Landlord and tenant — Landlord and Tenant Act 1988 — Landlord’s opposition to subletting — Whether landlord entitled to rely on reasons not put in writing within reasonable time of request — Whether reasons satisfactory — Whether test of profit greater than three times rent
By a lease
dated August 24 1989, the plaintiff tenant held a term of 24 years from June
1989 of business premises. The lease contained a covenant by the tenant: ‘Not
to assign, underlet … the demised premises … without the prior written consent
of the landlord. Such consent not to be unreasonably withheld or delayed’. In
November 1997 the tenant wrote to the defendant landlord asking for consent to
sublet the premises and enclosed the accounts of the proposed subtenant. In a
telephone conversation on November 20 1997, the landlord’s managing director
indicated to the tenant’s surveyor that consent would not be forthcoming.
Following a period of ‘without prejudice’ negotiations between the parties and
a further telephone conversation, consent continued to be withheld by the
landlord. The tenant commenced proceedings contending, inter alia, that
the effect of the Landlord and Tenant Act 1988, section 1(3), is that, in the
absence of a refusal with reasons in writing, it is not open to the landlord to
adduce reasons before the court to justify its refusal or withholding of
consent to the underletting. The tenant sought a declaration that they were
entitled to underlet.
Act 1988 interlinks with, and does not provide an entirely separate code from,
the contractual covenant as between the landlord and tenant. If a landlord does
not within a reasonable time give his reasons for refusing consent in writing,
then it is not open to him to rely on those reasons in court for justifying his
withholding of consent. The policy of the 1988 Act is that a landlord who has
not given his reasons for refusing consent within a reasonable time cannot
thereafter justify his refusal of consent by putting forward any reasons even
though he had them in his mind. The defendant landlord failed to reply to the
request to underlet within a reasonable time in writing. If the defendant can
rely on the reasons it did adduce before the court, it was not reasonable to
object to the accounts of the proposed assignee. There is no such test that a
proposed assignee should have profits after tax equal to three times the rent,
before it would be regarded
proposed use and diminution in the reversionary value were not made out.
The following
cases were referred to in this report.
British
Bakeries (Midlands) Ltd v Michael Testler &
Co Ltd [1986] 1 EGLR 64; (1986) 277 EG 1245
Bromley
Park Garden Estates Ltd v Moss [1982] 1 WLR
1019; [1982] 2 All ER 890; (1982) 44 P&CR 266; [1983] 1 EGLR 65; [1983] EGD
492; 266 EG 1189, CA
International
Drilling Fluids Ltd v Louisville Investments
(Uxbridge) Ltd [1986] Ch 513; [1986] 2 WLR 581; [1986] 1 All ER 321; (1985)
51 P&CR 187; [1986] 1 EGLR 39; (1986) 277 EG 62, CA
Kened Ltd v Connie Investments Ltd (1995) 70 P&CR 370; [1997] 1
EGLR 21; [1997] 04 EG 141, CA
Norwich
Union Life Insurance Society v Shopmoor Ltd
unreported April 10 1997
Pimms Ltd v Tallow Chandlers Co [1964] 2 QB 547; [1964] 2 WLR 1129;
[1964] 2 All ER 145, CA
Shanly v Ward (1913) 29 TLR 714
Woolworth
(FW) & Co Ltd v Lambert [1937] Ch 37
This was an
originating summons application by the plaintiff, Footwear Corporation Ltd,
seeking declarations against the defendant, Amplight Properties Ltd, that it
had unreasonably withheld its consent to the subletting of premises comprised
in a lease and that it was entitled to sublet the premises.
Anthony Radevsky
(instructed by Titmuss Sainer Dechert) appeared for the plaintiff; Stephen
Jones (instructed by Franks Charlesly & Co) represented the defendant.
Giving
judgment, NEUBERGER J said: This is an application by the plaintiff,
Footwear Corporation Ltd, for a declaration that the defendant, its landlord,
Amplight Properties Ltd, has unreasonably withheld its consent to the
subletting of the premises comprised in a lease, to a company called Creature
Co Ltd (CCL). The plaintiff also seeks a declaration that in those
circumstances the plaintiff is entitled to sublet the premises to CCL, and
damages, albeit that the claim for damages is, as I understand it, unlikely to
be proceeded with on any view.
Lease
The lease is
of 54 The Broadway, Wimbledon, and is dated August 4 1989. It is for a term of
24 years from June 24 1989 and was granted by the defendant’s predecessor in
title, Guardian Assurance plc, to the plaintiff, then known as British Shoe
Corporation Ltd. The rent was £32,500 pa subject to review in an upwards-only
direction every five years. On the first rent review the rent remained
unchanged.
