Landlord and tenant — Covenant against assignment without consent of lease of business premises — Tenants challenge landlord’s refusal of consent as unreasonable — Landlord refused consent on two grounds, on the proposed user of the premises and on the financial ability of the proposed assignees — The first ground was rejected by the judge in the light of Killick v Second Covent Garden Property Co Ltd as being an expectation of a future breach of user covenant which did not provide a good reason for a refusal of consent — The main issue was as to the second ground — Tenants put forward six sets of references as to proposed assignees’ financial ability, from accountants, bankers, solicitor, estate agents and two trade references, and also submitted accounts relating to the proposed assignees’ past trading — The references, however, related to the proposed assignees’ previous business and previous premises, whereas they were intending to embark on a further venture in premises with a higher rent; certain property valuations were unreliable; and the unaudited accounts were not such as to remove a reasonable landlord’s doubts as to the proposed assignees’ financial ability — A suggestion that the proposed assignment would substantially depreciate the landlord’s interest was, however, rejected, both on the ground that there was no evidence that this had affected their minds at the date of refusal and for the reasons given by the deputy judge in criticising a similar submission in International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd — Held that the landlord was not acting unreasonably in refusing consent in view of his real doubts as to the proposed assignees’ ability to meet the obligations under the lease — Declarations sought by tenants refused and action dismissed
In this action
the plaintiff, British Bakeries (Midlands) Ltd, tenant of premises at 89
Cornwall Street, Plymouth, sought against the defendant, Michael Testler &
Co Ltd, the landlord, declarations based on the plaintiff’s submission that the
defendant had unreasonably refused consent to the assignment of the lease of
the premises.
W Poulton
(instructed by Metson Cross & Co) appeared on behalf of the plaintiff;
David Neuberger (instructed by Hughes Watton & Co) represented the
defendant.
Giving
judgment, PETER GIBSON J said: British Bakeries (Midlands) Ltd, the tenant
under a lease of premises at 89 Cornwall Street, Plymouth, seeks two
declarations: (1) that the defendant, Michael Testler & Co Ltd, the
landlord under that lease, has unreasonably withheld its consent to an
assignment of the lease to two proposed assignees, and (2) that the tenant is
entitled, without the landlord’s consent, to assign the lease to those
assignees.
The lease of
those premises is one granted for a term of 35 years from March 25 1962. The
premises consist of a building on two floors. I need only refer to the user
covenant in the lease relating to the ground floor, the user of which is
limited to that of a retail shop for the trade of baker, confectioner and
pastry cook. That was varied in 1980 and the present actual and permitted user
of the ground floor is a composite use of retail shop, hot food take-away and
restaurant/snack bar. Clause 24(a)(ii) contains a covenant by the tenant ‘not
without the previous consent in writing of the landlord, not to be unreasonably
withheld, to assign or under-let the premises as a whole’. As a result of a
rent review in 1983, the rent payable for the remainder of the term of the
lease is £14,780 per annum.
