by Brian Woolcock
The Landlord and Tenant Act 1988 came quietly into force on September 29 1988. So far, its impact on the commercial property world has been limited, but there are signs that this situation is about to change.
Where a tenancy contains a covenant prohibiting a form of alienation, whether it be assignment, underletting, mortgaging, charging, parting with or sharing possession of the demised premises, or any combination of these, without the consent of the landlord, then that covenant is by virtue of section 19(1) of the Landlord and Tenant Act 1927, subject to the proviso that consent shall not be unreasonably withheld. Prior to the 1988 Act, the onus fell upon the tenant to prove that the landlord was being unreasonable where consent was not forthcoming. In practice, actions by tenants for a declaration against the landlord were very rare. It was far more likely that in the case of such difficulties a prospective assignee would seek alternative premises with a more amenable landlord.
Under the new legislation, however, the emphasis has switched to the landlord. There is now a duty imposed upon the landlord to respond within a reasonable time to any notice served upon him by the tenant, and such response must contain either the landlord’s consent (which may be subject to such conditions as are reasonable) or a refusal giving reasonable grounds for such refusal. It is worth noting that the Act applies to all premises whether commercial or residential (except secure tenancies) but does not extend to any of the other covenants by the tenant which are sometimes considered at the same time as an application for consent to assign. Thus, for example, the landlord will still have an undiminished power to veto a new user where the lease contains an absolute covenant restricting the tenant to a specific user.
Obviously, the most important issue in each case is whether the landlord is being reasonable or not, especially as the Act gives no specific assistance on the interpretation or application of this test. There is no reason to suppose that the courts are likely to view the test any differently from the way in which they have always viewed it when dealing with the few cases that have come before them in the past. For example, it would appear that the landlord can refuse consent where the references for the proposed assignee are unacceptable on reasonable grounds or where the transaction, if allowed to proceed, will lead to a breach of covenant. The old line of cases relating to the principle of good estate management are also almost certainly still good law. The Act does not affect the nature of the duty on the landlord. Rather it affects the likelihood of enforcement of that duty and the consequences of failure to comply.
The landlord who unreasonably withholds or delays consent or who grants consent subject to unreasonable conditions or who refuses consent on unreasonable grounds may be liable for damages in civil proceedings for breach of this new statutory duty. The implications of this duty are far-reaching, since the tenant can recover any reasonably foreseeable losses. In those sectors where a premium can still be achieved for the assignment of a lease the loss could include that premium. If the tenant has vacated the premises he would probably be able to include a claim for rent thrown away during the period from the date when the rejected assignee would have occupied until the date when an acceptable replacement assignee occupies (if one can be found at all). The sums are therefore potentially quite large.
In spite of the protection given to tenants by this Act, many landlords and some landlords’ agents and solicitors do not appear to be fully aware of the potential dangers. Therefore, when acting for tenants, the writer has for some time been using (in appropriate circumstances) a standard, hard-hitting form of application for consent to assign which specifically sets out the potential effects of the landlords’ not complying with the requirements of the Act. The expressions of surprise and indignation from the recipients of such notices tend to confirm the impression that a substantial proportion of the letting fraternity are still in a state of blissful ignorance over the Act’s provisions.
It does seem, however, that the practice of serving such notices may be starting to spread. Certainly it has been noticeable recently, when acting for landlords, that a few similar notices are being served and it is necessary to be ever more careful in giving advice to landlord clients.
In the past, applications for the landlord’s consent have been good news for the landlord, his solicitors and agents. In the case of a licence to assign, the landlord would receive the benefit of a further covenant for payment of rent from the assignee which was in addition to those already “under his belt”; for example, from the original tenant. The landlord has also traditionally taken the opportunity, when granting consent, to recover all arrears of rent, service charge and interest from the existing tenant up to the time of the application. Furthermore, landlords often took the opportunity to inspect the premises and to require outstanding repairs and redecoration to be dealt with by the tenant as an express or implied condition of giving consent. Whether they are strictly entitled to do this is another story. As for landlords’ agents and solicitors, such applications presented an opportunity to recover agreeable levels of profit costs for apparently relatively uncomplicated work.