The lease is a
full repairing and insuring lease. Alienation is dealt with in clause 3.17.
Clause 3.17.1 is a covenant by the tenant against assigning or underletting the
whole of the premises, unless the proposed assignee or underlessee enters into
direct covenants with the landlord to perform all the tenant’s covenants
contained in the lease, save in the case of an underletting, where it does not
extend to paying the rent. In the case of an assignee a surety has to be
provided if the landlord reasonably requires.
Clause 3.17.2
is in familiar form and is the centrally relevant covenant for the purposes of
these proceedings. It is a covenant:
Not to
assign, underlet or part or share possession [with] of the whole of the demised
premises nor underlet the upper part without the prior written consent of the
landlord. Such consent not to be unreasonably withheld or delayed.
Clause 3.20
sets out the permitted user:
Not to use
the demised premises or any part thereof … otherwise than as a retail shop.
There is a
proviso whereby, subject to obtaining necessary planning permission, the upper
part can be used for residential purposes or as offices. The upper part is,
and, as I understand it, at all times has been, used for residential purposes.
Relevant
facts
In July 1996
the plaintiff vacated the premises and sought to find an assignee or
underlessee, and, to that end, it instructed agents, Healey & Baker, who
proceeded to market the premises. The plaintiff’s case is that the premises
have been fairly intensively marketed. There is a dispute as to whether for a
time an estate agent’s board was exhibited at the premises. I do not think that
it is necessary for me to decide the point. I accept the plaintiff’s case that
the premises were seriously and effectively marketed in so far as that was
possible.
One possible
undertenant, MJL Holdings Ltd, was found, but was rejected by the defendant on
the grounds that its accounts were qualified. It appears from the evidence that
MJL would probably not have proceeded anyway. The premises, as is perhaps
inevitable for any property that has been left unoccupied for 18 months or so,
have a somewhat forlorn and, superficially at any rate, dilapidated appearance.
On November 17
1997 the plaintiff wrote asking the defendant for licence to sublet the
premises to CCL. CCL runs a pet shop business from premises across the road at
45 The Broadway. 98% of that business is ancillary, ie does not involve live
pets, and the remaining 2%, as I understand it, involves small pets such as
gerbils, rabbits and goldfish. There are no dogs or cats involved. The letter
enclosed the accounts of CCL.
On November 20
1997, Mr Cox, the managing director of the defendant talked on the telephone to
Mr Philip James Joyce [arics],
who is the disposal surveyor of Sears Group Properties Ltd, which is in the
same group as the plaintiff. Mr Cox indicated that consent would not be
forthcoming to the proposed subletting. The pet shop use, he said, was
inappropriate for the location and would diminish the value of the defendant’s
interest in the premises. He also said that the accounts of CCL were not strong
enough. Thereafter it appears that there were some ‘without prejudice’
negotiations between the plaintiff and the defendant which came to nothing on
January 8 1998.
Meanwhile,
under cover of letters dated November 24 and December 4, the plaintiff
submitted references for CCL to the defendant. These were an accountants’
reference, a trade reference, a landlord’s reference and a bank reference, the
last two being qualified in fairly familiar form.
After the
‘without prejudice’ negotiations came to an end, the plaintiff instructed
solicitors, Titmuss Sainer Dechert. They wrote to the defendant on January 13
1998 referring to the fact that licence had been sought and not given and then
saying:
You will be
aware of your duty not to unreasonably withhold or delay your consent in this
matter. We are instructed that unless we receive a substantive response from
you, or from your solicitors within 7 days from the date hereof, we are to
commence proceedings to obtain a declaration of unreasonably withholding of
landlord’s licence to underlet.
Thereafter, on
January 15, there was a telephone conversation between Mr Cox and Mr Joyce,
when Mr Cox, on behalf of the defendant, effectively confirmed that the
defendant was not prepared to grant consent and reiterated the two reasons to
which I have referred. Mr Cox also had direct conversations with Mr Kendall,
the husband of Mrs Kendall, who runs the business of CCL.
There are four
disputes of fact between the parties. The first is whether there was a clear
indication, albeit orally, of refusal of consent on November 20. In my
judgment, there was. Any refusal of consent can be said to be provisional, in
the sense that the person refusing consent may thereafter be provided with
information which causes him to change his mind. However, in my view, in the
conversation of November 20, in my judgment, Mr Cox gave Mr Joyce a refusal of
consent on the part of the defendant.
