Landlord and tenant — Assignment — Consent to assignment — Headlease of residential property comprising flats let on subleases — Assignee incorporated for purpose of acquiring headlease — Whether unreasonable for freeholders to require personal guarantee from director of assignee as condition of consent to assignment — Whether income from sublessees adequate security for covenants in headlease — Whether three-year guarantee sufficient
The defendant trustees owned the freehold of a property in Mayfair, London W1, that was subject to a 99-year headlease with a covenant against assignment without the defendants’ consent, which was not to be unreasonably withheld. The claimant agreed, at auction, to purchase the headlease for £1.05m by way of an assignment from the existing headlessee. At the time of purchase, the annual rent payable under the headlease was £18,250, with a review imminent. Most of the 26 flats in the property were let on subleases at annual rents totalling £64,069 pa, although four flats were subject to long leases that had been acquired pursuant to the tenants’ leasehold enfranchisement rights under the Leasehold Reform, Housing and Urban Development Act 1993. As a condition of granting consent to the assignment, the defendants demanded a personal guarantee from the claimant’s sole director, R, of the claimant’s obligations under the headlease on the ground that the claimant, as a company that had never traded and had been incorporated solely in order to become headlessee, could not provide the usual bankers’ references and three years of filed accounts to assure the defendants of its ability to pay the rent and to perform the other covenants. The claimant proposed that the guarantee be limited to three years, to reflect the usual period of accounts. The defendants refused on the ground that the value of the headlease might be dissipated if further flats were sold on long leases, which could occur outside the three-year period.
The claimant contended that the defendants had unreasonably withheld their consent since: (i) a guarantee was unnecessary where the headlessee was in receipt of sound rents from reliable sublessees, in contrast to cases where a limited company occupied and traded from commercial premises; and (ii) if a guarantee were to be given, a three-year period would suffice.
Held: The claim was dismissed.
The defendants had not acted unreasonably in demanding a guarantee and refusing consent to the assignment on the basis of the terms offered by the claimant. The security provided by the subleases was not sufficient to protect the freeholders since the claimant had no assets other than the headlease and was not trading other than in a very limited sense. Accordingly, payment of the rent under the headlease during the following three years did not amount to a guarantee that matters would not change after that time in the same way that successful trading by an occupying tenant, which had to continue to occupy in order to trade, would. The defendants were entitled to require a straightforward guarantee that supported the covenant to pay rent as and when it was due and made enforcement of that covenant effective. It was not unreasonable of them to require such a guarantee in case the claimant chose in the future to gain capital in the form of large premiums for long leases, thereby reducing the value of the headlease. That involved no departure from established law since each case turns on its facts. The remedies of forfeiture for failure to pay the rent, or distress by taking the rents of the sublessees, were not satisfactory alternatives in the circumstances of the case. The defendants had not acted unreasonably in rejecting a three-year limitation on the guarantee because there was a much greater need for the guarantee outside the three-year period. Moreover, a guarantee should normally be for the residue of the term until future assignment.
The following cases are referred to in this report.
Ashworth Frazer Ltd v Gloucester City Council (No 2) [2001] UKHL 59; [2001] 1 WLR 2180; [2002] 1 All ER 377; [2002] 1 EGLR 15; [2002] 05 EG 133
Cadogan Properties Ltd v Mount Eden Land Ltd [1999] CPLR 476, CA
Design Progression Ltd v Thurloe Properties Ltd [2004] EWHC 324 (Ch); [2005] 1 WLR 1; [2004] 2 P&CR 31; [2004] 1 EGLR 121
Greater London Properties’ Lease, Re[1959] 1 WLR 503; [1959] 1 All ER 728
Hindcastle Ltd v Barbara Attenborough Associates Ltd [1997] AC 70; [1996] 2 WLR 262; [1996] 1 All ER 737; [1996] 1 EGLR 94; [1996] 15 EG 103, HL
International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] Ch 513; [1986] 2 WLR 581; [1986] 1 All ER 321; (1986) 51 P&CR 187; [1986] 1 EGLR 39; 277 EG 62, CA
Storehouse Properties Ltd v Ocobase Ltd Unreported 19 March 1998
Straudley Investments Ltd v Mount Eden Land Ltd (No 1); sub nom Mount Eden Land Ltd v Straudley Investments Ltd (1997) 74 P&CR 306; [1996] NPC 138
This was a claim by the claimant, Landlord Protect Ltd, for a declaration that the defendants, Robert Dolman, Susan Martell and Viscountess Fitzharris, had unreasonably refused consent to an assignment of a lease.
