When Can A Landlord Stop A Tenant From Assigning Its Lease? Two Scottish Cases Provide Clarity – And Important Lessons

When can a landlord stop a tenant from assigning its lease? Two Scottish cases provide clarity – and important lessons

When commercial tenants want to sub-let their premises, or to pass their lease on to someone else ('assign' it, to use the legal term), they usually have to get consent from their landlord. Where this is the case, the lease generally prevents landlords from withholding consent "unreasonably" but where should that line be drawn? And how much information about the proposed new tenant can a landlord demand?

Two significant Scottish court cases considered these questions:Homebase Limited v Grantchester Developments (Falkirk) Limited [2015]andRileys Sports Bars (2014) Ltd v CGW Snooker LLP [2022]. Together, they confirm that landlords can demand proper financial information, and may refuse consent if a tenant withholds it; but they also reaffirm that any refusal must ultimately be reasonable. For both landlords and tenants, the conclusion is clear: when a lease is being drafted, transparent communication and a robust financial assessment are critical.

Homebase v Grantchester

Homebase held a 25-year lease of retail premises in Falkirk. Grantchester Developments was the landlord. In 2013, Homebase sought to assign the lease to CDS (Superstores International) Ltd. This required the landlord's consent.

The landlord asked for details of any financial arrangement between Homebase and CDS–including whether a "reverse premium" was involved (that is, a payment from the current tenant to the assignee). Homebase refused, arguing that only the assignee's financial standing was relevant.

In the Court of Session, Lord Tyre held that the landlord's request was reasonable. Even though CDS had sufficient financial standing, the potential impact of a reverse premium on the value of the landlord's interest was relevant. By refusing to provide the information, Homebase gave the landlord valid grounds to withhold consent.

The decision confirmed a two-stage test:

1. Does the assignee meet the lease's financial test? If not, consent may be refused absolutely.
2. If the answer to question 1 is "yes", consent can still be refused, but only if the refusal is reasonable and is connected to the landlord-tenant relationship.

Lord Tyre summarised this as follows: "The first stage involves a determination of whether the proposed assignee meets the financial requirements specified by the lease... [I]f the proposed assignee failed to meet that test, the landlord had an absolute right to withhold consent... Only if the first test was met did the second stage, asking whether it was reasonable to withhold consent, come into play."

Rileys Sports Bars v CGW Snooker

Rileys Sports Bars leased premises in Aberdeen from CGW Snooker. In 2020, it sought to assign the lease to WPC7 Ltd, a company related to Rileys. WPC7's parent company, WPCL, offered a guarantee for the lease obligations.

The landlord refused consent, citing concerns about WPC7's financial standing and the adequacy of information regarding the WPCL guarantee. Rileys argued that this refusal was unreasonable.

In the Court of Session, Lord Braid upheld the landlord's refusal. Importantly, he relied directly onHomebase v Grantchesteras authority: The landlord had properly assessed the assignee's financial standing, and had not misunderstood the facts.

On the reasonableness of withholding consent, Lord Braid stated: "The landlord's decision was neither arbitrary nor based on collateral considerations, but on the financial covenant offered. In those circumstances, the refusal was reasonable."

The decision also clarified that landlords are entitled to assess both the assignee and any guarantor, and that the refusal will not be unreasonable if financial standing is insufficient or information is incomplete. Lord Braid said: "Where the proposed assignee has insufficient financial standing, or where relevant information is withheld, refusal of consent will not be unreasonable."

What does this mean for landlords and tenants?

Together, the cases highlight that while tenants benefit from the protection against landlords arbitrarily withholding consent, that protection has limits. If tenants fail to disclose relevant financial arrangements, or if the assignee's financial standing is doubtful, a landlord may reasonably refuse consent.

Tenants should be prepared to provide full financial details about a proposed assignee or sub-tenant.Refusing to share such information could result in consent being lawfully withheld.

Landlords should ensure that all new leases clearly set out the financial tests and conditions for consent if the tenant wants to assign the lease. If this situation does arise, and they refuse consent, they should ensure that their reasons for this decision all relate to the lease and the tenant's obligations. They should also document those reasons clearly.

And both parties should ensure that they agree clear terms at the drafting stage, particularly around assignation and sub-letting.

Greater transparency and certainty at the outset reduces the chance of disputes further down the line.

This article was co-authored by Trainee Mia Ibrahim.

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.