Landlord and tenant — Proposed assignment of lease — Unreasonable delay in communicating decision on consent and unreasonable refusal of consent — Provisions of Landlord and Tenant Act 1988 — Reversal of burden of proof by section 1(6) of Act — Declarations granted in favour of assignor bank
The following
case is referred to in this report.
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; 277 EG 62, CA
This was an
originating summons by the plaintiff lessees, Midland Bank plc, seeking
declarations to the effect that the defendant lessors, Chart Enterprises Inc,
had unreasonably delayed a decision as to consent to the assignment of a lease
and had unreasonably refused consent to the assignment. The lease in question,
which was for a term of 5 years from September 29 1986, related to premises at
278-280 Old Kent Road, London SE1, consisting of a ground floor and three other
floors
Miss Caroline
Hutton (instructed by Nabarro Nathanson) appeared on behalf of the plaintiffs;
Timothy Fancourt (instructed by Franks Charlesly) represented the defendants.
Giving
judgment, POPPLEWELL J said: This is an originating summons by the
plaintiffs, the Midland Bank plc, for a declaration that on the true
construction of a lease and in the events which have happened the defendants
have unreasonably delayed communicating their decision whether or not to grant
or refuse consent to the assignment of a lease to the partners in the firm of
Messrs Lomax Lloyd-Jones; second, a declaration that on the true construction
of the lease and in the events which have happened the defendants have
unreasonably refused their consent to the aforesaid assignment. If I grant
those declarations, then the third declaration which is sought is that,
notwithstanding the delay, the plaintiffs want a declaration that they may
without licence assign the lease; then there are claims for consequential
relief, namely damages and other relief, which it is agreed would need to be
adjourned in the event that I granted the declarations under 1 and 2.
The plaintiffs
entered into a lease dated May 24 1988 with the then landlords, Metropolitan
& City Properties Ltd. The premises were 278-280 Old Kent Road, London SE1.
The plaintiffs were to have the premises for a term of five years from
September 29 1986. The property consists of ground and three other floors. The
second and third floors constitute a flat. The first floor constitutes office
accommodation, which was the subject of a lease to the solicitors Messrs Lomax
Lloyd-Jones, who had been there since 1983. The ground floor was bank premises.
The second and third floors were occupied by Mr Spencer, Miss Glyn and a Mr
Evans. The lease was granted to the plaintiffs subject to those pre-existing
lettings.
The defendants
bought the reversion in an auction on June 9 1988. The plaintiffs applied to
the defendants for consent to the assignment on February 15 1989.
The law
relating to the granting of consent is that contained in the Landlord and
Tenant Act 1988. Section 1 reads:
This section
applies in any case where —
(a) a tenancy includes a covenant on the part of
the tenant not to enter into one or more of the following transactions, that is
—
(i) assigning . . . the premises comprised in the
tenancy or any part of the premises without the consent of the landlord or some
other person, but
(b) the covenant is subject to the qualification
that the consent is not to be unreasonably withheld.
It is not
necessary to refer to the terms of the lease, save to say that this lease so
provides.
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.
(4) Giving consent subject to any condition that
is not a reasonable condition does not satisfy the duty under subsection (3)(a)
above.
(5) For the purposes of this Act it is reasonable
for a person not to give consent to a proposed transaction only in a case
where, if he withheld consent and the tenant completed the transaction, the
tenant would be in breach of a covenant.
(6) 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 is 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.
And by section
4:
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.
It is accepted
that subsection (6) of section 1 reverses the burden of proof that previously
existed. There is some contest at the Bar about whether and to what extent it
reversed the standard of proof. I am happy for the purpose of this case to
accept the submission that what the landlords have to prove is that set out by
Balcombe LJ in the well-known case of International Drilling Fluids Ltd
v Louisville Investments (Uxbridge) Ltd [1986] 1 Ch 513*, where he says,
at p 520:
It is not
necessary for the landlord to prove that the conclusions which led him to
refuse consent were justified if they were conclusions which might be reached
by a reasonable man in the circumstances.
That case sets
out a number of matters — propositions of law — which a court should take into
account as to whether on the particular facts of the particular case the
landlords’ consent to an assignment is being unreasonably withheld. I have
carefully considered those matters in the context of this case and I need not
repeat them.