On June 26
1984 the tenant’s solicitors wrote to the landlord’s solicitors and said that
the tenant had instructed them in connection with the disposal of their
leasehold interest to a Mr P Vasiliou and Mr J Arghyrou, trading as Gregory’s
Steak House. The landlord’s consent was requested. To enable the landlord to
consider the proposed assignees, copies of references from the assignees’
bankers and accountants, together with a trade reference, were enclosed and the
landlord’s solicitors were asked to let the tenant’s solicitors know whether
further information concerning the assignees was required. On July 2 the
landlord’s solicitors acknowledged that letter and asked whether the proposed
assignees were currently trading from any other premises, in which case a
landlord’s reference was required. They also asked for copies of the last three
years’ trading accounts and inquired as to the use to which the proposed
assignees wished to put the premises. On July 6 a landlord’s reference in the
form of a letter from Hillier Parker May & Rowden, the managing agents of
the lessor, of 94 Cornwall Street, Plymouth, of which the proposed assignees
were the tenants, was supplied. Hillier Parker very properly drew attention to
the fact that the rent payable was approximately half the rent for 89 Cornwall
Street, but said that the proposed assignees had proved to be responsible and
respectable tenants, complying with all their covenants as tenants. Two other
references were supplied to the landlord’s solicitors by the tenant’s solicitors,
who stated that there would be no change of user. On July 17 accounts were
supplied for the years ended March 31 1981 and 1983 respectively. On July 19
the landlord’s solicitors wrote to the tenant’s solicitors expressing concern
that the reference supplied by Hillier Parker referred only to a smaller rent,
and they also expressed concern about the proposed user of the premises, saying
that it was only reasonable and proper that the landlord should be able to
satisfy itself that there would be no breach of the permitted user if the
proposed assignment took place. The tenant’s solicitors replied on July 20,
pointing out that Hillier Parker could only base their reference on the
property where the clients of those agents were the lessors, and stated that
the assignees would be using the premises as a cafe/take-away involving both
hot and cold foods and, therefore, there would be no breach of user. On July 25
the landlord’s solicitors wrote, commenting adversely on figures appearing in
the accounts of the proposed assignees, suggesting that the proposed user would
be a breach of the lease and stated that they could not advise the landlord to
approve the proposed assignment. On September 19 the tenant’s solicitors wrote
again. They enclosed a letter from the proposed assignees’ accountants, who
made various comments on the accounts. They also repeated that there would be
no change of user, and this was confirmed by the solicitor to the proposed
assignees. Finally, on October 19, the landlord’s solicitors wrote again. They
again commented adversely on the figures in the accounts and concluded that the
landlord’s opinion was the same as that set out in the letter of July 25 and
that the landlord must decline to approve the proposed assignment. It is common
ground that that was the relevant refusal by the landlord, which the tenant now
claims was an unreasonable withholding of consent to the assignment.
These
proceedings were instituted by the tenant on April 10 1985. The only evidence
that is relied on by either side is in the form of affidavits. Two have been
filed on behalf of each of the tenant and the landlord and there has been no
application to cross-examine any of the deponents.
There is a
good deal of common ground between Mr Poulton appearing for the tenant and Mr
Neuberger appearing for the landlord as to the relevant principles to be
applied. I put those principles in my own words as follows: (1) It was for the
tenant to satisfy the landlord that its consent to the proposed assignment
should not be withheld. Information not known to the landlord when it refused
consent is irrelevant to the question whether the refusal was unreasonable. (2)
The court should have regard to the reasons which affected the mind of the
landlord in refusing its consent. Reasons which were not stated to the tenant
before or at the time of the refusal may, if the court is satisfied that they
did affect the mind of the landlord at the relevant time, be taken into
account, but not reasons which subsequently occurred to the landlord. (3) The
onus is on the tenant to establish that consent has been withheld unreasonably.
(4) The test to be applied is an objective test: could a reasonable landlord
have withheld consent for the reasons actually shown by the landlord? The court cannot substitute its own view for
that of the landlord unless on the objective test it can be shown that no
reasonable landlord could have withheld consent for the reasons shown by the
landlord. (5) If a landlord has a good and a bad reason for withholding consent,
consent may nevertheless have been reasonably withheld if the good reason is a
sufficient reason and is not otherwise vitiated by the bad reason.
It is apparent
from the correspondence that two reasons were advanced on behalf of the
landlord for the refusal of consent. The first related to the financial ability
of the proposed assignees to meet the obligations that would be imposed on them
under the lease, in particular the rent of £14,780 per annum. The second
related to the proposed user of the premises. As I read the two affidavits of
Mr Testler, a director of the landlord and the person who dealt with the
question of consent, the first reason was the substantial reason for the
withholding of consent and I shall come back to it. The user of the premises is
primarily adverted to by Mr Testler in his affidavits in a way different from
that mentioned in the correspondence. In the correspondence the proposed user
was said to be a breach of covenant (see in particular the letter of July 25
1984). In the affidavits the primary point taken by Mr Testler on this is put
in this way:
It is my
considered opinion
and I note the
present tense
that the
proposed assignees in proposing to use the premises as a cafe/take-away
involving both hot and cold foods . . . may amount to an intensification of
that part of the actual user which is not recognised by the planning authority
and thereby invite action to be taken by the planning authority. Such action
would inevitably materially affect the proposed assignees’ profitability and
thereby their ability to meet their obligations under the lease.
