Landlord and tenant – Underlease – Consent – Claimant wishing to sublet land to third party – Defendant landlord refusing consent and seeking possession – Claimant seeking declarations that refusal of consent unreasonable – Whether claimant parting with possession in breach of covenant – Whether defendant unreasonably withholding consent – Claim allowed
The claimant was the lessee of 42 acres of land in Liverpool which was used for the storage and marshalling of motor vehicles under two long leases. It entered into an agreement with a third party under which the third party was granted permission to occupy the site “under licence agreements to be agreed”. The claimant subsequently wished to sublet the land to the third party for which it needed the consent of its landlord, the defendant.
When the defendant withheld consent, the claimant commenced proceedings for declarations that that refusal was unreasonable. The defendant denied unreasonableness and, following the issue of a forfeiture notice, made its own additional claim for possession against both the claimant and the third party. It alleged an earlier breach of covenant by the claimant in allowing the third party into possession without the defendant’s consent. The claimant and the third party denied any breach of covenant but, if it was found that there had been a breach, they maintained that it had been waived by the defendant’s acceptance of rent with knowledge of the breach. In any event, they claimed that the court could and should grant them relief against forfeiture.
Held: The claim was allowed.
(1) The courts had consistently given a strict, narrow meaning to covenants against parting with possession. A covenant which forbade a parting with possession was not broken by a lessee who in law retained the possession even though he allowed another to use and occupy the premises. Possession and occupation were separate legal concepts. However, for the purposes of a covenant such as the present, the parting with possession had to be complete. The acid test for possession, as contrasted with mere occupation, lay in the right of the person in occupation to exclude others, including the tenant, from the premises: Stening v Abrahams [1931] 1 Ch 470; Lam Kee Ying Sdn Bhd v Lam Shes Tong [1975] AC 247; Akici v L R Butlin Ltd [2006] 1 EGLR 34, [2006] 07 EG 136 and Clarence House Ltd v National Westminster Bank plc [2010] 1 EGLR 43, [2010] 08 EG 106 applied.
In the present case, the right conferred on the third party was a right to occupy the premises as the claimant’s licensee. The third party had a right to call for underleases which made it clear, by juxtaposition, that no right of legal possession was intended to be granted until such underleases were granted. It was neither side’s understanding that the claimant was to be excluded from the site. At the date of the forfeiture notice the claimant continued to have responsibilities on the site, and had not wholly ousted itself from possession. Both the claimant and the third party continued to recognise that its relationship had not changed from the original agreement so far as concerned the claimant’s possession of the site. There was accordingly no breach of the covenant against parting with possession in the leases.
(2) Although the issue of waiver did not therefore arise, viewed objectively, the defendant did not have good reason to believe that the claimant had parted with possession to the third party. The material available to the defendant merely showed that the third party had operational control of its business on the site. The defendant had no reason to suppose that the claimant had ousted itself altogether from possession of the site and could not be said to have waived any breach: Van Haarlam v Kasner [1992] 2 EGLR 59, [1992] 36 EG 135 considered.
(3) On the facts, if there had been a breach, the court would have been prepared to grant relief from forfeiture.
(4) The burden was on the defendant to show that the refusal of consent was reasonable pursuant to section 1(6)(c) of the Landlord and Tenant Act 1988. Consent could not be refused on grounds which had nothing to do with the relationship of landlord and tenant as regards the subject matter of the lease. The landlord’s obligation to show that his conclusions were reasonable did not mean that he had to show that they were right or justifiable, just that they were conclusions which might be reached by a reasonable person in the circumstances. Consent could not normally be refused unless the breach of covenant identified was of such a nature as to justify the refusal of consent, which would involve a consideration of the nature, gravity and remediability of the breach. The landlord was restricted to reliance on those reasons which he put forward in writing within a reasonable time: Ashworth Frazer Ltd v Gloucester City Council [2002] 1 EGLR 15, [2002] 05 EG 133 and Go West Ltd v Spigarolo [2003] 1 EGLR 133 applied.
In the present case, even if the defendant had had good reason to believe that the claimant had parted with possession to the third party, it would not have amounted to a reasonable basis for refusing to give consent. The third party’s financial standing did not provide a reasonable basis for refusal of consent; nor did its potential ability to object to the defendant’s planning application to develop the site. It was able to object to the planning application from its position as licensee, whether or not consent to an underlease was given. Accordingly, consent had been unreasonably withheld.
Nicholas Dowding QC and Alan Johns (instructed by Clarke Willmott LLP) appeared for the claimant; Mark Warwick and Henry Webb (instructed by Addleshaw Goddard LLP) appeared for the defendant; Martin Hutchings QC and Simon Atkinson (instructed by Weightmans LLP) appeared for the third party.
Eileen O’Grady, barrister