*Editor’s
note: Also reported at [1986] 1 EGLR 39.
The general
proposition put forward by Mr Fancourt is that, where a landlord has a
suspicion that there has been or may be a breach of covenant — not to sublet in
the instant case without the consent of the landlord — he is entitled to take
time and give consideration to that question before giving his consent; he is
not to be criticised as being in any way unreasonable if he pursues those
inquiries, and that until he is satisfied about the true position he cannot be
said to be unreasonable. He does not have positively to justify that there has
been a breach. If he has reasonable grounds for suspicion, he is entitled
properly to make inquiries. With that proposition, I do not think anybody could
quarrel. The question in this case is: has he shown that his withholding of
consent has been reasonable in all the circumstances?
It is
necessary to set out quite shortly the correspondence, to show how the matter
proceeded, and to make some reference to the affidavits. The matter started by
the plaintiffs writing the letter of February 15 1989 to the defendants’
solicitors, telling them that they now wished to assign their interest in the
lease to the firm of Lomax Lloyd-Jones and saying: ‘I would appreciate it if
you would accept this letter as an application for consent to assign.’ They enclosed three references. That was
replied to with, in this case, very great speed by the defendants’ solicitors,
saying they had passed the letter and enclosures to their clients and asking
for an undertaking from the plaintiffs for the costs and disbursements in
connection with the proposed licence to assign. That was replied to on February
20 by the plaintiffs, agreeing to be responsible for the defendants’ costs and
disbursements. On February 27 the plaintiffs wrote to the defendants’
solicitors a chasing letter. On March 1 the defendants’ solicitors wrote back,
saying that they were waiting for their clients’ confirmation. On March 30 the
plaintiffs wrote another chasing letter. On April 5 the plaintiffs’ property
agents wrote to the defendants’ property agents, asking for their assistance in
dealing with the matter, because they were ‘experiencing some difficulties in
obtaining consent from your clients to assign the lease’. That letter pointed
out that what was required was vacant possession of the ground floor only; the
first floor was subject to an existing lease by the solicitors; the second and
third floors were subject to an existing residential tenancy. ‘We understand
the tenant has become a fully Rent Act protected tenant.’ What happened then was that there was
apparently a telephone conversation on April 10, in which it appeared that
there had been discussion between the defendants’ solicitors and the
plaintiffs. The next thing that seems to have happened is that on May 2 there
is a note of a conversation, in which it is recorded that the plaintiffs’
solicitors had spoken with the defendants’ solicitors. Nothing, however,
occurred by correspondence until we get to May 5. The letter of May 5 is from
the defendants’ solicitors to the plaintiffs’ solicitors:
We refer to
our telephone conversation a couple of weeks ago. You will recall that you
stated that there were three items on which you believed that our client was
withholding consent to the assignment. This concerned (a) the state of the
premises (b) the removal of the safe (c) confirmation that the residential
tenants will be removed. Our clients are preparing a schedule of dilapidations
and are also obtaining an estimate in respect of the removal of the safe. If
however you can assure us that all the necessary works to the premises will be
done within a reasonable time (with strict liability on your client to comply)
and if you can confirm that your client will forthwith remove the safe and make
good any damage caused thereby, then we will be able to take the matter a stage
further. We also require your written confirmation that the residential tenants
have now vacated the premises.
That letter is
said by the defendants to be a communication communicating the decision to the
plaintiffs on their application. I confess that, on reading it, I thought it
could well be construed as a holding letter. It could be construed as a refusal
until certain things are resolved. It could be construed as a consent subject
to some matters being resolved. It could be construed as a holding letter. I am
invited, however, by the defendants to construe it as a consent subject to
certain conditions, and that is the submission which is made on the plaintiffs’
behalf. Whatever my own views I therefore approach it in that way.