The second
dispute is whether or not there was agreement as to a moratorium on dealing
with the request during the periods of the ‘without prejudice’ negotiations. In
my judgment, there was no express agreement to that effect. If the defendant
was sufficiently concerned to have an express agreement to that effect, I think
he would also have been sufficiently concerned to ensure that it was expressed
in
matters were in abeyance while the discussions were taking place, but I do not
think that there was any agreement to that effect.
The third
dispute relates to the reiteration of the refusal on January 15. The real issue
is whether Mr Cox told Mr Joyce in terms of the reasons again for the
defendant’s refusal. Mr Cox said that he did. Mr Joyce was not sure that he
did, but understood the reasons to be the same. In my judgment, the effect of
the conversation, whatever was precisely said, was not merely that the refusal
was reiterated, but it was also clear to both parties that the reasons were as
expressed in the earlier telephone conversation of November 20.
The fourth
dispute is whether in the conversations between Mr Kendall and Mr Cox, Mr
Kendall said that if the net rent for the premises was more than £20,000 pa CCL
could not afford it. (I refer to ‘the net rent of £20,000 per annum’ as,
although the passing rent is £32,500 pa, the upper part was sublet and produced
an income of about £12,000 pa from a residential tenant.) In my judgment, Mr
Kendall did not say that. It is something which Mr Cox may have believed
because of Mr Kendall’s anxiety to ensure that the net rent was not much more
than £20,000 pa, but having heard from Mr Cox and Mr Kendall, I do not think
that Mr Kendall was the sort of person who would have said that. Nor, on the
evidence he gave, is it something I think that he was likely to have said.
Issues:
general
So far as the
issues of principle are concerned, there are two. The first is important in the
sense that it raises a general point as to the effect of the Landlord and
Tenant Act 1988 (the 1988 Act). That issue is whether it is open to a landlord
to put to the court reasons justifying its refusal of consent, notwithstanding
the fact that such reasons (and indeed such refusal) were not put into writing
within a reasonable time of the request for consent.
The second
issue relates to the facts of this particular case. It is whether, if it is
open to the defendant to justify its refusal of consent, ie whether, in all the
circumstances, the refusal of consent was reasonable.
I turn then to
the law before the 1988 Act. Covenants against alienation without consent can
be absolute, qualified (in the sense that alienation cannot take place without
the landlord’s consent) and doubly qualified (in the sense that they can be
subject to the landlord’s consent not to be unreasonably withheld). The
Landlord and Tenant Act 1927 section 19(1)(a) provides that in the case
of the second type, that is a covenant against alienation without consent, such
a covenant shall be deemed to be subject:
(a) to
a proviso to the effect that such licence or consent is not to be unreasonably
withheld …
Thus, the
second type of covenant is now effectively the same as the third type. The law
in relation to a qualified covenant is that if the tenant wishes to alienate,
it has first to ask the landlord; the landlord can only refuse on reasonable
grounds; if the landlord refuses consent on reasonable grounds the tenant
cannot alienate; if the landlord refuses on unreasonable grounds the tenant can
alienate; but if the landlord refuses on unreasonable grounds and the tenant
suffers as a result the tenant has no claim for damages. In this connection,
the effect of a qualified covenant against alienation is summarised in the
judgment of Romer LJ in Woolworth (FW) & Co Ltd v Lambert
[1937] Ch 37, at p53:
The insertion
in the covenant of the words ‘such licence not to be unreasonably withheld,’
does not amount to a positive covenant on the part of the landlords that they
will not unreasonably withhold their consent, so as to compel them to grant a
licence on reasonable terms… If the landlords unreasonably withhold their
consent, then there is no covenant on the part of the lessees at all relating
to the subject-matter, because the words, ‘such consent not to be unreasonably
withheld,’ import a condition into the covenant so that the covenant is
conditional upon the consent not being unreasonably withheld; the result being
that, when a licence or consent is unreasonably withheld, there is no covenant
on the part of the lessee at all, the condition not having been fulfilled.
One question
which had to be considered was, where a landlord refused consent to assign or
sublet, and thereafter the tenant applied to the court for a declaration that
the landlord’s consent has been unreasonably withheld, whether the landlord was
entitled to rely on reasons which he had not put forward to the tenant at the
time. The point was considered by Slade LJ in Bromley Park Garden Estates
Ltd v Moss [1982] 1 WLR 1019* where he said, at p1034A–D, in
relation to the facts of that case:
*Editor’s
note: Also reported at [1983] 1 EGLR 65
It is hardly
surprising that the tenant, when she was given one reason only why consent had
been withheld and that reason was demonstrably a bad one, decided to proceed
with the assignment.
