Tenants wishing to sublet premises — Landlords refusing consent on ground of detrimental effect on value of reversionary interest — Rent to be reserved under sublease believed by landlords not to be open market rental value — Tenants seeking declaration that landlords unreasonably withholding consent
The defendant landlords leased to the plaintiffs premises at The Pyramid, High Street, Watford, on September 16 1994 for a term of 15 years at a rent of £115,000 pa (subject to five-year upwards-only reviews). The lease stipulated that the tenants would not underlet the premises without the prior written consent of the landlords, such consent not to be unreasonably withheld, and the tenants also covenanted that “each permitted underlease shall be granted … at a rent not less than the then open market rental value of the premises to be approved by the landlords prior to any such underlease such approval not to be unreasonably withheld”.
The tenants entered into an agreement with Byte Computer Stores Ltd on July 1 1996 to grant an underlease at £75,000 pa. The landlords refused consent on the ground that it would detrimentally affect the value of their reversionary interest and that the rent of £75,000 was not, or not believed by the landlords to be, the open market rental value of the premises. The tenants applied to the court for a declaration that the landlords’ consent had been unreasonably withheld. They contended that the premises had been extensively marketed and they had received a number of bids including one at the same rental level as Byte, but for a purpose not permitted under the lease. They also relied upon expert valuation evidence and further argued that, on the construction of the lease, if the proposed rent was established to be the open market rental value, it was no longer open to the landlords to oppose the subletting. The landlords contended that even if £75,00 were the open market rental value they were none the less entitled to withhold consent if, at the time consent was withheld, they reasonably believed that sum was not the open market rental value.
Held The landlords had unreasonably withheld their consent.
1. The best evidence of what a particular property was worth on the open market was the rent payable under a binding agreement for the letting of the property after it had been properly exposed to the market. On the evidence it was clear that the proposed rent was within the band of value which comprised the open market rental value of the property. The landlords were not entitled to object to the subletting on that ground, nor was it open to them to argue that their view on a valuation matter was reasonable merely because it was a view supported by a surveyor. The court had to consider whether the surveyor’s view was reasonable.
2. On the construction of the lease, once the tenants had established that the rent to be paid was the open market rental value, it was no longer open to the landlords to object to the proposed subletting on the ground that they reasonably believed that it was not. On the facts at the time of their refusal the landlords had not considered whether £75,000 was the market rental value of the premises.
3. On the assumption that the tenants could not achieve more than £75,000, it was not reasonable for a landlord to require a tenant to wait for the market to improve as to do so would have the effect that where a lessor wished to sell its interest in the future and anticipated that the market was going to rise, he could effectively prevent the lessee from subletting. On the evidence, the court found that the proposed underletting would actually increase the value of the landlords’ interest.
Alexander Hill-Smith (instructed by Brookstreet Des Roches, of Witney) appeared for the plaintiffs; Michael Driscoll QC (instructed by Pulvers) appeared for the defendants.