A recent Scottish Court of Session ruling could have major repercussions for commercial property leasing deals, a leading QC has warned.
The decision, in which the court ruled against Homebase in two cases where, as existing tenants, they wanted to assign leases on retail units in Falkirk and Kirkcaldy means that tenants looking to quit a commercial property lease and assign it to another party may have to divulge financial details of the deal in order to secure consent from their landlord.
Dispute resolution expert Craig Connal QC of legal firm Pinsent Masons said the ruling was an important one which may catch parties unawares.
Connal said: “It may surprise uncritical readers of the assignation clauses, who conclude that the only reason a landlord could reasonably withhold consent for assignation of a lease was, if the incoming tenant did not fit the bill in terms of being ‘good and strong’ and able to fulfil the obligations of the lease.
“The court has confirmed that a landlord is able to request details of any proposed financial inducement included in the deal, because that could impact on later rent reviews. If the tenant refuses to offer up this information, the landlord is entitled not to give consent for the lease assignation and this would not be considered to be unreasonable.
“The outcome of this ruling for tenants is that even if they have a strong occupier willing to take on their lease, they may not be able to get out of it without providing the financial details to the landlord, which they would normally regard as sensitive and confidential.”
Connal added: “Most tenants know they could face this situation further down the line and may want to assign a lease. They need to pay close attention to the clause wording when negotiation of the lease is still underway – and take good advice if a dispute later arises.”
Though the ruling is a Scottish one, similar issues can apply in England and Wales. English authority was cited in the case, and Lord Tyre’s decision may in future be relied on south of border.
Homebase requested consent from landlords Grantchester and Hammerson to assign a lease of the two retail premises to CDS, owners of The Range chain, but when solicitors for the landlords requested further details of Homebase’s proposed transaction, but the DIY chain refused to divulge the financials.
In those circumstances, Tyre found the landlords had not acted unreasonably in withholding consent.
Tyre said: “The question in the present case is whether the landlord has reasonably withheld consent on the ground of the tenant’s refusal to provide information as to whether it has agreed with the proposed assignee to make any payment by way of rent subsidy or reverse premium. In my opinion the landlord’s request for this information is reasonable, entitling it to withhold consent unless and until the information is supplied.
“If, as I have held, the payment of a rent subsidy or reverse premium is a matter which might – and I need put it no higher than that – reasonably affect the landlord’s decision whether or not to consent to the proposed assignation to CDS, then it follows that it is reasonable for the landlord to require the supply of that information before making its decision. It further follows that the landlord is not acting unreasonably in withholding consent either to the assignation or to the change of use on the ground that the tenant is refusing to supply the information.”
Homebase Ltd v Grantchester Developments (Falkirk) Ltd and Homebase Ltd v Hammerson (Kirkcaldy) Ltd Court of Session (Lord Tyre) 30 April 2015
Lindsay QC (instructed by DWF LLP) for the pursuer
Dunlop QC (instructed by Brodies LLP) for the defenders
