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Landlords...are you acting reasonably?

The case of No.1 West India Quay (Residential) Ltd v. East Tower Apartments Ltd [2016] EWHC 2483 (ch) concerned three long leases of residential apartments in London. Long leases of residential property can contain a restriction that the tenant cannot assign or underlet the whole of the premises without the prior written consent of the landlord, such consent not to be unreasonably withheld or delayed.

In this case the tenant sought a declaration that the landlord had (1) unreasonably delayed its consent to the assignment of one lease and had (2) unreasonably withheld its consent to the assignment of two other leases.

Background

No 1 West India Quay is a 33 storey building in London comprising a hotel and 158 residential apartments. The apartments are let on, essentially, identical long leases by West India Quay (“Landlord”). In 2004, East Tower Apartments Limited (“Tenant”) took 999 year underleases from the Landlord of 42 apartments in the building (“Underleases”).

The Tenant didn’t occupy any of the 42 apartments. The apartments were managed by Premview Properties Ltd who granted short term assured shorthold tenancies of the apartments of typically between 6 to 12 months. There was, therefore, a regular turnover of tenants in the apartments. The Underleases did not require the consent of the Landlord to the grant of the ASTs, but they did contain a covenant that the Tenant could not assign or underlet the whole of the demised premises without the prior written consent of the Landlord, such consent not to be unreasonably withheld. The Underleases also granted the Landlord a right of entry into the apartments on reasonable notice for the purpose of viewing the state and condition of the apartments.

A dispute arose between the Landlord and the Tenant about service charge, and against this background of disagreement, the Tenant decided to sell its 42 apartments. Between February 2014 and April 2015, the Tenant obtained the Landlord’s consent for the assignment of eight of the Underleases. The premiums being paid for the apartments ranged from £499,999 to £1.165 million. The Landlord took a fairly informal approach in giving its consent and consented via email. The only conditions imposed by the Landlord on the assignment of the Underleases were that the Tenant had to (1) pay all outstanding service charges and (2) pay the Landlord’s legal fees in the sum of £1,250 plus VAT. The Tenant paid the service charge, and the fees and the eight assignments were completed.

On 27 March 2015, the Tenant wrote to the Landlord to request consent to the assignment of the Underlease of apartment 28.08. However, the application was not sent to the Landlord’s registered office, but to an address provided by the Landlord in 2014 for the purpose of making applications for consent. The Underlease required any notices to be served on the Landlord at its registered office.

The Landlord acknowledged receipt of the Tenant’s application to assign on 30 March 2015 and the Tenant agreed to pay the Landlord’s legal costs in the sum of £1,250 plus VAT. The Tenant also sent a second application for consent to assign to the Landlord’s registered office 30 days after the first application.

The Landlord asked the Tenant to bring its service charge account up to date and did not question that the first application had not been sent to its registered office. The Tenant paid the service charge and completion was scheduled to take place on 14 April 2015.

However, completion did not take place as planned and on 20 April 2015, the Landlord, for the first time, sought to impose two further conditions on giving its consent to the assignment. Firstly, requesting an inspection of the apartment and secondly, a further cost undertaking in the sum of £350 plus VAT to cover the cost of the surveyor’s fees to be incurred in carrying out the inspection.

The Tenant’s solicitor challenged this, on the grounds that consent to assign had already been given and also that the requirements were unreasonable. The Tenant was keen to complete and agreed to pay £350 plus VAT, provided that the inspection took place the following day. However, the Landlord would not agree to this and the Tenant threatened to bring proceedings and as a result the Landlord decided not to insist on the inspection and completion eventually took place on 13 May 2015, 47 days after the original request to assign and 14 days after the second request.

On 19 May 2015, the Landlord sought to impose the same conditions in respect of the proposed assignments of apartments 27.02 and 27.09 requesting inspections and an undertaking for £1,600 plus VAT from the Tenant’s solicitor (i.e. £1,250 plus VAT legal costs plus £350 plus VAT for the surveyor). The Landlord in addition requested Bank references from the prospective purchasers.

On this occasion, the Tenant agreed to the inspections, but not to the payment of the £350 plus VAT. After further correspondence between the parties, the Landlord wrote to the Tenant on 26 May 2015 refusing to grant consent to the assignments of the apartments.

The Tenant issued court proceedings seeking declarations that (1) consent had been unreasonably delayed in relation to apartment 28.08 and that (2) consent had been unreasonably withheld in relation to apartments 27.02 and 27.09. What is the law in this area?

Under section 1 of the Landlord and Tenant Act 1988 (“LTA 1988”) where a written application is served on a landlord, the landlord owes a positive duty, within a reasonable time to: 1) Give consent, except where it is reasonable not to 2) Serve written notice on the tenant of its decision specifying (i) if consent is given subject to conditions what the conditions are and (ii) if consent is withheld the reasons for withholding consent. The burden of proof is on the landlord to show that it has acted reasonably in withholding consent.

What did the Court decide?

Apartment 28.08

The Court held that a formal request in accordance with LTA 1988 had not been made until the Tenant had served the written request at the Landlord’s registered office and consent was, therefore, given 14 days after this date which was within a reasonable timescale.

Apartments 27.02 and 27.09

The Court held that the Landlord had both “good” and “bad” reasons for withholding consent:

  1. The Landlord had been reasonably entitled to request Bank references for the prospective purchasers. The Judge said that the requirement for a Bank reference would have been simple and inexpensive to provide and could not be regarded as an onerous requirement.
  2. An inspection of each apartment by a surveyor at the cost of £350 plus VAT was also reasonable. The Judge said that landlords should be able to examine their premises to ascertain if tenants have breached their lease covenants.
  3. The Landlord’s insistence on the payment of its legal costs in the sum of £1,250 plus VAT was unreasonable. The Judge said that a reasonable fee should be assessed ‘by reference to things that would need to be done in a typical case, or were in fact done, rather than by reference to a list of all the things that could conceivably be done’. A covenant requiring consent to assign should not be used as an opportunity for a landlord to profit.

The Court referred to settled case law on this point which states:

“If the landlord has a good and a bad reason for withholding consent, consent may nevertheless have been reasonably withheld if the good reason is a sufficient reason and is not otherwise vitiated by the bad reason…”

In this case the Landlord’s success on its “good reasons” for refusal i.e. the bank references and the inspection request was not enough to render its overall decision to refuse consent as reasonable. The “bad reason” i.e. the insisting on the excessive legal fees cancelled out the other two reasonable conditions.

Practical considerations

  1. When acting for tenants the decision highlights the importance of serving LTA 1988 notices strictly in accordance with any notice clause in the lease. Landlords’ statutory obligations under LTA 1988 do not start to run until notice has been properly served.
  2. Even where a large premium is being paid, a bank reference or other financial information about the purchaser should still be provided if requested by the landlord.
  3. It is reasonable for landlords to require an inspection of the property by a surveyor and the costs of this will usually be recoverable from the tenant to ensure that there has been no breach of covenant.
  4. When acting for landlords it is necessary to ensure that costs for considering applications for consent to assign are not excessive and relate to the work which is actually required.
  5. Landlord and tenants can refer to the Alienation Protocol which offers practical tips to landlords and tenants on how to manage the process of applying for consent.

Winter 2016

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Clare Davitt