I find it
rather more surprising that, when the landlords came subsequently to question
the validity of the assignment in such circumstances, they should be free to
rely on reasons for their refusal which had not been mentioned to the tenant,
or even hinted at, either before or in the letter … [of refusal in that case]
which contained the outright refusal. In the absence of authority, I would have
thought there was much to be said for the view that a landlord who, by stating
to the tenant one reason only for refusing his consent to an assignment — that
reason being a demonstrably bad one — provokes a tenant into assigning without
consent, should not thereafter be allowed to rely on unstated reasons for the
purpose of attacking the validity of the assignment. However, authorities …
[and he cites two] appear to establish that the court, in considering questions
of reasonableness or otherwise in this context, is not confined to the reasons
expressly put forward by the landlord prior to the date of refusal.
The
legislature has now enacted the 1988 Act. As section 1(1) makes clear, it
applies to a case where there is a qualified covenant against, among other
things, assigning and underletting. By section 1(2) references to proposed
transactions are, inter alia, to assignment and underletting. Section
1(3) reads as follows:
Where there
is served on the person who may consent to a proposed transaction a written
application by the tenant for consent to the transaction, he owes a duty to the
tenant within a reasonable time —
(a) to give consent, except in a case where it
is reasonable not to give consent,
(b) to serve on the tenant written notice of his
decision whether or not to give consent specifying in addition —
(i) if the consent is given subject to
conditions, the conditions,
(ii) if the consent is withheld, the
reasons for withholding it.
Section 1(6)
reads:
It is for the
person who owed any duty under subsection (3) above —
(a) if he gave consent and the question arises
whether he gave it within a reasonable time, to show that he did,
(b) if he gave consent subject to any condition
and the question arises whether the condition was a reasonable condition, to
show that it was,
(c) if he did not give consent and the question
arises whether it was reasonable for him not to do so, to show that it was
reasonable,
and, if the
question arises whether he served notice under that subsection within a
reasonable time, to show that he did.
Section 4
reads:
A claim that
a person has broken any duty under this Act may be made the subject of civil
proceedings in like manner as any other claim in tort for breach of statutory
duty.
First
issue: the effect of the 1988 Act
The
plaintiff’s argument in this case on the first point is that the effect of
section 1(3) of the 1988 Act is that, in the absence of a refusal with reasons
in writing, as in this case, it is not open to the defendant to seek to adduce
reasons to justify its refusal or withholding of consent to the proposed
subletting. This question involves consideration of the interrelationship
between a contractual provision
1988 Act.
The defendant
puts its case in two ways. The first is there is no interrelationship between
the 1988 Act and the covenant against alienation. The second is that, if there
is such an interrelationship, it does not go so far as to preclude a landlord,
who has refused consent giving reasons orally, from justifying his refusal in
reliance of those reasons at a hearing such as this.
The first
argument has its intellectual and logical attractions, perhaps most clearly in
the light of section 1(3) and section 4 of the 1988 Act. That Act imposes a
statutory duty, breach of which gives rise to a claim for damages in tort. That
duty and any breach of it could be said to exist quite separately from the
relationship created by an alienation covenant in a lease. The statutory duty
is conceptually different from the established duty under the covenant and they
are perfectly capable of existing side by side. It may also be said that if the
legislature had intended to vary ‘the contractual relationship’ under the
contract between the parties it could have easily done so, as indeed it did
when enacting section 19(1) of the 1927 Act.
There are,
however, a number of arguments against this. First, it is obviously very
inconvenient to have two entirely separate codes, each of which coexists with
the other, in relation to a covenant against alienation. It may be said that
the law was complicated and potentially uncertain enough before the 1988 Act,
so that it would be particularly unrealistic to attribute to the legislature an
intention that the provisions of the 1988 Act should create a new system wholly
independently of the established contractual system.
Second, it is
generally accepted, both in the leading books and in cases so far reported,
that the 1988 Act has varied the law relating to the ‘contractual provisions’,
at least to the extent of the burden of proof. As long ago as 1913 it was
established that the onus of proving consent has been unreasonably withheld was
on the tenant: see per Balcombe LJ in International Drilling Fluids
Ltd v Louisville Investments (Uxbridge) Ltd [1986] Ch 513*, at p520,
citing Shanly v Ward (1913) 29 TLR 714 and Pimms Ltd v Tallow
Chandlers Co [1964] 2 QB 547, at p564. As is perhaps most clearly stated in
the current looseleaf edition of Woodfall on Landlord and Tenant, at
para 11-131:
*Editor’s
note: Also reported at [1986] 1 EGLR 39
The Act
reverses the burden of proof established at common law.
