· A landlord can only demand an
automatic AGA where the lease contains an express provision to that effect
· On a lease renewal, a landlord can
only insist on a reasonably required AGA
Although the
Landlord and Tenant (Covenants) Act 1995 came into effect more than four years
ago, it was always going to take time for its precise impact to be tested in
the courts. That said, it is surprising that one key area in which its
operation was uncertain right from the outset, namely lease renewals, has taken
so long to be litigated. This has now been rectified by the recent ruling in Wallis
Fashion Group Ltd v CGU Life Assurance Ltd [2000] EGCS 45. Here,
Neuberger J has decided that, upon the statutory renewal of a pre-1996 lease,
the landlord cannot insist upon the inclusion of a provision under which, upon
assignment, the tenant must automatically enter into an authorised guarantee
agreement (an AGA). The best that a landlord can achieve is a term under which
the tenant must, if reasonably required to do so, enter into a pre-agreed form
of AGA.
The dispute in Wallis
arose out of the statutory renewal of 15 leases of retail units within the
Southgate Centre in Bath. All were due to expire on 23 June 1999 and all
contained assignment provisions under which the tenants could only assign if
the assignee entered into a direct covenant with the landlord; and then could
only do so with the landlord’s prior written consent, which would not
unreasonably be withheld. It was always clear that any renewed lease would need
to comply with the 1995 Act, and, indeed, sections 34 and 35 of the 1954 Act
were amended so as to make this explicit. Thus, the assignment provision in the
new leases would need to be very different from its current form.
The landlord
proposed, quite naturally, to take advantage of the freedom given to it under
the 1995 Act to specify in advance the circumstances in which it could refuse
consent without being required to satisfy any test of reasonableness.
Furthermore, it also wished to include another requirement that has become
standard practice in new lettings, namely one that effectively requires the
tenant, as a condition of consent to any assignment, automatically to enter
into a pre-agreed form of AGA. It was this requirement that proved to be the
sticking point for the tenant. It wished the obligation to enter into an AGA to
be subject to a reasonableness test.
The first argument
run by the landlord was that, under the terms of the 1995 Act itself, it was
entitled as of right to an automatic AGA under section 16(3)(b). This provides
that an AGA can only be entered into where the landlord’s consent to an
assignment is required and that consent is subject to a ‘lawfully imposed’
condition requiring an AGA. The landlord contended that ‘lawfully imposed’
meant no more than that the AGA itself otherwise complied with section 16. The
tenant argued that it was the condition that had to be ‘lawfully imposed’;
hence, if the lease was silent on the question of an AGA, the landlord could
only demand an AGA if it was reasonable to do so.
The judge had no
difficulty in agreeing with the tenant’s interpretation of the Act. An
automatic AGA can only be imposed where the lease itself expressly provides for
it. This meant that the inclusion in the renewed lease of an express term
requiring an AGA only where this was reasonable appeared to be superfluous.
However, as Neuberger J accepted, the advantage of the proposed provision was
that it would settle in advance what the form of any reasonably required AGA
would be.
He therefore went
on to consider the key question of whether the court should order the inclusion
of an express requirement for an automatic AGA in a statutorily renewed lease
or whether the condition should, as the tenant contended, be subject to a
reasonableness test.
The landlord argued
that the automatic AGA should be included for three main reasons. First, the
assignment provision in the new lease would, in any event, be more favourable
to the tenant than that in its existing lease. Second, the inclusion of a
reasonableness requirement would lead to uncertainty. Third, the fact that 14
of the other 15 tenants in the centre who were actually renewing their leases
had accepted an automatic AGA was of significance in two respects: it
demonstrated that automatic AGAs represented current market practice, and it
also meant that if the Wallis lease did not contain such a provision it would
be out of line with the other leases in the centre.
Although the judge
acknowledged the combined force of these arguments, he was not persuaded. In
particular, he was satisfied that where legislation changes the law so as to
benefit tenants, this does not mean that landlords are entitled to insist upon
the most generous form of clause permitted under the Act. It is settled law
that any change in the terms of a lease on a statutory renewal to which one of
the parties is opposed must be justified and fair to both sides. The 1995 Act
represents a ‘sea change’ in the law governing a tenant’s liability following
assignment and in the law governing the landlord’s power to impose terms on
assigning the lease. Unless the court ordered otherwise, the landlord could
not, merely by including a requirement for consent to an assignment, demand an
AGA as of right.
A
useful analogy could be found in the Court of Appeal decision in Cairnplace
Ltd v CBL (Property Investment) Co Ltd [1984] 1 WLR 696. Here, the
Court of Appeal had refused to include an express provision requiring the
tenant to pay the landlord’s costs of preparing the lease on the basis that the
Costs of Leases Act 1958 had intended to change that practice, and the court
would not exercise its discretion so as to deprive the tenant of the Act’s
protection. This, the judge in Wallis thought, was the correct approach
to the impact of the 1995 Act.