Jonathan Brock QC (instructed by Reid Minty) appeared for the claimant; Wayne Clark (instructed by Wedlake Bell) appeared for the defendants.
Giving judgment, HH Judge Peter Cowell said:
[1] The trial of this matter was due to begin on Monday of this week (today being Friday 13 October). The matter was in the unassigned list and no judge could take the matter. I was asked to hear it during the course of Monday afternoon, and I arranged to hear it on Tuesday, as I did. It was estimated to last for one day but, unfortunately, it had not finished and Mr Jonathan Brock QC, in his submissions, felt somewhat short of time.
[2] It was impossible to continue it on the Wednesday, if only because Mr Wayne Clark was in the Court of Appeal that day, and I had |page:22| duties to other litigants to hear other cases on Wednesday and Thursday. So it was arranged that written submissions in reply would be submitted by Mr Clark on Thursday, as indeed happened. It is right to say that there was much that was repetitive in those submissions, and they did not simply go in reply to Mr Brock’s submissions, as indeed he pointed out in some further submissions that he sent to me, I think at around 11 o’clock in the evening of Thursday. I have read those submissions as well as Mr Clark’s submissions, although it is right to say that the gist of the argument for both parties appears in the original skeleton arguments that were available before the start of the case.
[3] At the time it agreed to sell it, on 13 July 2006, St Anselm Development Co Ltd owned a leasehold term of 99 years from 29 September 1964 in a property at 13-17 Clarges Street, Mayfair, London W1, consisting of 26 residential flats and 16 parking spaces, granted by a headlease dated 29 October 1964. I shall refer to that as the headlease. The present freeholders and reversioners are the defendants. I shall call them the freeholders. They are three individuals who are trustees of a trust. The claimant company agreed to purchase the headlease at an auction on 13 July 2006 for £1.05m. I should have said at the outset that the reason for the despatch and the very hard work of both counsel during this week is because a decision was needed on Friday 13 (that is today) for reasons that I need not explain.
[4] The auction particulars showed that there were many subleases or sublettings (I shall refer to these as the subleases) of the flats and of 10 of the car-parking spaces.
[5] The question to be determined, to put it shortly, is whether the freeholders unreasonably withheld their consent to the assignment of the headlease to the claimant following the offer of a guarantor for three years of the claimant’s obligations by the sole director of the claimant, a limited company. I shall now deal with three particular matters: first, the headlease; second, the subleases as in the auction particulars; and, third, the claimant.
[6] The headlease, which is due to expire on 29 September 2063, is to be found at p25 of the bundle. The rent when the headlease was granted in 1964 was £4,000 pa. It is now £18,250 since the rent review in 1980, and it is to be reviewed again as from 29 September 2006 (which is around a fortnight ago). It is due to be reviewed again in 2034. That all appears from clause 4 (iii)(b). For the rent review, which is to take effect on 29 September 2006, the freeholders say that the appropriate rent is £225,000, and St Anselm has said that the appropriate rent is £72,000. It has not yet been determined what the rent will be.
[7] There are many clauses that I think can be called “usual clauses” in the headlease. It is clause 2(s) on p29 that contains the usual provision that there should be no assignment or underleasing without the consent of the freeholders, such consent not to be unreasonably withheld. There is also in clause 5 the usual right of re-entry.
[8] It is to be noticed, at p30, that there is a definition of the “Deemed Rack Rent” in clause 4(i)(a), which is defined in terms of the basis upon which a seven-year lease would be granted. In clause 4(iii)(a), there is a provision that the rent on the various review dates should not exceed one-third of the deemed rack-rent. It is not entirely clear upon what basis the valuer is to determine the rent, for the only thing that appears to be defined is the deemed rack-rent. So, probably, although in practice it is unnecessary to decide the point, the rent amounts to one-third of the deemed rack-rent.
[9] One further point to be mentioned about the headlease is that it is what those in the business would call an “old lease” for the purpose of the Landlord and Tenant (Covenants) Act 1995.