The text then
goes on to expand on that principle and to cite cases where that assumption has
been made. If the first argument of the defendant is correct, namely that there
is an entirely separate code under the 1988 Act and under the covenant, then
that statement would not be right, because the provision which is said to
reverse the common law position, namely section 1(6) of the 1988 Act, would
only be concerned with the statutory duty. It plainly would be offensive to
commonsense if what has been generally assumed were wrong, because the landlord
would have the burden of proof in so far as the tenant was proceeding for breach
of statutory duty, but the tenant would have the burden of proof in so far as
he was seeking to establish that consent had been unreasonably withheld under
the covenant. Given that most, if not all, landlord and tenant proceedings in
this field would almost inevitably involve claims both under the 1988 Act and
under the covenant, it seems to me almost ridiculous if the generally presumed
and unchallenged assumption as summarised in that short passage in Woodfall
were incorrect.
Third,
although the interrelationship of the covenant and the 1988 Act has been left
open in the Court of Appeal (see per Millett LJ in Kened Ltd v Connie
Investments Ltd (1995) 70 P&CR 370*, at p374) there is an unreported
decision of Sir Richard Scott V-C in Norwich Union Life Insurance Society
v Shopmoor Ltd, unreported April 10 1997, which does take the point
further. Having referred to the passage I have just quoted from Slade LJ in Bromley
Park, he said:
*Editor’s
note: Also reported at [1997] 1 EGLR 21
The law,
however, has moved on from the state in which it stood in Bromley Park …
The significant change since then is that the Landlord and Tenant Act 1988 has
been enacted. The Act was intended to remedy the state of affairs in which a
landlord, by his dilatory failure to respond to an application for consent to
an assignment or to subletting, could cause substantial financial damage to the
tenant without the tenant having any remedy for that damage.
A little later
he said:
The Act
creates a statutory duty requiring landlords to attend promptly to applications
for consent to assignments, or underletting … where there is a covenant not to
do those things without consent.
He then set
out section 1(3) and said as follows:
The Act
having imposed the statutory duty, no doubt an action for damages for breach of
duty would lie in any case in which the breach could be established and in
which it could be shown that the breach had led to damage. But the Act does
not, expressly at least, make clear what the position is regarding the tenant’s
ability simply to assign the lease or grant the underlease or part with the
possession of the demised property in a case where the landlord has failed for
an unreasonably delayed period to deal with and consent to the application.
He then
referred to counsel for the landlord’s argument that the law after the 1988 Act
remained as summarised in the passage he and I quoted from Slade LJ. He then
said:
In my
judgment, however, the 1988 Act has altered the law in this respect. It has
done so by necessary implication, although not explicitly. The landlord has a
statutory duty to the tenant within a reasonable time to give consent, except
in a case where it is reasonable not to give consent. In judging whether it is
reasonable not to give consent, the position must, in my view, be tested by
reference to the state of affairs at the expiry of the reasonable time. If, at
that time, the landlord has raised no point and there is no point outstanding
which could constitute a reasonable ground for refusal of consent, then it
seems to me that the landlord’s duty is positively, as expressed by s 1(3), to
give consent.
It is, at
least in principle, open to me to differ from the Vice-Chancellor, but I am
confident that I should not do so. Indeed it is fair to Mr Stephen Jones to say
that he did not invite me to do so with any great enthusiasm. I should only
depart from the view expressed by another first instance judge in circumstances
where I am satisfied that he was wrong. I am far from being so satisfied. Quite
apart from this, I would be reluctant to introduce further confusion into an
area involving a statute which, as Woodfall suggests (at para 11-129),
is expressed in convoluted language and is concerned with practical matters,
namely alienation of leases. It seems to me that it would be doing a great
disservice to landlords and tenants and their advisers if there were not
clarity and consistency in first instance decisions on this topic.
Furthermore,
as Mr Anthony Radevsky, on behalf of the plaintiff, says, it is easy to
understand why parliament decided to put the 1988 Act in terms of statutory
duty and not in terms of contract. That is again helpfully explained in Woodfall,
at para 11-130:
It is to be
noted that the Act operates, not by imposing an implied term in the lease, but
by placing a statutory duty on the landlord. This means that the original
landlord will not be under any liability to the tenant once he has parted with
the reversion. Moreover, the duty is owed only to the tenant: no duty is owed
to the potential assignee or sub-tenant.
