In the first article of a two-part series on landlord’s consent, Krista Powell and Millie Pancholi explore alienation.
It is difficult to imagine a world where landlords give their tenants free reign to do as they please on the grant of a commercial lease. Whether found in the provisions around alienation, alterations or the permitted use of the property, the majority of commercial leases require consent from the landlord, and in some cases the landlord’s mortgagee and/or a superior landlord. Most commonly, landlord’s consent is required before a tenant can deal with its lease.
What is alienation?
Alienation is the legal term for assigning, subletting, charging, sharing or otherwise parting with the tenant’s interest. Leases very often contain provisions dealing with alienation; however, where they do not, the tenant is free to dispose of its interest in whatever manner it pleases.
For a commercial lease to omit restrictions on alienation completely is extremely rare – but why is this? Ultimately, landlords want to maintain control. They want control of who is occupying their property, control of who is paying the rent and control of how the property is being used.
This concept is deep-rooted in English law dating back to 1066, following the invasion of William the Conqueror and the start of feudalism. The king was the superior landlord of all land, with a few lords possessing parcels of land that would be divided among tenants of their own – and if the tenants wished to convey their land, they were expected to seek consent to do so.
And why would they have to do so? The answer is clear: to ensure that the king was not too far removed from controlling the land and those who occupied it. Hundreds of years later, a similar principle still applies in relation to landlords.
Types of restrictions
- No restrictions Leases with no express provisions in respect of alienation facilitates complete freedom for a tenant to deal with the lease with no requirement for a landlord’s consent. Having no restrictions on alienation at all is unusual, and is typically only seen in long leases, where a premium has been paid and/or there is no significant rent payable.
- Absolute restrictions A lease may include provisions that prohibit alienation completely, which is preferable for landlords aiming to maintain control and wanting to ensure the original tenant remains in situ. However, it is less favourable for tenants, who are unconditionally restricted from dealing with the lease. At present, absolute restrictions in relation to underletting or assigning the whole are uncommon, although they can often be seen in respect of assigning part only.
- Qualified restrictions The most common type of restriction requires the prior written consent of the landlord, with leases ordinarily adopting the caveat that the consent is “not to be unreasonably withheld”. In the absence of such wording, section 19(1)(a) of the Landlord and Tenant Act 1927 takes effect to imply also that consent is not to be unreasonably withheld.
In granting consent, a landlord has statutory duties under the Landlord and Tenant Act 1988 to: (1) give consent, except where it is not reasonable to do so; (2) give written notice of the decision, including any conditions to be imposed; and (3) pass on applications to appropriate parties, such as a superior landlord or mortgagee, all of which must be done within a reasonable time.
Therefore, if withholding consent or imposing conditions, landlords hold the burden to prove that they are acting reasonably and must explain the reasons for refusal. Landlords must respond within a reasonable time to avoid a breach of statutory duties and payment of damages.
This then raises the question: what constitutes acting reasonably? This ultimately depends on the circumstances. A lease may explicitly set out circumstances where the landlord has the right to refuse consent; alternatively, it may set out conditions the landlord may impose on granting consent.
Reasonable refusals
- Financial viability Looking towards the well-known three times rent rule, by which landlords require tenants to have a gross income of at least three times the rent, landlords can reasonably refuse consent where the proposed assignee does not have the financial means to meet the rent demands and ultimately perform the covenants of the lease.
- User It is reasonable for landlords to refuse consent on the grounds of the proposed assignee’s or subtenant’s use and the aim of keeping a good tenant mix (see Moss Bros Group plc v CSC Properties Ltd [1999] EGCS 47). Mainly in the retail sector, landlords commonly have policies which they can produce to the court outlining what type of tenant they require in a particular property, which will in turn satisfy the test of reasonableness.
- Diminution in value Where an assignment will result in diminution of the value of the property, landlords can reasonably refuse consent. However, evidence will be required.
- Breach of lease If the tenant making the application for landlord consent is in breach of its covenants, the landlord is entitled to refuse consent on this basis. Therefore, it is crucial that tenants ensure that they are complying with all the obligations of the lease to the relevant standards before making an application.
Reasonable conditions
On the grant of consent, landlords may seek to impose conditions, which also must be reasonable. Again, this raises the question: what is a reasonable condition? A landlord can give consent conditional on the provision of a guarantor; that being so, the landlord is also entitled to request confirmation that the guarantor can not only meet the rent requirements under the lease but also that it is able to meet all its other liabilities.
Furthermore, it is deemed reasonable for a landlord to demand a bank reference, provided that this is requested in relation to obtaining comfort in respect of the sums due from the tenant pursuant to the lease only.
