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Landlords... Are you acting reasonably? An update

Back in December 2016, my colleague, Clare Davitt, wrote an article for Quarter Day looking at whether a landlord’s decision to withhold consent to assign a lease was reasonable. In that case, the landlord was unsuccessful in showing that its reasons for withholding its consent to assign were reasonable. There was a further appeal in which the landlord was successful.

The tenant appealed the first appeal and the case was heard by Court of Appeal in February 2018. This article focuses upon the decision of the court and sets out the current legal position.

Background

By way of a reminder, the brief facts of this case are as follows:

1. East Tower Apartments Limited (“tenant”) wished to sell its interest in a number of residential apartments which were held on long 999 year leases

2. Pursuant to those leases, the tenant had to apply to No.1 West India Quay (Residential) Limited (“landlord”) for consent to assign. The leases contained the usual qualified covenant that such consent would not be unreasonably withheld

3. The landlord gave its consent to assign some, but not all, of the leases. Essentially, in relation to the disputed leases, upon application for consent, the tenant had stated that it agreed to give an undertaking to pay £1250 plus VAT in connection with the licence to assign.

4. Following negotiations in respect of the licence, the landlord sought to impose two further conditions that (1) the tenant should pay £350 plus VAT for each property so that the landlord’s surveyor could inspect it and (2) a current UK bank reference should be provided in respect of the proposed assignee to ensure that it could meet its liabilities pursuant to the leases

5. The tenant stated that it would agree to the inspection, however, it would not pay for it. Further, it requested confirmation that the landlord would not require a UK bank reference. The tenant stated that, unless confirmation was provided regarding the non-payment of the surveyor’s fees and the UK bank reference, it would issue proceedings for a declaration that imposing such conditions was unlawful and would amount to unreasonable withholding of consent

6. Following this correspondence, the landlord wrote to the tenant refusing consent to the disputed leases, on the basis that: (1) the landlord was entitled to its costs (which the landlord deemed not to be unreasonable) and that such costs included the additional fee for the inspection of the property; (2) the landlord was entitled to check that there were no breaches of the terms of the underleases prior to any assignment; and (3) there were works amounting to over £1million contemplated, of which the tenant was aware, and so the landlord needed to ensure that the tenant was of sufficient covenant strength to meet its liabilities.

Issue before the court

This article won't review the earlier decisions. However, by way of a summary, at first instance, the tenant was successful in that the reasons for refusal given by the landlord were unreasonable and the fees were ordered to be repaid. At the first appeal by the landlord, it was decided that it was reasonable for the landlord to claim the fees and therefore two out of the three reasons given for refusal were reasonable. The matter to be decided by the Court of Appeal was that if a landlord refuses consent on three grounds  two of which were reasonable, the third unreasonable  was the overall refusal of consent to assign valid?

Court of Appeal's decision

The court reviewed the existing case law and found that, consistent with previous cases, the landlord was able to rely on one “good” reason, despite there being two “bad” reasons for consent for refusal to assign being deemed reasonable overall.

Essentially, what the court stated, and which clarified the position in previous cases, was where a “good” was a smokescreen for a “bad” reason for refusal of consent then consent would be deemed to be unreasonably withheld by a landlord. However, if the decision would have been the same (ie. to refuse to grant consent) without the reliance on the bad reason then the decision overall is good and thus refusal of consent is reasonable.

The Court of Appeal did grant permission to appeal its decision, so it’s a case of watch this space to see whether the tenant decides to do so!

Practice points

1. When reviewing cases such as this, the court will look at whether the decision to refuse consent was reasonable, as opposed to whether all of the reasons for that decision were reasonable.

2. Landlords, if wishing to refuse to grant consent, should ensure that any reasons given are standalone, to ensure that a potentially “bad” reason cannot be disguised by a “good” reason.


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Spring 2018

Key Contact

Joanne Mills