The important
point is that, unlike in the 1927 Act, parliament was creating a new potential
liability, which could in many cases be substantial, on a landlord; to imply
that duty into the covenant would have meant that the original landlord would
be liable.
In those
circumstances I consider it is right to proceed on the basis that the 1988 Act
does, as it were, interlink with, and does not provide an entirely separate
code from, the contractual covenant as between landlord and tenant.
Proceeding on
this basis, it seems to me that, as a matter of logic, the plaintiff’s argument
is correct in the present case. In other words, if the landlord does not within
a reasonable time give his reasons for refusing consent in writing, then it is
not open to him to rely on those reasons in court for justifying his
withholding of consent.
If the
Vice-Chancellor is correct, then a landlord who has given reasons in writing
for refusing his consent cannot, when subsequently seeking to justify his
refusal of consent, rely on reasons which he has not given. If that is right,
then in a case where a landlord gives no reasons for refusing consent, it would
seem very odd if he could subsequently rely on reasons which he had in his mind
but had not specified. Therefore, it seems to me to follow that the policy of
the 1988 Act is that a landlord who has not given his reasons for refusing
consent within a reasonable time cannot thereafter justify his refusal of
consent by putting forward any reasons, even though he had them in his mind.
Given that the
Act specifically requires consent or refusal of consent in writing, I find it
hard to see how one can resist the conclusion that, if I am right so far,
reasons given orally are sufficient. To put it more succinctly, the logic of
the Vice-Chancellor’s observations and decision in Norwich Union is
that, construing the covenant together with the 1988 Act, it is not now open to
a landlord to put forward reasons justifying the withholding of consent if
those are reasons which were not put forward in accordance with section
1(3)(b), that is they were not reasons which were put forward in writing within
a reasonable time.
Mr Jones says,
with some force, in relation to the facts of this case, that that produces an
unfair result. The defendant made it clear what his reasons were and the
plaintiff was in no doubt about them. I accept that, in this case, my
conclusion might be perceived as wreaking something of an injustice on the
defendant. However, as the Vice-Chancellor emphasised, the purpose of the 1988
Act was, among other things, to introduce a degree of certainty, ie to enable
parties to know where they stood. What was said in oral conversations can be
the subject of fundamental and genuine dispute. Even in this case, where there
is a substantial measure of agreement between the parties so far as what was
said, there are small disputes which could have been significant, namely
whether consent was clearly and genuinely refused and whether reasons were
given. The advantage of the conclusion of principle I have reached is that,
once one requires any refusal with reasons to be in writing, the court can be
in no real doubt as to whether and when refusal was given and the reasons on
which the refusal was based. Landlords on the whole should be aware of their
obligations under the 1988 Act. I appreciate that there are many small,
individual landlords. However, parliament has taken the view that if the landlord
wishes to object to an assignment for underletting, he must make his position
clear within a reasonable time, and, in my judgment, he must make it clear in
writing.
Finally, on
this point I ought to make it clear that I consider that the defendant failed
to reply to the request to sublet within a reasonable time in writing.
Initially that was conceded by Mr Jones. On reflection he argued that it may be
that insufficient time was given. Consent was sought in mid-November. Although
there were then negotiations for some six or seven weeks there was no good
reason why the defendant could not have replied in writing by January 23 (when
these proceedings were issued), more than nine weeks after consent was first
sought. The defendant had had ample time within which to refuse its consent
twice orally. There is no question of the defendant being in financial
difficulties so that it was not being able to seek advice. Bearing in mind the
time that passed, there is a heavy onus on the defendant if it wishes to say that
it did not have a reasonable time to refuse consent in writing with reasons. In
my judgment, with all due respect to Mr Jones’ argument, the defendant falls a
long way short of discharging that onus.
In those
circumstances I would hold that the plaintiff succeeds on the first point.
Because the point is a difficult one and may go further, it is right, however,
that I go on to consider the second issue, namely if the defendant can rely on
the reasons it seeks to rely, whether consent was or was not unreasonably
withheld.
Second
issue: was the defendant reasonable?
The purpose of
giving the landlord the right to refuse consent on reasonable grounds was
considered by Balcombe LJ in the International Drilling case at pp519H
to 521E, where he set out seven principles of which one, the third, I have
already referred to and has been reversed by statute. I do not propose to add
to the length of this judgment by setting them out.
In this case,
as I have said, the defendant has put forward two reasons for refusing consent.
