Commercial tenant giving qualified covenant against subletting – Freedom to sublet qualified by provisos as to contents of proposed sublease – Tenant subletting on required terms but furnishing proposed sublessee with collateral deed modifying certain obligations recited in proposed sublease – Landlord refusing licence on ground that provisos not complied with – Whether proposed sublease and deed had to be read together as being interdependent – Whether burden lay with tenant to establish compliance with provisos
The defendant tenant operated a DIY store in a 40,000 sq ft retail warehouse unit in the outskirts of Wolverhampton, which it occupied under a 25-year, full-repairing lease expiring in June 2010. The initial rent of £105,000 pa was subject to five-yearly, upwards-only reviews. By clause 3(32)(C) of the lease, the tenant covenanted not to underlet the whole or any part of the unit without the prior consent of the claimant landlord, such consent not to be unreasonably witheld or delayed. However, that covenant was subject to a number of provisos, notably that such underlease would: (i) not reserve a rent less than the full market rent reasonably obtainable without taking a premium; (ii) contain covenants by the underlessee in the same form (mutatis mutandis) as those given by the tenant; and (iii) effectively provide that the rent payable by the underlessee would be subject to review, on an upwards-only basis, upon the same dates as those applicable to the rent payable by the tenant.
In June 1995 the rent was reviewed to £322,500 pa. In March 1998 the tenant, having notified the landlord that it intended to close its store at the unit with effect from the end of May of that year, engaged estate agents to find a suitable subtenant. However, because of the inconvenient size and location of the unit, which did not lend itself to subdivision, no sustained interest was shown before the end of 1999, when heads of terms were agreed with a newly founded furniture retailer, L Ltd. The heads of terms recorded that L Ltd would, after a rent-free period, pay a rent of £200,000 pa until the next rent review in June 2005, and thereafter £323,624 (described as the current passing rent) until the end of the term, when the premises were to be handed over in a wind and watertight condition.
Applications by the tenant for the landlord’s consent to the proposed subletting met with various objections. In June 2000 the tenant submitted a revised application, having furnished the landlord with copies of the proposed underlease and a further deed (the collateral deed) made with L Ltd. The proposed underlease reproduced the material provisions of the tenant’s lease and purported to reserve the same rent (£322,5000), subject to the same review provisions. By the collateral deed, the tenant undertook to pay to L Ltd: (a) the difference between the rent payable under the proposed underlease and the lower rent specified in the heads of terms; and (b) the cost to L Ltd of complying with any obligation to repair or redecorate that would involve the unit being put into a better state of repair than it was at the date of grant of the underlease. The collateral deed went on to declare that the undertakings were not intended to affect any persons other than the tenant and L Ltd.
The landlord continued to withhold its consent and sought an order to restrain the tenant from proceeding with the subletting. It contended that the provisos had not been complied with, because the terms of the collateral deed had to be read as one with the proposed underlease. This was disputed by the tenant, which made a counterclaim under the Landlord and Tenant Act 1988 for damages for unreasonable refusal of consent. The judge found as a fact that the rent stated in the heads of terms could not be described as less than the full market rent reasonably obtainable in the circumstances.
Held: The provisos had not been fully complied with.
1. In the light of Bocardo SA v S&M Hotels Ltd [1979] 2 EGLR 48, it was common ground that each of the provisos had to be complied with before the issue of reasonableness could be taken. In contrast to the statutory rules applicable to allegations of unreasonable refusal (see, generally, Footwear Corp Ltd v Amplight Properties Ltd [1998] 2 EGLR 38), the burden of showing compliance with a proviso lay with the tenant. The question of whether the underlease and the collateral deed had to be read together depended upon whether they were “interdependent” in the sense employed in AG Securities v Vaughan [1988] 2 EGLR 78, the main test being whether both documents would have been signed or neither.
2. That test was clearly satisfied as regards the first proviso (achieving a market rent). However, in view of the findings made as to the steps taken to market the property in difficult conditions, the landlord could not claim that the first proviso had not been fulfilled. Nor could such a claim be made as regards the second proviso (repeating material terms), as the obligation in the proposed underlease to perform the repairs was in no way diminished by the underlessor’s collateral obligation to make a contribution to a part of the cost of those repairs.
3. However, the third proviso (alignment of rent review provisions) had not been complied with. The provision in the deed for a fixed rent to be payable as from 2005 was plainly inconsistent with the intention, expressed in the underlease, of having a review to a full market rent in respect of that period. For that reason alone, the landlord was entitled to succeed.*
*Editor’s note: The judge went on to decide (applying the sixth proposition of Balcombe LJ in International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] 1 EGLR 39) that if the provisos had not stood in the tenant’s way, it would have made out its case for unreasonable withholding of consent.
Michael Barnes QC and Tiffany Scott (instructed by Nabarro Nathanson) appeared for the claimant; John McDonnell QC and Gerard van Tonder (instructed by Russell Jones & Walker) appeared for the defendant.
Alan Cooklin, barrister