[10] I now mention the subleases. There are 26 flats, although they are numbered 1-12 and 14-27. At the time of the auction, the total rents amounted to £64,069 pa. That appears from the auction document at p677 of the bundle. Of those total rents, the rent of £12,000 is deemed to be the rent for the porter’s flat, although in fact the porter himself does not pay £12,000 for his flat (which is flat 2). Flat 12 is occupied by a tenant whose rent is regulated under the Rent Act 1977 and, at the time of the auction, was £18,658 pa. Similarly, flat 20 is occupied by a tenant whose rent is similarly regulated, and that tenant pays £22,371 pa. The remainder of the total rent that is, £11,040 pa comes from 21 of the remaining 23 flats and from the 10 car-parking spaces. Each one of those flats has a ground rent ranging from (at the lowest) £237 pa to £1,200 pa (which is the highest, the next highest being £800).
[11] Of the 23 flats, 19 flats are held on subleases expiring on 19 September 2063, in other words 10 days before the expiry of the headlease. The remaining four, that is, nos 18, 21, 26, and 27, are held on subleases expiring on 19 September 2153. That is because of the exercise of enfranchisement rights under the Leasehold Reform, Housing and Development Act 1993. In the latter two cases, flats 26 and 27, no ground rent is payable at all; on the exercise of the enfranchisement rights, there was a surrender of the existing lease and a regrant at no ground rent and, in those two cases, there is no clause that I will call the “head rent clause” (which I shall explain in due course) otherwise called during the course of the hearing “the £4,000 clause”. I shall come to that in a moment.
[12] Ten of the car-parking spaces are held by sublessees until 19 September 2063 at £100 pa each, making £1,000 altogether. Six of the car-parking spaces are vacant. That is the position. Practically all of that is evident from the auction particulars, but some of the explanation that I have given is not evident from them.
[13] I now turn to consider the typical sublease. In this case, it is of flat 1. This was granted in 1993 for a premium of £95,000. It is at p78 of the bundle. It is to be noticed in the recital (E) that “the Lessor intends (but shall not be bound) to demise the flats in the Building (other than accommodation to be provided for staff) subject to lessee’s covenants substantially similar to those hereinafter mentioned”. At p89, one finds clause 4(5), which is the lessor’s covenant “to pay the rent reserved by the Headlease and to comply with the lessee’s covenants therein contained save insofar as the same are the responsibility of the Lessee under these presents”. In clause 3(2), at p81, there is a covenant by the sublessee to pay the service charge as set out in the third schedule (at p92). There appears, as part of the service charge provision, what I have already referred to as the head rent clause or the £4,000 provision. Paragraph 1(a)(i) reads as follows, it being one of the things that makes up “the Annual Maintenance Provision”:
(i) all costs, charges, expenses and outgoings expended or incurred by the Lessor in any financial year in complying with its obligations under clause 4 other than in paying each year the first £4,000 of the annual rent reserved by the Headlease.
[14] Then, para (iii) deals with the porter’s flat so that the service charge includes “an amount equal to the annual rack rental at which the Lessor might reasonably be expected to be able to let in the open market accommodation provided for staff”. There appears to be no obligation to provide a porter, for, under paras 6 and 12 of the fourth schedule, the “Services” include the employment of “such contractors, agents, consultants, advisers, workmen, housekeepers, porters and other personnel as in the opinion of the Lessor may be requisite in providing services at the Building” and, by para 12, “to discharge the outgoings of the accommodation provided for staff and to decorate, maintain, repair and furnish the same”. It is to be noticed in para 6 of the third schedule that the lessor has to make up any shortfall if any flat is vacant (that is at p94).
[15] The claimant is a limited company incorporated on 26 January 2005 in the UK, two shares of which have been issued for £2 altogether. It has been dormant since its incorporation and has never traded. Its raison d’être is to be the head lessee. Its sole director is a solicitor, Mr Andrew Reid. The company has a bank account. Neither St Anselm nor the freeholders knew any of that until after the auction, but assumed that it had more substance, as is apparent from the letter written by Guy Clapham & Co (St Anselm’s solicitor) on 18 July when it asked to see the claimant’s “filed accounts and the usual bankers and professional references”. Such documents (as will appear) were not available.
