a covenant requires landlord's consent, such consent is not to be unreasonably withheld or delayed.
Also important is the Landlord and Tenant Act 1988 which provides that a landlord must (i) give consent (following a tenant's written request) unless it is reasonable not to do so, and (ii) give the tenant written notice of the decision and any conditions.
Reasonableness has been considered in a number of landmark cases, the most important of which is International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] 1CH 513. This set out a number of principles (see box) which were supplemented by the further principles in Mount Eden Land v Straudley Investments (1996) 74 P&Cr 306.
In short, provided your request is reasonable, the landlord will find it very hard to resist it.
Four key principles
You can help yourself to make it very difficult for the landlord to refuse by remembering four key principles.
First, make sure you have a full pack of information about the proposed assignee/ sub-tenant before approaching the landlord. Your solicitor will be able to help you with this, but it should include the proposed tenant's full name and reports and accounts for the past three years. If objectively their accounts do not look good, or if they are a startup or an overseas company, be realistic about the additional comfort the landlord is likely to want, and offer it up front. This could include a guarantor (provide their reports and accounts also), a bank guarantee, a rent deposit or some form of rental insurance.
If they want to change the use of the property or make alterations, say so. Landlords get annoyed at having to play detective about such things. It is true that matters such as a change of user give the landlord a reason to refuse, but most landlords are going to do the type of basic investigation needed to work out that a change of user will be necessary anyway.
Your assignee will also probably want permission for the change of user confirmed before they will take an assignment from you.
Second, keep up the pressure time-wise. Recent case law has suggested that a landlord has as little as two weeks to reach a decision once a full pack of information has been provided. It would be a brave tenant who commenced proceedings after the minimum time period, but legal correspondence reminding the landlord of obligations after two weeks is not only advisable but also should help if, and when, you get to bringing such proceedings. It also has the welcome side-effect of making it less likely you will need to bring proceedings as it shows the landlord you mean business.
Third, if the landlord is acting unreasonably, don't be afraid to say so - and to say why.
Four, if the landlord does refuse, he has an obligation to give you written reasons, which you can then analyse for reasonableness, and then object to if necessary. Remember, the onus is on the landlord to prove that consent has not been unreasonably withheld.
Beverley Vara is a partner and head of real estate litigation at Allen and Overy
What constitutes reasonableness?
- Covenants against alienation are designed to protect a landlord from having his premises used or occupied by an undesirable tenant
- The landlord can't refuse consent for reasons not connected with the landlord/tenant relationship
- The landlord (not the tenant) has to prove consent has not been unreasonably withheld
- The landlord doesn't have to show justification if he can show the conclusions he reached might have been reached by a reasonable person
- 'User' - even if permitted by the lease - may be a valid reason for refusal of consent
- The landlord has only to consider his own interests, unless the detriment to the tenant is disproportionate
- Subject to the above, each case is a question of fact depending on all the circumstances
- It is reasonable for a landlord to refuse if his contractual rights under the lease would be prejudiced
- A desire to enhance the landlord's rights under the lease is not normally a good reason to refuse consent