I am not
satisfied on this evidence that this was a reason which affected Mr Testler’s
mind when the landlord refused consent. The point then taken was the alleged
breach of covenant, despite the repeated assurances that the assignees would
not change the user. I need not, however, take up time on this point as Mr
Neuberger accepts that, in the light of the decision of the Court of Appeal in Killick
v Second Covent Garden Property Co Ltd [1973] 1 WLR 658, even if the
landlord did expect there to be a breach of the user covenant, it would not be
a sufficient reason for withholding consent. Accordingly, I hold that the
second reason given by the landlord and based on user is not a good reason.
I turn back to
the first reason. The tenant in seeking the consent of the landlord relied
first on references and second, when it complied with the request for accounts,
on accounts. There were six references: (1) the proposed assignees’ accountants,
(2) their bank, (3) their solicitor, (4) Hillier Parker, and (5) and (6) two
trade references. All suggested that the proposed assignees were satisfactory
persons to have had dealings with. But this was said in relation to the
assignees’ business of which they had experience, that is to say of them
trading as Gregory’s Steak House. Had the assignees been proposing to transfer
their existing business to 89 Cornwall Street, and the obligations under the
lease of those premises were not more onerous than they were under the lease of
their existing premises, those references would have been of greater weight.
But it is common ground that the assignees were proposing to embark on a
further business venture by seeking the further premises. Some referees like the
accountants, the bank and the solicitor, Mr Daniel, went further in saying that
the assignees should prove satisfactory tenants of the new premises, but save
in the case of the accountants who prepared the trading accounts of the
existing business, it is not apparent — and in my judgment would not be
apparent to the reasonable landlord — on what facts that opinion was based. For
example, the National Westminster Bank say (and it does not appear who in the
bank so said): ‘Responsible and trustworthy; should prove good. A lease of
premises with annual outgoing of £14,780 exclusive.’ All the referees except the trade referees
excluded liability for their statements, and, while this is common enough these
days, it nevertheless detracts from the weight to be given to the references.
Mr Poulton
submits that I should infer that the references from the accountants, the
solicitor and the bank were based on information such as is contained in an
affidavit sworn by Mr Brennan, the solicitor of the tenant, on October 28 of
this year. He deposes to Mr Vasiliou owning a £60,000 house and Mr Arghyrou
owning jointly with his wife two properties each worth £37,000, but one subject
to a £12,000 mortgage, and the other, as well as Mr Vasiliou’s house, subject
to a £50,000 mortgage apparently being to purchase another property in
Plymouth. I do not see how I could properly infer that those referees had that
information. Indeed, even with the affidavits before me, I do not see how I can
infer that such information was available to such referees. None of the
information was conveyed to the landlord before its decision to refuse consent
and they only appeared in Mr Brennan’s late affidavit.
In any event,
to my mind it is impossible to place much reliance on valuations which are not
stated to have been made by a professional valuer; nor do I see that such
information would satisfy a reasonable landlord that the rents under the lease
would be paid as they fell due.
Of the two
trade references, one is wholly unspecific as to the amount of business
transacted with the proposed assignees, while the other refers to only doing
£300-400 worth of business per month.
Hillier Parker
could only speak as to the assignees’ behaviour as tenants under a lease
requiring payment of a much smaller rent.
Mr Brennan
submitted in his affidavit that the various trade references for the proposed
assignees which were provided to the landlord were those that might normally be
expected for the location and nature of the business under consideration. Mr
Brennan appears to be a London solicitor. He does not state what is his
experience to justify that submission. It is further contradicted unequivocally
by Mr Testler in his second affidavit. Mr Testler deposes to the fact that he
has been professionally engaged in the commercial property market for 18 years.
He draws attention to the fact that the references do not contain much
information and that notwithstanding the criticisms made by him of those
references in his own first affidavit, no attempt was made to meet the
deficiencies. I prefer Mr Testler’s evidence on this point in the
circumstances. In my judgment, a reasonable landlord would be entitled to
regard the references as not justifying the giving of consent to an assignment
unless there was other information available to the landlord of the assignees’
ability to meet their obligations under the new lease as those obligations fell
due, in addition to their existing obligations.