[16] I should just mention that the parties are entirely agreed as to the principles that apply about the question of the unreasonable withholding of consent. They are set out in the well-known case International Drilling Fluids Ltd v Louisville Investments (Uxbridge) |page:23| Ltd [1986] Ch 513*, at pp519H-520E, although statute has altered the burden of proof and put the burden on the landlord.
—————————————————————————
* Editor’s note: Also reported at [1986] 1 EGLR 39
—————————————————————————
[17] I was referred to the House of Lords decision in Ashworth Frazer Ltd v Gloucester City Council (No 2) [2001] UKHL 59; [2001] 1 WLR 2180† and, in particular, to the speech of Lord Bingham in [3], [4] and [5], which I will take as read (I will not read it out in this judgment). I have also been referred to Woodfall 11.141 and 11.143. Essentially, it seems to me, and, indeed, as Lord Bingham pointed out, each case depends upon its own facts.
—————————————————————————
† Editor’s note: Also reported at [2002] 1 EGLR 15
—————————————————————————
[18] Similarly, I will not read out all the letters that are to be found in proper order at pp33, 35, 34, 36, 38, 37, 39, 41, 40, 42, 44, 43, 45, 46, 48, 47, 49, 50-51, 52, 53, 54, 55, 56, 57, 58, 59, 60, 61-62, 63-64, 65, 66, 67, 68-69, 70, 71-72 and 73. I shall take all those as read, but essentially they consist of four that I will read. At p36, there is a letter from the claimant’s solicitor, Reid Minty, of 21 July, in which it says:
The Buyer is a company which has been dormant until now and therefore there are no past accounts; it is only now appointing accountants and opening a bank account.
“There are, however, three factors which should reassure the freeholders:
1. The Buyer is financed by shareholder loans and is not seeking bank or other outside finance for purchase.
2. The sub-leases of the property provide that the ground rent in excess of £4,000 is recoverable from the sub-tenants by way of service charge so that although it may appear that there is a considerable liability for rent on the Buyer, in practical terms this is not the case.
3. The principle [sic] ultimate shareholder in the Buyer is Andrew Reid of this firm (together with his family).
We trust that in these circumstances the freeholders will be satisfied even though the documents which they have requested are not available.
[19] The freeholders’ solicitor, Wedlake Bell, wrote (at p38) on 8 August 2006. It wrote to Guy Clapham, the assignor’s solicitor:
Thank you for your letter of 25 July enclosing a copy of the letter from Reid Minty LLP of 21 July on which we have now had an opportunity of obtaining our client’s instructions.
With regard to the proposed assignment to Land Protect Limited, we note that the company is unable to provide any accounts or references, as we had requested. Unfortunately, the contents of Reid Minty’s letter of 21st July do not provide our client with any assurance that the company is able to pay the rent or to perform the other covenants contained in the lease.
While our client is grateful for the information provided regarding the shareholders in the company, this does not address the ability of the company to pay the rent. Similarly, the fact that the rent payable under the Headlease can be recovered by the tenant by way of the service charge in the underleases (if this is the case) does not provide our client with any assurance of the payment of rent on the due date. We note that no security has been offered for the payment of the rent or performance of other covenants.
Therefore, we would inform you that our client is only prepared to grant licence for the assignment to Land Protect Limited on condition that personal guarantees by the directors of the company are provided. Otherwise, the grant of licence will be subject to the payment of our client’s reasonable costs in connection with the licence owner in respect of which you have already supplied us with your undertaking.
[20] There was a certain amount of debate as to whether what was called “personal guarantees” could be described as “unlimited”. I do not think that it really matters what name one gives to such things, but, in my understanding of the matter, what would ordinarily be sought by way of a guarantee from a proposed assignee would be a guarantee to last until further assignment of the lease by that assignee to another. There are further wrinkles that might often be found to that. In the event of a disclaimer of the property, there might be, even after the Hindcastle decision‡, a provision that the guarantor should take a grant of a lease on the same terms. Broadly speaking, the guarantee would be expected to last during the period of the assignee’s ownership of the lease.
