Landlord and tenant — Whether landlords’ refusal of consent to proposed assignment of lease was unreasonable — Whether tenants had discharged the burden, which lay on them, of establishing the unreasonableness of the refusal — The lease was a 30-year lease from 1971 of a two-storey office building — The use which the proposed assignees intended to make of the building was for the provision of ‘serviced office accommodation’ — This was the provision of temporary office accommodation, with fully-furnished offices and the services of a receptionist, telephonist and typist, in small office suites of two or three rooms, provided also with such ancillary facilities as word-processing, photocopying and telex and telephone equipment — The idea was to offer such suites on short-term licences to out-of-town and overseas companies — Landlords objected mainly on the grounds that the proposed use would adversely affect the value of their interest and would create car-parking problems — Tenants sought declarations by originating summons that the landlords had unreasonably refused consent and that, notwithstanding the refusal, the tenants were entitled to proceed with the assignment — The judge considered expert and other evidence and reviewed a number of authorities — Such authorities established that what a landlord had to show (or more accurately what the tenant had to negate) was a reasonable apprehension of damage or detriment to the landlord’s property interests, having regard to the circumstances of the particular case — A theoretical diminution in the value of the reversion which had no, or only minimal, practical consequences did not constitute a ground for such reasonable apprehension — In the present case the practical consequences of the use of the property for serviced offices of the kind contemplated seemed to be confined to an infinitesimal effect on the total book value of the landlords’ properties and a possible reduction in maximum borrowing capacity, which was not likely to be required — The judge also held that the car-parking problem was not likely to be substantially greater than if the property were assigned to a company for use as its own offices — Declarations granted as sought in tenants’ summons
The plaintiff,
International Drilling Fluids Ltd, tenants, sought against the defendant,
Louisville Investments (Uxbridge) Ltd, landlord, a declaration that the latter
had unreasonably refused a licence to assign a lease of Colne House, Oxford
Road, Uxbridge, to Euro Business Services Ltd. The plaintiff also sought a
declaration that, notwithstanding the refusal, they were entitled to assign the
lease without any licence to Euro Business Services Ltd.
Paul Morgan
(instructed by Nabarro Nathanson) appeared on behalf of the plaintiff; Kim
Lewison (instructed by Helder Roberts & Co, of Epsom) represented the
defendant.
Giving
judgment, MR EDWARD NUGEE QC said: In this action the plaintiff seeks a declaration
that the defendant has unreasonably refused to grant it a licence to assign a
lease of certain property at Uxbridge to Euro Business Services Ltd (‘Euro’)
and a declaration that, notwithstanding the refusal, the plaintiff, without any
licence from the defendant, is entitled to assign the lease to Euro.
The property
is a two-storey office building known as Colne House, which stands at the
entrance to the Highbridge Industrial Estate on the south-west side of Oxford
Road, Uxbridge, about one-third of a mile from the town centre and about 4
miles north of Heathrow Airport. The estate is owned by the defendant,
Louisville Investments (Uxbridge) Ltd, which is a subsidiary of Property
Security Investment Trust plc, a substantial public company. The estate comprises
nine industrial units with a total floor area of about 145,000 sq ft, which are
currently let at a total rent of £291,200 per annum, and four office buildings
with a total floor area of about 40,000 sq ft, which are currently let at a
total rent of £314,000. Colne House itself has a floor area of about 6,250 sq
ft. It appears that it was built as a sawmill about 60 years ago, and converted
into offices in the late 1960s to serve as the administrative block for the
estate when the estate was redeveloped by the defendant. Immediately in front
of the building and facing on to the estate road there is a parking area marked
out for 10 cars, and behind the building there are two further car-parking
spaces.
The lease
under which the plaintiff holds the property (which includes the 12 car-parking
spaces) is dated January 31 1972 and was made between the defendant and Bovis
New Homes Ltd (‘Bovis’). The lease is for a term of 30 years from December 25
1971. The rent was initially £12,500 per annum, but is subject to five-yearly
upwards-only reviews. The rent currently payable under the review
are conducted on the assumption that the premises are being let in the open
market with vacant possession on terms similar in all respects to those
contained in the lease and on the assumption that the lessee has complied with
the obligations for repair, decoration and other obligations imposed on the
lessee by the lease. The lessee’s covenants are contained in clause 4 of the
lease. Subclause (7)(i) restricts the lessee’s rights to make alterations
without the consent of the lessor, but provides that:
no consent
shall be required for the erection of portable partitioning in the interior of
the demised premises.