Landlords can also require that the tenant pay a reasonable sum in respect of any costs incurred in connection with the application for consent (such as lawyers’ and surveyors’ fees), including surveyors’ costs relating to reporting on whether the tenant is in breach of its lease. Nonetheless, if the sum imposed is deemed to be unreasonable, the condition itself will also be deemed unreasonable and the condition becomes redundant.
Reasonable time
The requirement for a landlord to deal with an application for consent within a “reasonable period” relates to the period from the date the application is served on the landlord until the date on which the landlord notifies the tenant of its decision.
The period has been seen to be measured in days rather than weeks. However, in more convoluted cases it has been measured in weeks rather than months (Go West Ltd v Spigarolo [2003] EWCA Civ 17; [2003] 1 EGLR 133).
Again, it ultimately depends on the circumstances, and in NCR Ltd v Riverland Portfolio No 1 Ltd (No 2) [2005] EWCA Civ 312; [2005] 2 EGLR 42 three weeks in August was not considered inherently unreasonable owing to it being the holiday season.
During challenging times, tenants may wish to assign or underlet quickly in order to escape their liabilities and, if so, they should consider setting clear timescales for transactions, as what is considered a “reasonable time” is judged from the landlord’s point of view.
As seen in E.ON UK plc v Gilesports Ltd [2012] EWHC 2172 (Ch); [2012] 3 EGLR 23, the court found that 11 days was not an unreasonable time, taking into account the tenant’s failure to highlight the urgency of the matter.
It is evident from the case law that there are a number of lessons to be learnt. For landlords, a careful balancing exercise between the desire to keep a tight control over their property versus their duties to act reasonably and quickly must be undertaken.
For tenants, preparation is key. A comprehensive written application for consent is paramount, addressed to the correct recipient and incorporating as much information as possible, including setting a reasonable timetable. On the whole, it is crucial for both parties to take legal advice.
Talking point
Distinguishing between “occupation” and “possession” is key in this area of law. In Ansa Logistics v Towerbeg [2012] EWHC 3651 (Ch); [2012] PLSCS 276, the landlord refused consent to underlet on numerous grounds, one being that it believed the tenant was in breach of the lease covenant not to part with possession. Here, the tenant had allowed a third-party company to operate on the site. The judgment confirmed that consent was unreasonably withheld on the basis that parting with possession involved the exclusion of all other parties, including the tenant. Therefore, the landlord did not have good reason to believe that the tenant had parted with possession; instead, it had simply parted with occupation.
Common pitfalls
- Where landlords are potentially in breach of their duties (ie their refusal is found to be unreasonable or their response is unreasonably delayed), tenants often proceed with the alienation in the hope that they can later claim damages for reasonably foreseeable losses suffered as a result of the breach. In reality, however, it is risky for tenants to proceed based solely on their subjective assessment of the landlord’s reasonableness. If the tenant’s judgment is deemed incorrect, the landlord can seek damages, claim an injunction or even seek to forfeit the lease. For this reason, although time-consuming and costly, most tenants will prefer to make an application to the court for a declaration.
- Invalidly serving applications for consent. Section 1(3) of the Landlord and Tenant Act 1988 stipulates that the application must be “served on the person who may consent”. Accordingly, it is deemed best practice to always make the application directly to the landlord, copying in the landlord’s agent or solicitor where appropriate. In No 1 West India Quay (Residential) Ltd v East Tower Apartments Ltd [2016] EWHC 2438 (Ch); [2016] EGLR 3, the landlord advised the tenant to send the application for consent to an in-house lawyer, as opposed to the landlord’s address for service. Thus, the application for consent was deemed not to have been served and the landlord’s statutory duty was not triggered, irrespective of the landlord’s directions.
- Further, the application for consent should be served in the manner provided in the lease, or if the lease is silent, in accordance with section 23 of the Landlord and Tenant Act 1927. Although an email was considered a “written application” in the recent case of Gabb v Farrokhzad [2022] EWHC 212 (Ch); [2022] PLSCS 26, an application for consent via email is unlikely to be considered good service.
- Misinterpreting the drafting of the alienation provision. Each document should be interpreted in line with the specific drafting, noting that a slight amendment or addition can completely change the meaning of the clause. In Field v Barkworth [1986] 1 EGLR 46, a covenant “not to assign or underlet any part of the premises” was interpreted by the tenant to restrict the alienation of part of the property. However, the word “any” changes the context and also prohibits an assignment or underletting of the whole.
- Although a landlord may be found to be acting reasonably in granting consent conditional on the payment of costs, if the sum sought is “unreasonably high” then the landlord will be in breach of its statutory duty, as the Court of Appeal found in Dong Bang Minerva (UK) Ltd v Davina Ltd [1996] 2 EGLR 31.
Krista Powell is a partner and Millie Pancholi is a paralegal in the investment and property management team at Brabners
Next time: Krista Powell and Millie Pancholi conclude their two-part series on landlord’s consent by exploring alterations