—————————————————————————
‡ Editor’s note: Hindcastle Ltd v Barbara Attenborough Associates Ltd [1996] 1 EGLR 94
—————————————————————————
[21] I come back to the important letter at p57 of 11 September 2006 written by Reid Minty, in which it thanks the freeholders’ solicitor for its letter of 11 September and says:
Please note this is intended to be an open letter.
We note your client’s comments in relation to the limited personal guarantee and in particular the rent. We have considered your point in relation to this, which although not accepted, for the ease of speed is reflected in our revised offer set out below. We do not, however, accept your comment in relation to the time limit. Your client would usually only ask for three years of accounts to be able to assess whether or not a tenant is suitably pecunious. This is the rationale behind our offer. In the unlikely event that your client has to seek recourse to the guarantee within that time, then it can do so for any outstanding rent and forfeit the lease to prevent any further breaches. If within that time no claims have been made, then that is sufficient evidence that our client is good for the rent.
Accordingly, our client is prepared to make one further final offer in an attempt to avoid proceedings which are looking to be increasingly inevitable and it is as follows. Please note that this has been offered on the advice of Jonathan Brock QC.
1. Mr Reid will offer a guarantee for a duration of three years from the date of the contract to purchase the head lease, but limited to the passing rent.
2. At the end of this three year period, Mr Reid will be released automatically from this guarantee.
3. In the event Mr Reid wishes to sell the head lease during the three year period, your client will release him from the guarantee provided that reasonable alternative security is provided by the purchaser.
Due to the stance of the seller in this matter, we have to give you a very short deadline of midday tomorrow to accept this offer, failing which we will issue proceedings as we have previously set out.
I do not think that I need read the rest of the letter. It is there to be read.
[22] The next letter that I will read is at p71. It is the freeholders’ response by its solicitor on 19 September.
Thank you for your fax message of 14 September and we are now writing in reply to your letter of 11 September.
We do not consider that the usual requirement for the provision of 3 years of accounts to be relevant to the issue of whether the guarantee should be limited in time. In respect of commercial premises, the provision of accounts will provide information regarding the tenant’s trading record and therefore, its ability to pay. This is of no application in the present case.
Therefore, we would respond to your proposal as follows:
1. You have provided no justification for seeking to limit the guarantee to the current passing rent. This is unacceptable, having regard to the pending rent review and the likely significant increase in the rent.
[23] I pause, before reading the rest of the letter, to say that that was something that was later sorted out, as appears from p73. What was being referred to was the rent for the time being, including the rent after the review.
2. We have previously highlighted our client’s concern that the value of the Headlease may be dissipated, if the parts of the property which are not presently sublet on long leases are subsequently sold on long leases and this may well occur outside the 3 year period that you have proposed. Therefore, the proposal for the guarantee to be limited to a period of 3 years is unacceptable.
3. In the event of the subsequent sale of the Headlease, we would confirm that our clients are prepared to release the guarantors from liability on the provision of reasonable alternative security by the purchaser.
Accordingly, our client’s position remains as stated in our letter to Reid Minty of 8 August 2006, although for the purpose of reaching a compromise, our clients are prepared to agree to a release of the guarantors, as indicated under paragraph 3 above. For the avoidance of doubt, our clients require the provision of guarantees by two of the directors of the company and not one, as proposed by you.
We are satisfied that our clients are acting reasonably in imposing a condition on the grant of licence to ensure that future rents are paid.
[24] I do not think that I need read the rest of that letter. Perhaps the only thing that I need observe about the other correspondence, which I have not read, is that, at p39, Reid Minty refers to the advantages to be had on the part of the freeholder from forfeiture and, at p42, it refers to the advantage that the freeholders have of having a covenant from the original lessee. |page:24|
[25] As an example, in order to see more clearly the operation of the subleases, it was assumed that the new rent to be fixed might be £100,000 pa. Of that, it is clear, because of the head rent clause, that the head lessee cannot recover from the sublessees £4,000 of that, so that £96,000 is left. The percentages in which the sublessees pay the service charge is such that the head rent clause results in 84.387% of that £96,000 being recoverable as part of the service charges. That will come, as a matter of arithmetic, to (in round figures) £81,500. That, of course, assumes that there is no dispute about the reasonableness of the service charge, which might come from a subtenant that might object to the head rent clause on the ground that it was not reasonable. That apart, it would mean that, on the basis of those figures, the head lessee must find £18,500 otherwise than from those subtenants on long leases.