Other material
covenants are as follows:
(13) Not to obstruct the Estate roads and footpaths
in any way whatsoever.
(26) Not to permit any vehicles belonging to or
calling upon the lessee to stand on any roads in the neighbourhood of the demised
premises . . . and throughout the term hereby granted to use its best
endeavours to ensure the free flow of traffic over the roads on the Estate.
(27) Not to use the demised premises or any part
thereof for any purpose other than as offices within the meaning of Class II of
the Town and Country Planning (Use Classes) Order 1963 with ancillary showrooms
for the display of machinery and samples subject however to the lessee
obtaining all necessary planning and other consents and licences for such use.
I interpose to
say that, although the property is in an area zoned for business uses, the
existing office use is an established use.
(28) (i) Not at any time during the term hereby
granted by any ways or means whatsoever to assign part only of the demised premises.
(ii) Not at any time during the term
hereby granted to assign the whole of the demised premises without the licence
in writing of the lessor being previously obtained such licence not to be
unreasonably withheld.
(iii) Not at any time during the term
hereby granted by any ways or means whatsoever to underlet or part with
possession of the whole or any part of the demised premises except upon such
terms (in the case of an underletting) as to the proposed underlease as shall
have been previously submitted to and approved by the lessor and in any case
not without the written consent of the lessor being previously obtained such
consent not to be unreasonably withheld PROVIDED ALWAYS that such consent shall
not be withheld in the case of a subsidiary company of the lessor within the
meaning of section 154 of the Companies Act 1948.
(34) At all times during the said term to observe
and perform such regulations (if any) in respect of the said Estate as the
lessor may think necessary and expedient for the proper management of the
Estate.
Clause 6
contains a proviso for re-entry for non-payment of rent, breach of covenant or
if the lessee being a company shall go into liquidation, compulsory or
voluntary, save for the purpose of reconstruction or amalgamation.
The lease was
assigned by Bovis to the plaintiff by an assignment dated March 1 1978. By a
deed dated February 28 1978 and made between the defendant, Bovis and the
plaintiff, the defendant granted Bovis licence to assign, and the plaintiff
covenanted with the defendant that it and its successors in title and assigns
would at all times thereafter duly and punctually pay the rents reserved by the
lease and perform and observe the covenants therein contained.
The plaintiff
is a subsidiary of English China Clays plc. Its accounts for the year ended
September 30 1983 show a profit in that year of £470,000 (after tax) on a
turnover of almost £15m, with fixed assets of £2.16m and net current assets of
£963,000.
In July 1983
the plaintiff instructed Leslie Lintott & Associates (‘Lintotts’), a firm
of surveyors and valuers in Portman Square, that it wished to dispose of Colne
House and move to new premises in London. Lintotts took steps to try to find
someone who would take an assignment of the lease, no premium being sought by
the plaintiff. They prepared particulars, circulated abut 150 commercial agents
in London on the basis that full commission would be paid to any agent who
introduced a tenant, and contacted over 200 firms or companies occupying
offices in the Uxbridge area. The defendant’s witnesses criticised the steps
taken by Lintotts in marketing the property, but I am satisfied that they took
appropriate steps, having regard to the nature of the property. A number of
people inspected the property, but until very shortly before the trial of this
action only one serious inquiry was received. This was from a Mr Brodie and a
Mr Gluck, who wished to use the building for the provision of serviced office
accommodation. This is a form of business which has developed in recent years
to meet a demand for office facilities which can be used on a short-term basis.
