UK: Beware All Landlords – Are You Being Unreasonable?

Last Updated: 15 December 2016
Article by Mark Barley, Stephanie Doyle and Patrick Wetherall

Leases typically contain a restriction preventing the tenant from assigning the lease to a new tenant without the landlord's prior consent. That restriction is usually subject to a qualification that the landlord should not unreasonably withhold its consent.

The difficulty facing landlords is that they are also under a statutory duty (by virtue of the Landlord and Tenant Act 1988 ("the 1988 Act")) to give consent within a reasonable time (unless it is reasonable not to give consent). Where the consent is made conditional, any condition must also be reasonable and, if challenged, the onus falls on the landlord to show that it is reasonable.

In the recent case of No.1 West India Quay (Residential) Ltd v East Tower Apartments Ltd [2016] EWHC 2438 (Ch), the High Court considered what terms may be reasonable when giving conditional consent to an assignment. Whilst the case concerns residential property, it has wider reaching application, with commercial landlords and tenants also being affected by the decision.

Background

East Tower Apartments Ltd ("ETAL") was a tenant under long leases of residential apartments at No 1 West India Quay, London ("the Building"). The leases contained the usual provision that landlord's consent to any assignment was not to be unreasonably withheld .

ETAL challenged not only the refusal of its landlord, No.1 West India Quay (Residential) Ltd ("West India Quay"), to consent to the proposed assignments of two of its apartments in the Building but also West India Quay's response time for granting consent on a third apartment.

The county court judge found that West India Quay had not delayed in dealing with ETAL's application for consent. However, West India Quay appealed to the High Court against the court's further decision that it had unreasonably withheld its consent and was in breach of the 1988 Act.

West India Quay had given three grounds for withholding its consent:

  1. ETAL's refusal to give a bank reference (West India Quay wanted to assess the prospective assignee's covenant strength) ("Precondition One").
  2. ETAL's refusal to allow West India Quay's surveyor to inspect the apartments at ETAL's cost (prior to making its decision) to check for breaches of the leases ("Precondition Two").
  3. ETAL's refusal to give an undertaking for West India Quay's costs of £1,600 plus VAT for dealing with the application for consent and for the surveyor's inspection ("Precondition Three").

The High Court found that West India Quay's insistence that £1,600 costs be paid under Precondition Three was unreasonable. The sum claimed was simply too high.Whilst West India Quay was successful on the reasonableness of Precondition One and Precondition Two, this was not however enough to render the refusal of consent overall as reasonable. There were no apparent reasons to believe that West India Quay would have changed its stance on Precondition Three (which was an unreasonable condition to consent being given) even if ETAL had complied with Precondition One and Precondition Two.

Lessons learnt

This case highlights the difficulties faced by landlords in refusing consent to assign but it is not all bad news for landlords and there are practical lessons to be learned from it.

At least two preconditions to the grant of consent are likely to be considered as reasonable:

Bank references

These are an appropriate means of providing landlords with assurance that a proposed assignee is able to perform the lease covenants.

It therefore remains reasonable for landlords to request them even when, for example, the relevant lease conditions are silent on whther they can be required. This seems to be the case even where a substantial premium for the assignment is being paid by the proposed assignee and the usual landlord's remedies for breach of covenant are available in the lease if the assignee is not ultimately able to fulfil its obligations.

Surveyor inspections

These enable landlords to ascertain whether there have been any serious breaches of the repairing and alteration provisions in the lease (which could justify consent being refused).

It therefore remains reasonable for landlords (as part of their due diligence) to instruct a surveyor where the lease contains a right of inspection. The landlord can then recover the surveyor's fees from the tenant, assuming the lease terms provide for this and the amounts claimed are reasonable.

Landlords must, however, proceed with caution in relation to :

Professional and other administrative fees

If the amount demanded by a landlord for dealing with the application is unreasonably high this will probably make it unreasonable to refuse consent to an assignment unless such high fees are paid. A restriction on the tenant assigning without consent should not be used as a source of profit for the landlord.

Landlords should be able to justify any amounts claimed and provide a breakdown of the actual work undertaken.

Comment

In this case, it was found that the good reasons for refusal of consent were vitiated by the bad reasons relating to Precondition Three and that West India Quay was not therefore entitled to rely upon the good reasons. Ultimately this meant that their decision not to grant consent was held to be unreasonable overall. It is important that landlords remember that one unreasonable precondition can negate the reasonableness of the other preconditions for giving consent.

It will therefore be in the interests of landlords to consider very carefully the real reasons why they are giving a conditional consent and whether any preconditions imposed would be viewed favorably by a Court overall,should they be challenged. Landlords should also carefully consider how best to formally respond to tenants with their reasons for refusing consent or making such consent conditional, and not be too hasty - this could otherwise be costly.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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