The first
question that has to be resolved is: given that the application was made on
February 15 and that no communication was made in writing, as is required by
the Act, about the decision until May 5, has there been unreasonable delay? To that, there can be only one answer. There
is nothing deposed to by the defendants which starts to explain the failure to
give a decision more promptly. The matters which are raised in this letter are,
first, the state of the premises. There is some very marginal evidence from Mr
Ezekiel [director of the defendants] in his affidavit that there may be some
work that needed to be done, but it is so marginal as to be non-existent. The
letter suggests that a schedule of dilapidations is to be prepared. No such
schedule was prepared. The condition that any work would be done was readily
given by the solicitors. The removal of the safe was, it is now conceded, a
matter which could never have been required of the plaintiffs. The confirmation
that the residential tenants will be removed was, in my judgment, a condition
which was totally unreasonable.
The
defendants’ case generally is that they were suspicious that there had been a
breach of covenant not to sublet without the consent of the landlords and
therefore they were entitled to take a reasonable time to make inquiry. Mr
Ezekiel’s affidavit, sworn to on November 8, upon which Mr Fancourt has founded
his submissions, is this. The lease between the plaintiffs and Metropolitan
& City Properties referred in clause 9, in relation to the user, to this
phrase: ‘that the subsistence of the existing non-shorthold tenancies’ — I
emphasise the plural — ‘on the second and third floors held by Jeremy Spencer
Catherine Glyn and John Evans shall not constitute a breach of that covenant’;
and clause 20(a) in the clause referring to the right of assignment says this:
‘. . . provided that the subsistence of the existing non-shorthold tenancies’ —
I emphasise the plural — ‘on the second and third floors held by Jeremy Spencer
Catherine Glyn and John Evans shall not constitute a breach of that covenant’.
The fact that there were said to be tenancies in the original lease and that
the plaintiffs were contending that there was only one tenancy led, so it is
said, Mr Ezekiel to the reasonable suspicion that there had been a letting
contrary to the terms of the lease and therefore there was a breach of
covenant, and that would entitle the defendants not to give
of forfeiture.
That argument
was fully developed by Mr Fancourt and it had an initial attraction. It is,
however, pointed out that throughout none of the correspondence was that matter
ever raised, until Mr Ezekiel’s affidavit of November 8. So that the factual
foundation for the argument which Mr Fancourt properly put forward was never
there.
I go on with
the correspondence. On May 9 the plaintiffs’ solicitors wrote back and said
that their clients would carry out any necessary repairs. They deal with the
safe and then they say:
The second
and third floors of the Premises are let to Jeremy Spencer. Clause 20(a)
expressly provides that this particular Sub-Tenancy shall not constitute a
breach of Contract. No further Sub-Tenancy has been granted by Midland Bank.
Nothing, in my
judgment, could be clearer as to the position, as the plaintiffs saw it, of the
position of Mr Spencer.
The
correspondence then goes on, and we get a letter of May 12, when there had been
some discussion, relating to the question of whether Mr Jeremy Spencer was
occupying the premises as a service tenant or how. It had been Mr Ezekiel’s
evidence that when they had acquired the premises at the auction they had
understood that the second and third floors were occupied by employees of the
plaintiffs pursuant to a service tenancy. The letter of May 12, from the
plaintiffs to the defendants, obviously deals with that issue, and it reads as
follows:
As far as the
Tenancy to Mr Jeremy Spencer is concerned you advised the writer on the
telephone that Mr Spencer is only entitled to occupy the Premises so long as he
is an employee of Midland Bank. With respect, this is incorrect. Clause 20(a)
of the Lease expressly states that the Tenancy to Jeremy Spencer and others
shall not constitute a breach of Contract. This is not made subject to his
remaining an employee of Midland Bank.
So the matters
went on. That letter and a fax of May 14 reached the defendants’ solicitors on
May 15. Nothing seems to have happened by way of correspondence until there is
a letter from the plaintiffs’ solicitors on June 8, saying that the conditions
contained in the letter of May 5 were not acceptable and saying yet again:
Our client’s
only tenant is a Mr Jeremy Spencer, who is an employee of our client and whose
non-shorthold tenancy is specifically acknowledged as lawful in our client’s
Lease
So the matter
went on. Eventually on June 29 the plaintiffs’ solicitors wrote to the
defendants’ solicitors:
We refer to
your telephone call to our Miss Wakeford this morning when you confirmed that your
client’s one outstanding condition attaching to the grant of consent to the
proposed assignment was sight of a copy of the tenancy agreement with Mr
Spencer.