The evidence before me showed that there are a growing number of businesses
which do not wish to take permanent office accommodation but want to have the
temporary use of offices which are fully furnished and which provide the
services of a receptionist, telephonist and typist, and such facilities as
word-processing, photocopying and telex and telephone equipment. The majority
of serviced offices of this kind are to be found in central London, but there
are a number in the Thames Valley and within easy reach of Heathrow. Mr Brodie,
who has had some experience of providing serviced offices in Florida and in
London, considers that there is a good opening for providing such offices in
Uxbridge. He is confident of attracting computer-related business and business
from overseas, particularly from Western Europe. He and Mr Gluck have looked at
about 100 properties, and consider that Colne House, though not as attractive a
building as many others, is the most suitable from the point of view of
location and of the shape of the building, which lends itself well to the
creation of small office suites of two or three rooms apiece. He and Mr Gluck,
who is a chartered accountant, anticipate a profit of £50,000 to £100,000 a
year once the business is established. They expect the building to be at least
50% occupied within two months, and voids to be less than 10% in the longer
term. The users of the offices would be licensees and not subtenants; and by
the end of the hearing it was common ground that, if the lease was assigned to
Mr Brodie and Mr Gluck, or to a company formed by them, the proposed use of the
property would not be in breach of clause 4(28)(iii) or of any of the other
covenants or provisions in the lease. The defendant’s witnesses were less
optimistic about the viability of the proposed business than Mr Brodie and Mr
Gluck, but it seemed to me that Mr Brodie had carried out sufficient research
into this field of business to entitle him to form the view that it could be
successful at Colne House.
Mr Brodie and
Mr Gluck first approached Lintotts at the beginning of December 1983. Their
proposal then was that the lease should be assigned to a company known as
Markborough Estates Ltd, in which they each had a 50% interest, and for which
they would stand surety. On December 23 1983 Lintotts wrote to the defendant’s
parent company stating that they were taking up references for Mr Brodie and Mr
Gluck, and continuing:
As soon as
these references are to hand a formal application for licence to assign the
lease will be made. In the meantime I am writing to tell you that it is
proposed the premises to be used as serviced office suites let on short term
licence to out of town and overseas companies and accordingly I am writing to
you for your consent to this proposed use.
The references
proved satisfactory, but after further correspondence the defendant’s
solicitors wrote to the plaintiff’s solicitors on February 23 1984 saying:
We take the
view that the proposed use of the premises will constitute a breach of the
existing terms of the lease, in that there will be a parting with possession of
parts of the demised premises. Further, in our clients’ opinion, the proposed
use of the premises would adversely affect the value of our clients’ interest
in the property and, in particular, could create problems with regard to car
parking. In view of the above, our clients are not prepared to give their
approval to the proposed assignment.
The
plaintiff’s solicitors replied that the intended use fell within that permitted
by clause 4(27) of the lease, that an intended use could not make the
withholding of consent to an assignment reasonable, that the proposed licences
would not amount to a parting with possession, that no problems with regard to
car parking could be created, and that they would recommend the parties to
proceed without seeking the defendant’s approval. In reply on March 13 1984 the
defendant’s solicitors repeated their refusal of a licence to assign, saying
that their clients:
were
satisfied that in the event of this assignment taking place and the licences
being granted the capital value of our client’s interest in the building would
be considerably reduced as the presence of 20-odd licensees would render the
building unacceptable to an institutional investor.
They added
that there were a number of decisions which made it plain that:
A landlord is
entirely able to refuse a licence to assign when he is aware that the proposed
assignment will result in an inevitable breach of covenant.
An interval of
time then passed when it appeared possible that another company might take a
sublease of one floor of Colne House. Negotiations towards this end fell
through, and on August 2 1984 the plaintiff’s solicitors renewed their
application for licence to assign, this time to Euro, another company owned by
Mr Brodie and Mr Gluck. On August 28 1984 the defendant’s solicitors wrote,
saying:
Our clients
are not prepared to grant a licence to assign on the grounds that the
investment value of our clients’ interest in the property would be
detrimentally affected by the proposed use.
On October 26
1984 they wrote more fully, as follows:
There are
many grounds for refusal including the points mentioned below. Our clients were
advised by an independent chartered surveyor that there would be a substantial
reduction in the capital value of their building should the proposed assignment
go through. In addition the value of the remainder of our clients’ estate would
be adversely affected. Our clients also object to the proposed assignment on
estate management grounds. Multi-occupation of a building, be it on licences or
leases, at the entrance to the estate is undesirable, particularly bearing in
mind the limited availability of parking. Furthermore, if the proposed
assignees default on the lease our clients will inherit the problem of
obtaining possession from licensees and rehabilitating the building to normal
use. Incidentally our clients have also been advised that the viability of the
type of operation proposed by the assignees in this particular location is
highly questionable. In any event our clients would not be prepared to accept
the proposed tenant company. The company is without references or track record
and our client would insist that the assignment go direct to Messrs Brodie and
Gluck. New references will be required from Messrs Brodie and Gluck on the basis
of a commitment of £60,000 per annum for a full repairing and insuring lease
subject to upward-only rent reviews every five years with an unbroken term of
17 years remaining. Our client is also not prepared to accept that the schedule
of dilapidations be dealt with by the placing of a sum of money on deposit. The
property will deteriorate if dilapidations are not promptly dealt with and our
clients would seek to have this cleared up before any assignment took place.