The first is the covenant strength of CCL as shown by the accounts. So far as
they are concerned, as I understand it, CCL has been in business for six years
in the close vicinity of the subject premises and for four years almost
directly opposite. The reason it wishes to take a subletting of the subject
premises is that it is due to vacate the premises opposite, at 45 The Broadway,
on June 24 due to redevelopment, and it wishes to remain in the vicinity. The rent
payable for 45 The Broadway is £14,000 pa. Therefore, the rent it will have to
pay for the subject premises, particularly if one ignores the fact that it can
reasonably anticipate receiving a reasonable income from the upper part, will
be more than double the rent payable for its present premises. If one can take
into account the rent receivable from the upper part at £12,000 pa, its net
liability for rent will be around 50% more than the rent it currently pays. The
accounts produced to the defendant show that in the year ending April 30 1996
the turnover, gross profit and profits after tax of CCL were £261,000, £113,000
and £24,000 respectively. The comparative figures for the previous year being
£204,000, £89,000 and £14,000.
In my
judgment, I do not consider that the defendant’s objection to these accounts
was reasonable. As a matter of principle, the plaintiff was seeking not to
assign the lease to CCL, but to grant an underlease to CCL. Furthermore, CCL
was not seeking to expand its business: it was merely seeking to transfer its
business across the road. The accounts suggest that CCL, although in a small
way of business, is a successful and well run business; nothing I have heard in
the evidence persuades me to think there was reason to suspect otherwise. While
it is not something that can be taken into account when considering whether the
defendant was reasonable, the evidence of Mr Kendall reinforced the view that I
think that any reasonable landlord would have taken on what he saw of the
accounts and, indeed, the references, namely that this was a reasonable
covenant for a subtenant of the premises. It may be that the defendant would be
on stronger grounds if this had been a case of a proposed assignment of the
lease, but the plaintiff is proposing CCL as an undertenant. CCL would,
therefore, not be in any relationship, whether in privity of contract or
privity of estate, with the defendant. Of course CCL will have to covenant
directly with the defendant to observe the terms of the lease. However, that
merely gives the defendant the benefit of an extra covenant additional to that
of the plaintiff, almost, as it were, a guarantor. None the less, the plaintiff
will continue to be the person, vis-à-vis the defendant, in possession
of the premises and the person liable to pay the rent, and will remain the
primary person to whom the defendant can look.
In connection
with the financial strength of CCL, the defendant relied on the effect which
the cost of fitting out and repairing the premises would have on CCL’s
resources. It is true that CCL will have to incur expenditure in fitting out
the premises and carrying out repairs, but I am not persuaded that that is
something which was of concern to the defendant when the defendant refused
consent. Apart from anything else, no schedule of disrepair had even been
prepared, as I understand it, when the refusal was first given. In any event,
while this was not something the defendant knew at the time, having heard from
Mr Kendall, it seems quite clear that, if necessary, the money for fitting out
would come out of the individual pocket of Mr or Mrs Kendall, who are well off.
If that point had been raised by the defendant, as it should have been if it
wished to rely on it, I have no doubt it would have been answered satisfactorily
in that way.
It is true, as
the defendant points out, that the plaintiff has, as it transpires, no assets,
and that in those circumstances there is a real risk that during the remainder
of the lease, some 16 years, the lease may be liable to forfeiture or
disclaimer if the plaintiff does not pay the rent or goes into liquidation. In
those circumstances CCL, as undertenant, would be able to seek relief in
forfeiture or to have the lease vested in
it were, to take on CCL as a direct tenant.
To my mind,
there are two answers to that. The first is that though it is true that the
plaintiff has no assets, it is a member of a publicly quoted group and there is
no history of any problem, as the defendant’s evidence very fairly accepts, of
recovering the rent from the plaintiff. There is no reason to think on the
evidence I have seen that that situation will change, although I appreciate
that in the context of a 16-year lease it is conceivable that it could do so.
Second, if the defendant forfeits the lease for nonpayment of rent or the lease
is disclaimed by the plaintiff’s liquidator, and CCL seeks relief from
forfeiture or a vesting order, as the case may be, it will be open to the
defendant to oppose. CCL would not have an automatic right either to relief
from forfeiture or to seek a vesting order. It would be a matter for the court.
It therefore
seems to me that the financial standing of CCL is very much of a contingent
concern of the defendant. In my judgment, it was not a concern which in all the
circumstances was reasonable, bearing in mind that the plaintiff seems a well
run, if small, company, making regular profits and running a business, which,
subject to what I have to say about the other objection, appears to be
acceptable and sensible.