[26] At present, there is ample to provide that sum, for the two regulated tenants pay around £40,000 pa, and there is the porter’s flat, and if that is a reasonable part of the service charge that is recoverable from the sub tenants. If, of course, all three of those flats (2, 12 and 20) are turned into long leases at a premium with small ground rents, there might not be. The head lessee (the claimant) is reliant, in order to pay the rent to the freeholders, on the subleases, including the two regulated tenancies and has no occasion to rely upon any resources of its own.
[27] I now mention Mr Brock’s arguments on behalf of the claimant, his client, being essentially the equitable assignee of the headlease. The arguments are along the following lines, and I hope that I do justice to them. In summary, they are these. First, a limited company that can show good trading accounts for three years does not ordinarily need to provide a guarantor for its obligations. If any guarantee is to be provided in this case, and that is, of course, itself in dispute, a three-year period will be sufficient in this case.
[28] The second main argument is to this effect: that the decided cases, which, on their facts, have required a guarantee, are invariably cases concerning a limited company being in occupation of premises such as a shop at a rack-rent, and that this is different, for here the head lessee has good sound rents coming in from sublessees and so no guarantee at all is needed.
[29] Third, although this is perhaps another way of putting the second main point, one should concentrate not on the strength of the covenant in this case, a covenant given by a dormant company that has never traded but on the strength of the security, in this case, the security provided by subleases of valuable property in Mayfair that are occupied by sublessees that are good for the money.
[30] I will deal with the question of trading and no trading. It is of course the case that this is not a case of an occupying company of premises from which the occupier will trade. However, I do not draw the conclusion from that that all that is needed to protect the freeholders is the security provided by the subleases. That is because, ordinarily, a company that trades and occupies deals with the general public and needs, for success, both the premises and all the other virtues such as hard work in order to succeed. It will avoid forfeiture in its own interests by paying the rent, and the degree of its success is unlimited and not connected with the property itself.
[31] In this case, the claimant has no assets other than the headlease, is not trading except in the very limited sense of dealing as a landlord with the sublessees and turning any vacant properties to some account. Thus, successful trading, if such it can be called, during the next three years involving payment of the rent under the headlease is not itself a guarantee that things will not change after the three years, in the same way that successful trading by an occupying tenant that must continue to occupy in order to trade would be. Mr Reid will not and could not, except by being in breach of his covenant, carry on practice as a solicitor in any part of the property, nor does he need any part of the property to maintain or enhance the success of his practice.
[32] I now say something about the period of a guarantee. I have already made the point that, normally, it would be for the period during which the assignee remains the owner of the property. The foreseeable future is not ordinarily to be limited to three years from now. It seems to me that it should be for the residue of the term, until further assignment. For reasons that I will give in my own words in due course, it seems to me that there is a much greater need for a guarantee, in the circumstances of this case, after the three-year period from the auction has expired rather than during that period.
[33] I now mention the matter of security and Mr Brock’s argument that I must concentrate not upon the strength of the covenant or its weakness but upon the strength of the security offered. It can, I think, be accepted as a general rule that the better the security the less need there is to be concerned about the strength of the covenant to pay rent. Mr Brock gave as an example a long lease of a flat granted to a Lichtensteinian Anstalt, or maybe a company registered in the British Virgin Islands, whose covenant to pay may alone be worthless. If it defaults, forfeiture follows and the usual windfall accrues to the landlord that grants another long lease for a good premium, that assuming that the landlord does not prefer to have a rent rather than a void property.
[34] However, in that particular example the windfall arises because the landlord obtains vacant possession. It seems to me that this case is wholly different because forfeiture does not result in vacant possession, but, in practice, will involve many applications for relief from forfeiture by many sublessees, and the freeholders becoming commercial landlords that have to run a property business. At the moment, they are simply three individual trustees. Just as that is an inconvenient kind of security, the alternative remedy of distress by taking the rents of the sublessees under the Law of Distress Amendment Act 1980 may not avail the freeholders once the regulated tenants have gone and long leases at low rents have been granted, which is what one would expect to happen.