Our clients reserve their position concerning other possible grounds for
objection of the proposed assignment.
The
originating summons in this action was issued on November 23 1984.
At the hearing
the defendant’s case was based principally, as it had been from the beginning,
on the contention that the capital value of the defendant’s interest in the
property would be reduced if the lease were assigned to Euro, or at all events
that a reasonable landlord could form that view. Reliance was also placed on
the likelihood of parking problems arising on the estate road, which it was
said was enough on its own to justify the refusal of licence to assign. The
defendant also contended that it was justified in refusing consent to a company
with Mr Brodie and Mr Gluck acting as guarantors and was entitled to insist on
the assignment being to Mr Brodie and Mr Gluck personally.
I can deal
with this last point, which it was accepted was subsidiary, quite shortly. Mr
Lewison, counsel for the defendant, argued that a guarantee was unsatisfactory
because first, it might be inadvertently released as a consequence of a
variation in the terms of the lease between the landlord and the tenant, and
second, a person could more easily dissipate his assets without this coming to
the knowledge of the landlord if he was a guarantor than if he was a tenant. As
to the first point, I was shown precedents of a guarantor’s covenant which was
acceptable to Mr Brodie and Mr Gluck and which would in my view be effective to
prevent the guarantor being released by inadvertence in the manner suggested;
and I do not consider that there is any substance in the second point. If this
were the only ground for refusing consent it would not in my judgment be a
reasonable ground; and I do not consider that it adds any weight at all to the
other grounds.
The first two
grounds present more difficulty. On the first of them I had the benefit of
expert evidence, as well as evidence from a Mr H L S Dibley, a director of the
defendant, who is himself a Fellow of the Royal Institution of Chartered Surveyors.
The points which emerged from the evidence were as follows.
(1) Mr A C A Matthews, a partner in Weatherall
Green & Smith, who gave evidence on behalf of the plaintiff, said that the
site value of the property was catching up with the value of the building and
had very nearly reached it. By the end of the lease in 16 1/2 years’ time he
considered that the site value would be as great as or greater than the
building value. His evidence was not challenged, and I can therefore disregard
the possibility that the use of the building for serviced offices might have a
depreciatory effect on the letting value of the property at the end of the
lease. Indeed the contrary was not suggested on behalf of the defendant.
(2) If the assignment takes place, the rent will
be secured for the remainder of the lease not only by the covenant of Euro
(which has a share capital of only £1,000) and Mr Brodie and Mr Gluck (both of
whom provided excellent references) but also by the covenant of Bovis, the
original lessee, and the plaintiff, which gave a covenant for the duration of
the lease in the licence to assign dated February 28 1978. Although it may be a
little less convenient to have to recover the rent from Bovis or the plaintiff,
it was accepted that, in view of the plaintiff’s financial position, there was
no significant danger that the rent would not be paid throughout the term.
(3) It was accepted that the rent obtainable on
future rent reviews would not be prejudiced by the use of the premises as
serviced offices, since the review is to be on the assumption that the building
is vacant and can be used for any kind of offices within use class II. If
Euro’s business prospered the rent might be enhanced.
(4) It was accepted that, if Euro ran the
business in the way proposed, the occupiers of the offices would be true
licensees and not subtenants, and that there was nothing in the lease to
prevent the plaintiff, or Euro (once the lease had been assigned to it), from
carrying on such a business. The defendant had indeed received advice from
leading counsel to this effect after writing the letter of March 13 1984.
Where the
parties chiefly differed was on the effect of the proposed assignment on the
value of the defendant’s freehold reversion during the remainder of the lease.