Mention was
made of the existence of a rule of thumb, that a proposed tenant should have
profits after tax equal to three times the rent, before it would be regarded as
a satisfactory prospective tenant. The only reference to that, apart from Mr
Cox’s view on this, given for the first time when in the witness box (not
supported by what he said when he was asked for consent and not supported by
what he said in his seven-page affidavit), is to be found in British
Bakeries (Midlands) Ltd v Michael Testler & Co Ltd [1986] 1 EGLR
64. I am not satisfied that there is such a test. In that case it appears that
there was no cross-examination and the evidence was on affidavit. Even if there
is such a test it cannot, as Mr Jones very fairly accepts, be a test which is
to be applied blindly. British Bakeries was not a case of underletting
or the business being moved: it was a case of an assignment and of the business
expanding; very different considerations applied. In any event, if the only
reason for objecting to the assignment in that case had been that the proposed
assignee did not satisfy the ‘three times rent rule’ — if I can put it that way
— then I am by no means satisfied that Peter Gibson J would have decided the
case in the way that he did.
I turn to the
second ground of objection, ie the pet shop use being inappropriate for the
subject premises. That was justified by Mr Cox for three reasons. The first,
which I do not think was raised when he refused consent, was that it would make
the upper part more difficult to let. If that had been raised, I think the only
basis it could have been justified was that there would be animals in the shop
which might make a noise. It is clear from the evidence that, if that concern
had been raised, CCL would have been able to answer it without any difficulty,
because of the very limited nature of the animals which were kept in the
premises. No doubt if a condition had been sought by the defendant, such as no noisy
animals to be kept on the premises, CCL may well have agreed. Quite apart from
that, as Mr Radevsky points out, the lease contains a covenant against nuisance
and no doubt if nuisance was caused that would give the defendant a cause of
action under the lease.
The second
reason was that a pet shop use was inappropriate for these premises, and, the
third, that a pet shop use would damage the reversion. In my judgment, neither
of those points is made out. While I accept that many pet shops may be in what
Mr Cox called tertiary locations and the premises are, depending on whose view
one prefers, a ‘secondary’ or a ‘good secondary’ location, that of itself does
not persuade me that consent could be reasonably refused. While it is clearly
open to a landlord, in light of what was said by Balcombe LJ in the International
Drilling case, to refuse consent on the basis of an objectionable use, even
though that use is permitted by the lease, it would none the less be wrong to
ignore the fact that the lease does not seek to cut down the various retail
businesses which could be carried on in the premises. Furthermore, it seems to
me that the mere fact that a pet shop use may be regarded as unusual or even
inappropriate for this particular location, is not of itself a reason for
objection. Quite apart from that, it appears to me that the point is not
successfully made out on the evidence I have heard. The very fact that a pet
shop has been carried on by CCL in the close location of the subject premises
for the past six years casts serious doubt on the strength of this point. In my
judgment, it is simply not made out on the facts. If it is right it is none the
less not a reason for refusing consent on its own.
So far as
diminution in the value of the reversion is concerned, that is a point which
should, in my judgment, always be approached with a certain degree of caution
by the court, as is clear from the International Drilling case. No
figures or valuations were put forward; no independent expert evidence was
given. The only person who raised it was Mr Robert Neil Cox [arics]. While he is a chartered
surveyor, he has had no experience of acquiring or owning property which
included a pet shop. Even though I accept that the defendant is interested in
selling these premises, it does seem to me that if a landlord wishes to oppose
a proposed underletting or assignment on the grounds that the resultant use
would diminish the value of his reversion, it would require a fairly
exceptional case before the court accepted that ground without either valuation
figures or independent evidence, be it evidence of other transactions or an
independent expert.
Quite apart
from this, even if I am wrong in saying that I am unsatisfied that these two
bases are not, or either of them is not, a good reason for refusing consent, I
do consider that this is a case where, in so far as there may be any prejudice
to the defendant, it would only be very slight and would be well outweighed by
the prejudice to the plaintiff.
The premises
have been on the market for 18 months. There has, in my judgment, been a
genuine and sustained attempt to assign or sublet them. The rent, although not
enormous, particularly to the Sears Group, is significant, particularly when
one bears in mind other outgoings such as repairs, insurance and rates. The
plaintiff has come up with a proposed subtenant who has traded on a small, but
successful, basis in the immediate area. The defendant has come up with
arguments, which, in my judgment, are not good, but, even if they are good, they
have so little merit in them that they are outweighed by the points raised by
the plaintiff.
Conclusion
In the event, the plaintiff
succeeds and is, subject to the submissions by counsel, entitled to the relief
sought in the originating summons.