The accounts,
which are unaudited accounts, relate to the business of the assignees trading
as Gregory’s Steak House. Because they are unaudited, the accountants must have
been dependent on what they were told by the proposed assignees. The latest
accounts show the position as at March 31 1983, that is to say 18 months before
the refusal. No accounts or information were supplied in relation to 1984. The
accounts show that in 1983 the gross takings were £138,439, leaving a net
profit of £15,654. That profit is struck before the assignees take a penny for
themselves. The accountants, in their letter of September 12 1984, point out
that the net profits of the business to March 31 1983 were after charging
£3,120 for ‘wife’s wages’. Mr Poulton suggests that this was relevant because
the more money that came to the family, the less the assignees themselves
needed. I cannot see the relevance of this to a reasonable landlord looking to
the ability of the assignees to pay rent. The wives were not offered as
guarantors. The accountants further refer to nearly £6,500 of refurbishment
expenses and suggest that in normal trading circumstances annual profits of
between £18,000 and £20,000 would be expected. The £6,500 appear in the
accounts as ‘repair and maintenance’ and the sum is higher by about £4,000 than
the previous year. But even if the figures given by the accountants as normal
are correct, the profit margins are not large, particularly when the absence of
any salary for the assignees themselves is taken into account. Further, the
figures should be contrasted with the net profits for the previous year, which
were only £8,438, again without the assignees taking a penny.
A reasonable
landlord may well have serious doubt as to the ability of the assignees to pay
a rent of £14,780 exclusive of rates, taxes and other outgoings, as well as
meeting the full repairing obligations under the lease, if the new venture did
not prosper. No profit projections whatsoever were offered to the landlord in
relation to the premises which the assignees wish to acquire. Mr Testler’s
evidence, which was not challenged, was that a generally accepted test of the
financial standing of any proposed assignee is that his accounts should show a
pre-tax profit of not less than three times the amount payable under the lease
in question. It is clear that the assignees cannot satisfy that test.
The
accountants in their letter of September 12 also refer to the balance sheet.
That showed net current assets of only £353. If the 1983 accounts had followed
the practice adopted in the 1981 accounts, and shown a loan account belonging
to Mrs Arghyrou and Mrs Vasiliou as current liabilities, current liabilities
would exceed current assets by £13,000. The accountants suggest that the loans
would not have been called in before sale, but a reasonable landlord would
understand the position as being that the loans were repayable on demand. The
accountants then state that the assets of the business would realise at least
£100,000 on the open market. I comment that a reasonable landlord is concerned
with the tenant’s ability to meet the obligations under the lease as those
obligations fall due. Many a debtor is properly made bankrupt, even though he
claims he has
In any event,
I am not clear how the accounts have arrived at the figure of £100,000. The
accounts show that the assets of the business exceed the liabilities by some
£7,000, but that ignores the loan account owned by Mrs Arghyrou and Mrs
Vasiliou. Thus the true picture is that the liabilities exceed the assets.
The
accountants made a general statement about the assets of the business being
written down. Mr Poulton accepted that the £100,000 figure must be made up by
the value of the lease and the goodwill, the values of neither of which were
written down. The accountants do not say that they obtained a professional
valuation of the lease and a reasonable landlord might assume that they had not
done so because the accountants state that it is their opinion that the value
of the business is £100,000. Whether there was any value in the residue of the
term of the lease would depend on the relevant provisions of the lease. A major
item would appear to be goodwill, but given the low margins on which the business
operated, with the two assignees taking no salaries, I find it hard to accept
that the goodwill ought realistically to be valued at anything like a figure
which would justify the accountants’ opinion.
For the sake
of completeness I should add that Mr Brennan exhibited a copy of a letter dated
August 7 1985 addressed to Mr Arghyrou from a Mr May of May & Trout, who
describe themselves as ‘Estate, Land and Business Agents’, but no professional
qualifications are given. In the letter, Mr May purports to value the business
at 94 Cornwall Street at £110,000, but the only figures on which that valuation
appear to be based, that is to say a turnover — no figure is given for profits
— of £250,000, as well as a rental of £12,250, contrast with the figures made available
to the landlord at the relevant time. Indeed, it does not even accord with
Hillier Parker’s statement about the rent. This is not relevant evidence, not
having been presented to the landlord at the relevant time. In any event, I
accept Mr Testler’s criticism of the valuation as being one on which no
reliance can be placed.
