One of the phrases often used to describe the attributes of an acceptable assignee or undertenant specifies that the proposed assignee or undertenant must be “respectable and responsible”. What do those words mean when a landlord is dealing with a company?
The Outer House of the Scottish Court of Session has provided us with some useful guidance in Burgerking Limited v Castlebrook Limited [2014] CSOH 36; [2014] PLSCS 72. The litigation concerned a fast food restaurant in Kilmarnock. The tenant had applied for a licence to underlet to a company that had lain dormant until it acquired 26 restaurants from Burger King in Scotland. The company was unable to provide audited accounts to support its application, but did supply further information about the owner of the company, who had been operating Burger King Restaurants through another company, with an established track record, since 1993.
The landlord rejected the application on the ground that it did not know whether the company was respectable and responsible, as was required by the tenant’s lease. However, it did indicate that it would consider a further application by the new company, if the application were to be supported by a guarantee from either the owner of the company or the other company in the group. Alternatively, it would consider an application to underlet directly to either of those parties.
The new company tried to persuade the landlord that its corporate background sufficed to establish its credentials, but the landlord stood firm. There was no positive evidence that the company was respectable and responsible and it was insufficient to say that there was no evidence to the contrary.
The Scottish court referred to several English cases that deal with the meaning of the phrase “respectable and responsible” while explaining its decision (although the law relating to the reasonableness of a landlord’s decision in Scotland does not turn on the application of section 19(1) of the Landlord and Tenant Act 1927, as it does in England). The court ruled that a limited company is capable of being “a respectable and responsible person” for the purposes of an application to assign or underlet. The word “respectable” refers to the manner in which a company conducts its business, and to its reputation, whilst “responsibility” relates to its financial capacity and the obligations that it plans to undertake.
The court noted that insolvency can strike any one member of a group of companies while the owner, and other group companies, continue to flourish. Therefore, a landlord who specifies that a proposed tenant must be responsible is stipulating that he must be satisfied as to the financial position of the incoming tenant itself, and not of third parties who may or may not provide assistance if the company were in financial trouble.
Evidence of respectability should also relate to the incoming tenant itself. A company does not acquire respectability automatically along with its certificate of incorporation. However, the way in which it carries on business may soon indicate this. Interestingly, the court suggested that it might have been more sympathetic had the company provided evidence of a successful first few months’ trading, together with references from landlords of other Scottish outlets from which it had already begun to trade.
Allyson Colby is a property law consultant