[35] So, I accept Mr Clark’s argument that, essentially, the freeholders are asking for and, in my judgment, reasonably asking for, the security that exactly matches the covenant to pay rent a straightforward guarantee. They do not want another security of a kind that involves them in the business of property management or development. The freeholders are entitled to ask for the security that they reasonably want, which goes no further than support the very covenant that they are entitled by the headlease to enforce, and which makes that enforcement effective.
[36] There is more to be said about security. It really comes down to this. The freeholders, as trustees, are simply concerned to receive a rent that, so far as one can tell, is measured at one-third of the deemed rack-rent within the definition that I have mentioned. The freeholders are concerned with the tenant’s ability to perform the covenant to pay as and when it is due, and are not interested in the alternatives that I have mentioned. It seems to me that it can reasonably take the view that the alternatives are unattractive. The parties are the freeholders and the head lessee, not the freeholders and the sublessees with whom the freeholders do not, at the moment, have any contractual connection. Such things as service charge disputes are for the head lessee to deal with, not for the freeholders. As Mr Clark put it, I think rightly, forfeiture does away with the entire covenant that the freeholders wish to retain. It would leave the freeholders to deal with all the sublessees or to create some new headlease, which would have to be marketed and granted to some party that is prepared to deal with them and to take such a new headlease.
[37] The freeholders’ concern is that, by taking a guarantee, they put out of Mr Reid’s way any temptation that he may have so to arrange matters that the claimant receives, at an uncertain time in the future, large capital payments and small rents from flats 2, 12 and 20 without making arrangements to ensure payment of the rent under the headlease. The evidence of Mr Winham suggests that much is likely to be done along those lines, and one only has to look at the way that the property was advertised for the auction (p636) to see that there is considerable emphasis on “future capital growth”. Particulars of that follow on that document. If Mr Reid is so sure that the claimant will have no problem in receiving, during the period of the assignment, sums ample enough to pay the head rent, he should have no problem in giving a guarantee for the period of the claimant’s ownership.
[38] The question of the value of the headlease has been debated and the claimant, in particular, relied upon the claimant’s wish not to lose |page:25| the headlease, an asset that was bought for just over £1m, as indicating the absence of need for a guarantee. However, that of course in turn depends upon whether the claimant chooses to gain capital in the form of large premiums for long leases, thereby reducing the value of the headlease. It is not unreasonable for the freeholders to seek a guarantee in case, as the freeholders reasonably fear, the claimant does take that course.
[39] The opprobrious epithet of asset-stripping has been used. The fact remains that, in my judgment, the argument put forward by Mr Clark is compelling and, in particular, the crucial points that he makes in paras 1, 2, 3, and 5 of his skeleton argument. The answer in the numbered para 2 of the letter of 19 September puts in different words the point that is made in the skeleton argument, and the point that I have endeavoured to explain above in my own words. As I have indicated, it seems to me that the freeholders reasonably fear, as I have explained, that what is likely to happen, later rather than sooner within the three-year period, is a diminution in the value of the headlease.
[40] Mr Brock argued that whenever vacant property is to be dealt with the claimant would negotiate with the freeholders to grant a term longer than the remaining period of around 56 years. It seems to me that the claimant might, but, then again, it is under no obligation to do so and might not. The point is well put, in my judgment, in para 38 of Mr Clark’s skeleton argument.
[41] Similarly, the paragraph in the letter above the numbered points puts in different words the other point that I have attempted to put into my own words. In my judgment, it cannot properly be said that no reasonable landlord would withhold consent, having been offered the terms offered at p57. Being a landlord may be a risky business, and many risks are difficult to foresee, but it is perfectly reasonable for a landlord that sees a clear risk to seek to avoid it and to cast the risk of the claimant’s insolvency on the very man who protests that the claimant will have no difficulty in paying.
[42] Each case turns on its own facts. Neither the existence of cases that are factually different nor the absence of any authority factually the same induces me to think that this is an unprecedented decision that in some way departs from established law. The reason there is no recorded case with substantially similar facts could be that any director of a £2 company with no trading record, taking an assignment of a headlease under which a substantial rent is payable, has ever refused, when asked, to give a guarantee for the period of the assignment.