In theory, this situation changed when the Landlord and Tenant Act 1988 came into force. In practice, it does not seem, so far, to have done so. There may well, however, be changes as and when the courts are required to pronounce upon the “reasonableness” of landlords, particularly if the decisions result in the award of high measures of damages. It is to be hoped that any such decisions receive a high degree of publicity to serve as a warning to all those who have not adjusted their procedures in the light of the 1988 Act. The Act is designed to ensure that applications for consent are placed at the top of the landlord’s pending tray rather than at the bottom, but a substantial proportion of investment owners seem to need convincing that the Act has any teeth before reacting. In some ways this is perhaps not surprising given the limited effect of some previous attempts by Parliament to impose a new regime on the property world; for example, the totally ineffective Costs of Leases Act 1958, which was intended to ensure that on lettings the landlord would be responsible for his own professional costs.
While judicial pronouncement on the Act is awaited, the defences to the aggressive application for consent to assign are still being refined by those of us who are believers in the potential efficacy of the Act’s provisions. The current favourite is for the landlord to insist on full references before even considering the application. This may not be new, but whereas it was usual to perm any two or three references from “trade”, “bank”, “accountants”, “landlords”, “solicitors” or previous years’ accounts, it is now becoming the fashion to ask for all of these references and any others of which the landlord or his agents can think.
The second line of defence is to ask for security for the landlord’s professional costs before proceeding to deal with the application. It is usually the tenant’s solicitor who is asked to give a formal undertaking even though he is relying on (at best) an informal agreement with his client. Many tenants’ solicitors (quite rightly in the writer’s view) refuse to give such undertakings and time ticks by while this impasse is resolved. Usually this will involve the landlord’s agreeing to accept the tenant’s undertaking rather than his solicitors or the solicitor agreeing a ceiling on costs and obtaining hard cash from his client up to that level. It is not yet decided whether such a requirement for security for costs is reasonable, but it is often thrown in for good measure.
One, perhaps not so common, ploy is to ask the tenant for details of any premium payable for the assignment. This seems to be a valid request to enable the landlord to assess the potential damages if he acts unreasonably. Many tenants when faced with this request may suspect that the landlord has ulterior motives and may not wish to disclose any information. But if the tenant does not do so he may well reduce his chances in any subsequent proceedings. This sort of request has further scope and one can foresee a time when tenants are asked for additional information, such as details of other interested potential assignees.
The most common battleground in connection with applications for licences to assign is the requirement for the provision of guarantors in respect of the assignee’s covenants. For many years, there has been a degree of academic uncertainty as to whether a landlord has carte blanche in deciding in what circumstances guarantors would be required on assignment of his leases or whether there is a risk that a particular form of requirement for a guarantor may be an unreasonable withholding of consent under the provisions of section 19(1) of the Landlord and Tenant Act 1927. The academic argument appears to have had little effect in practice upon the attitude of landlords, who have continued to require guarantors often in unlimited numbers and with any assignee. It seems to be self-evident that such provisions should be resisted most strongly during negotiations for the lease, but all too often they are not. Frequently this type of clause only gets headline billing when the tenant wishes to assign.
Until now there has been little real incentive for tenants to take this issue before the courts for a definitive ruling. The proposed assignee would invariably prefer to seek out alternative premises with a more amenable landlord rather than await the outcome of potential protracted court proceedings. Now, however, there is the prospect of the assignor’s claiming damages under the 1988 Act, where the assignee refuses to provide a guarantor and the landlord consequently refuses consent. The whole issue regarding guarantors may, therefore, finally be brought before the courts. It is likely that the courts would wish to consider carefully the individual clauses of each lease before reaching a decision upon whether it is reasonable for the landlord to insist upon a guarantor in a particular case. Landlords should, therefore, seek advice from their professional advisers on the terms of the lease before responding to the tenant’s application.
If this view of the shape of things to come is correct, the landlord will need up-to-the-minute advice on the state of play in this interesting field. At present, there are many areas which lie shrouded in mystery. Over the coming months and years landlords’ professional advisers will have to be ever watchful for any light shed on the pitfalls along the increasingly difficult path leading to successful property investment. They will need to respond quickly and correctly to a wide variety of applications raised in varying ways by different tenants in connection with various forms of lease. As a result, more time and effort will be required on the part of the advisers.
Undoubtedly this will be reflected in the professional adviser’s bill, which will normally be payable by the person benefiting from the increase in speed and efficiency — the tenant. There is, therefore, no need for the landlord to worry, provided he has the correct advisers.