In my
judgment, therefore, a reasonable landlord could properly take the view, on the
information available to the landlord, that there was a real doubt about the
assignees’ ability to meet their obligations under the lease as they fell due.
Mr Poulton has
criticised the landlord for concentrating attention on the existing business of
the proposed assignees. He submitted that the landlord overlooked the fact that
the proposed assignees were to take the lease in their own name and so be
personally liable. Of course it is right that they would be personally liable
up to the full extent of their assets, but the way the tenant chose to present
the proposed assignees as suitable persons to receive an assignment was as
persons trading as Gregory’s Steak House. Even the tenant’s letters asking the
references were headed with that designation. It was never suggested to the
landlord that the assignees had other income or other assets and no profit
projections or information about the business to be carried on at 89 Cornwall
Street were supplied, save as to user. A reasonable landlord, with such limited
information, could properly be concerned lest the proposed assignees were
over-extending themselves financially.
Mr Poulton
also submitted that the real reason for the refusal of consent was that the
landlord was content to have the tenant, a subsidiary of a large public
company, as tenant, and did not want the tenant to assign to anybody, unless
perhaps another public company. He submitted that this was the inference to be
drawn from the penultimate para in the second affidavit of Mr Testler. In that
para Mr Testler stated that after careful reconsideration he adhered to the
view that the proposed assignees were of inadequate covenant and that consent
of an assignment to them would substantially depreciate the landlord’s
interests. He accepted that the tenant’s intermediate covenant would remain,
but said that in practice the market would direct its attention to the tenant
in occupation and to the quality and nature of its business operations and
planning risks. He calculated the damage to the reversion to be that, instead
of a yield of 8%, the market would require a yield, with the proposed assignees
as tenants, of 9% with a 20% depreciation in the capital value of the
reversion.
Various points
can be made about this. First, there is no evidence that such diminution in
value to the reversion was a matter which affected the landlord’s mind at the time
of refusal. It was only when Mr Testler on October 29 of this year, in his
second affidavit, raised the point, that the matter first came to light. I
accept Mr Poulton’s submission that it should not be admitted as a reason for
the refusal as it is not apparent that Mr Testler had this point in mind when
he refused consent on behalf of the landlord. Second, in any event the approach
of Mr Testler would appear to be similar to that which was criticised by Mr
Nugee QC, sitting as a deputy judge of this division, in International
Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd (1985)
275 EG 802, [1985] 2 EGLR 74 (affirmed today by the Court of Appeal)*. However,
Mr Poulton submits that I should infer from the para in question (because it is
nowhere stated expressly) that the real reason which motivated the landlord was
that the landlord wanted to prevent any assignment. In my judgment, it is
illogical to reject the para on the ground that it did not state Mr Testler’s
reasoning at the relevant time and yet to seek to infer from it what is said to
be Mr Testler’s true reasoning at the relevant time. In any event, in my
judgment; it is quite impossible to draw any such inference from the para in
question. The para is directed to a comparison between the value of the
reversion with the present tenant as tenant and the value of the reversion if
the proposed assignment to the two proposed assignees were allowed. It says
nothing about what the value of the reversion would be if another assignee were
put forward — indeed, how could it?
*Editor’s
note: The first instance decision is also reported at [1985] 2 EGLR 74. The
Court of Appeal decision is reported at p 39 ante and (1985) 277 EG 62.
In my judgment,
therefore, the landlord was not acting unreasonably in refusing consent,
because of the real doubt that the landlord had about the proposed assignees’
financial ability to meet their obligations under the lease. That reason does
not seem to me to be vitiated by the bad reason given by the landlord as to
user. It follows that I must refuse the first declaration sought.
Mr Poulton did
not suggest that the second declaration could be granted even if the first
declaration were refused. Accordingly, I refuse the second declaration as well.
I dismiss this
action.