I think that
is probably the first written communication of a decision whether they are
going to grant a consent or not.
We confirm
— say the
plaintiffs —
that there is
no written tenancy agreement. Nevertheless, the tenancy was known to and
accepted by your clients predecessor as recorded by the terms of our clients
lease. This is a matter that one would expect your client to have had explained
prior to completion of the purchase of the property.
If the
defendants had in fact inquired from their predecessors, it is clear from the
correspondence which has been disclosed that the position in relation to Mr
Spencer and the second and third floors would have been clear. They did not so
do.
That
understanding of the plaintiffs’ solicitors, that all that was required was a
copy of the tenancy agreement, was mistaken, because on July 4 they wrote:
We understand
from our clients that their agents were informed yesterday by Mr Ezekiel that
consent to the assignment would be given on condition that our clients serve
Notice to Quit on Mr Spencer,
— and they say
they are not prepared to do so. They go on —
We further
understand that Mr Ezekiel stated that Mr Spencer’s tenancy should be a service
tenancy. Although Mr Spencer is employed by our client Bank, it is not a
requirement of our clients Lease that Mr Spencer be either a service Tenant or
a Bank employee.
The
defendants’ solicitors wrote back on July 6:
Our client
states that at the time of their purchase of the property, it was made clear to
them that the tenancy was a service tenancy. The proviso to Clause 2(9) of the
Lease refers to ‘the existing non-shorthold tenancies’. It does not say that
these tenancies are ‘non-service tenancies’. You have already confirmed that Mr
Spencer is employed by your client Bank. Was he employed at the branch at Old
Kent Road or nearby? We are further
informed that the Bank Manager’s daughter occupied the flat — possibly on some
form of Licence from the Bank. The surrounding circumstances to these tenancies
seem rather strange and bearing in mind that our clients were informed that
these were service tenancies, we would demand that you let us have a full
Affidavit sworn by a duly authorised officer on behalf of the Bank giving all
the circumstances of the tenancies by listing rentals paid before the grant of
the present lease, and also rentals paid since together with any details of
employment of the occupants and the reasons why their tenancy was granted.
It is quite
clear from that letter that the concern of the defendants was about whether Mr
Spencer was employed by the bank and whether this was a service tenancy. That
is not an argument that has been put forward today in support of the delay or
the withholding of consent. Miss Hutton points out that the reason why the
defendants may have wanted the affidavit was to deal with the situation which
might occur at the termination of this lease in 1991. I say nothing about that
submission, because it is not necessary so to do.
The plaintiffs
wrote back on July 7, saying that Mr Spencer’s tenancy was known to the
previous landlord.
No assurance
has ever been given that Mr Spencer’s tenancy is a service tenancy. Clearly,
your client’s problem is a matter between your client and the Vendor and is not
a valid reason for withholding consent to our client’s proposed assignment.
The letter of
July 6 had ended:
When we have
such an Affidavit, our clients will be able to give the matter further
consideration.
The plaintiffs
pointed out in their letter of July 7 that they were not under an obligation to
provide an affidavit and nothing further happened until August 17 when this
originating summons was taken out.
I come back,
therefore, to the application for the declaration and ask: have the defendants
shown that they had reasonable grounds for delaying communicating the decision?
I am of the clearest view that they have
not demonstrated that. Such reasons as they have given for the delay subsequent
to May 5 relate either to the schedule of dilapidations or to the safe or to
the position of Mr Spencer in relation to a service tenancy. None of those
matters is relied on now as being matters which would entitle the defendants to
withhold their consent. Then when I ask myself: have they unreasonably refused
the consent?, that admits, in my judgment, of only one answer: they have. They failed
to show any reason for refusing consent in the instant case. The matters relied
on in Mr Ezekiel’s affidavit are never matters, in my judgment, which were in
the defendants’ mind, and certainly not expressed at any time before November.
Accordingly, I have no difficulty in this case in deciding that the
declarations sought should be granted and I propose so to do.
Declarations
in favour of plaintiffs granted with costs and inquiry ordered as to damages
suffered by plaintiffs.