[43] The claimant relied upon a number of authorities. One was Storehouse Properties Ltd v Ocobase Ltd (unreported case of Rimer J on 19 March 1998), but that depended upon its own facts, and the debate there was whose guarantee should be accepted. Reference was also made to Straudley Investments Ltd v Mount Eden Land Ltd (No 1) (1997) 74 P&CR 306. What is clear from that is that Mount Eden, the landlord, was clearly seeking far more than it was entitled to have under the terms of the lease, as appears from p311 of the report. In this case, the freeholders, by contrast, wish to have a covenant properly met, a covenant to which they are entitled.
[44] The claimant also relied upon Re Greater London Properties’ lease [1959] 1 WLR 503. The question there was whether a subsidiary company’s guarantee was acceptable. It was held to be perfectly acceptable because the parent company could have no interest but to preserve the subsidiary as part of its trading activities, which seems to have a reflection in what I said by way of contrast to this case about trading companies.
[45] The claimant also relied upon Design Progression Ltd v Thurloe Properties Ltd [2004] EWHC 324 (Ch); [2005] 1 WLR 1*. That was a case in which statutory damages were awarded for unreasonably withholding consent. I am well aware of the jurisdiction and recall a case in which I awarded such damages. It was Cadogan Properties Ltd v Mount Eden Land Ltd† in February 2000. As Peter Smith J said in the opening part of his judgment: “The qualified covenant against assigning is a powerful weapon in the hands of unscrupulous landlords.” There is a valuable summary of the mischief the Landlord and Tenant Act 1988 (the 1988 Act) was designed to remove in paras 7 to 17 of his judgment in which he mentions the duty of the landlord to respond to and give reasons within a reasonable time.
—————————————————————————
* Editor’s note: Also reported at [2004] 1 EGLR 21
† Editor’s note: Reported at [1999] CPLR 476
—————————————————————————
[46] I now mention the debate about reasons being given. The claimant took the point that the freeholders did not respond, as was their duty, to the offer when numbered para 1 was corrected. Perhaps correction is not the right word. I think that it was simply an ambiguity. What was the meaning to be given to “the passing rent”? The answer given simply clarified the point and made it clear that the passing rent was the rent that will be recoverable pursuant to the review.
[47] It seems to me that the answer that had been given when dealing with the other points remained equally applicable after that clarification as before. This was a point that was taken not in the original skeleton arguments, but by Mr Brock on Tuesday in his oral submissions. It was then the subject matter of a reply in the true sense of the word by Mr Clark in his final submissions between paras 11 and 16, and of a further riposte from Mr Brock in his comments upon those submissions.
[48] I am quite satisfied that the 1988 Act was not intended to prevent ambiguities from being clarified. It seems to me that if one matter is clarified and effectively removes a landlord’s objection that might otherwise have been thought to exist on the other view of the ambiguity, it simply means that the landlord will have less scope or chance for showing that its other objections are reasonable. Those other objections simply remain as the reasons that the landlord has given and is bound to give. There was no reason to think that any of those reasons had been abandoned. So, to put it shortly, there is nothing in that technical point to the effect that the landlord should, having had the matter clarified, have repeated all the matters that he had stated in the letter of 19 September. Indeed, I much prefer Mr Clark’s point that it is perfectly obvious what the objections are by reading the entirety of the correspondence. One can see all the arguments there rehearsed, and the claimant is in no way taken by surprise by the arguments that have been put forward, admittedly at much greater length, during a one-day hearing than could possibly be put into a paragraph or two of a letter.
[49] I merely point out that two of the alleged attractions that the freeholders should consider were raised by Reid Minty itself. That is, at p42, the point about the original covenantor and, at p39, the advantages of forfeiture. However, having heard the entire matter debated in detail, I am quite satisfied that the reasons for the withholding of consent were perfectly properly given by the defendants, and that the defendants reasonably withheld their consent to an assignment upon the terms offered in the letter of 11 September.
[50] I add only a little footnote. There is reference to the advice of “Jonathan Brock QC”. One wonders if it is intended to operate in terrorem of others. In reaching a conclusion that is contrary to what is said to be Mr Brock’s opinion I intend no disrespect. It is impossible to know, whether the opinion is one given by the most junior counsel to his client of little means, or one given by the Attorney General to the government, or by Mr Brock, the factual basis presented to the adviser when the advice was given. That is my judgment.
Claim dismissed.