Mr Matthews expressed the opinion that the proposed assignment would not lead
to a diminution in the current open market value of the freehold interest. He
pointed to the fact that the premises had been empty since May 1984 (when the
plaintiff vacated them), that a letting board had been affixed to the building
since June 1983 and effectively only one offer to take the lease of the whole
building had been received during this time, and that Euro intended to expend
at least £20,000 on improving the property internally in a way which would
increase the rental value of the property but would not fall to be disregarded
on future rent reviews. He agreed that the ideal from the landlord’s point of
view was that the building should be occupied by a single tenant with a strong
covenant, but he considered that there was a proven lack of demand from such a
tenant. The fact that the building had been standing empty for a year would
depress the capital value of the freehold interest. If the building were
occupied by Euro the decline in capital value would be halted, and if the
business were successful, as he thought it would be, the value would increase
after a year or two, until there would be no difference between the value if
the building were owner-occupied and if it were service-occupied.
Mr E F
Shapiro, a partner in Moss Kaye & Roy Frank, of Edgware, gave evidence for
the defendant. He considered that the investment value of the property would be
severely affected by Euro’s proposal. On the assumption that the building was
subject to a single letting to a covenant of substance, he expressed the
opinion that the current open market value of the freehold interest was
£510,000, which he explained was based on the current rent of £46,000 and a 9%
yield. If the property were let as licensed suites, then in his opinion the
value of the building would fall to £383,000, since he considered that in these
circumstances a 12% yield would be appropriate. He had no doubt that, once the
licences were granted, this would not form an attractive institutional
investment and would be regarded by the investment market as an extremely risky
investment. He thought it important to note that the building was not a modern
building, and hence it was necessary to ensure that a good covenant was
maintained. In his oral evidence he explained that his valuation of £510,000
was on the basis that the building was occupied by the plaintiff, while his
valuation of £383,000 reflected an investor’s concern lest the building should
come back into possession or the lease should come up for renewal. Investors
would dislike the uncertainty attached to serviced offices and the risk
involved and would look for a higher yield. His valuation of the building as it
now is, standing empty but with the current strength of the plaintiff’s
covenant, was £450,000. If the building were sublet in two floors he would
value it at £475,000. He thought he had assumed that the plaintiff had given a
direct covenant, but it had slipped his mind to verify this; and I am not convinced
that in making a reduction of £127,000 in the value of the property if let to
Euro he gave due weight to the fact that the plaintiff would remain liable on
the covenant throughout the term.
Mr C M Leigh,
a partner in Jones Lang Wootton, also gave evidence for the defendant. In his
opinion the proposed assignment would lead to a significant diminution in the
value of the reversion: if the defendant were to sell it would achieve less. On
the assumption that the property was let to, and occupied by, the plaintiff or
a company of similar standing, he would value the freehold interest at
£400,000. With the property vacant, as it now is, he would value it at
£370,000, since vacant buildings are less popular with investors. If the
proposed assignment had taken place and the proposed serviced office scheme had
been successfully established, he would value the property at £340,000; for
such schemes are still relatively uncommon and there is a reduced investment
market for them. Immediately after the assignment had taken place, when the
building was still vacant, he
the assignees’ lack of experience in establishing such a scheme. In his oral
evidence he expressed the view that if the lease were assigned to Mr Brodie and
Mr Gluck for use as the offices of a substantial business, the value of the
freehold would be less than £400,000, though not very much less; for in the eye
of the market a company, he said, is more likely to keep its covenant than an
individual. If the building were sublet to Euro for use as serviced offices, he
would put the value at £370,000; for the use would be disregarded and the
market would take into account the fact that rent-review negotiations would be
with the plaintiff. Mr Leigh produced a letter, dated three days before the
trial began, from Securicor Ltd, a well-known company whose covenant would be
as strong as the plaintiff’s, to a Mr Settle, of Stimpsons Commercial, an
Uxbridge estate agent, in which Securicor Ltd expressed interest in taking a
new lease of Colne House for 25 years at an initial rent of £53,000, subject to
five-yearly review, provided that they were free to sublet parts of the
building at their discretion. No direct evidence was given by any representative
of Securicor Ltd and the terms which they suggested in their letter are not, of
course, the same as the terms of the current lease. Mr Settle gave evidence
that Securicor had told him that they would take an assignment of the present
lease subject to the property being put into suitable condition for their use,
and subject to contract, but he agreed that nothing might come of it. I do not
think I can attach any real weight to the possibility of Securicor taking an
assignment if the present proposal falls through, and such possibility cannot
have influenced the defendant’s mind at the date of its refusal, which is the
relevant date (see Bromley Park Garden Estates Ltd v Moss [1982]
1 WLR 1019* at pp 1034E and 1035E).
*Editor’s
note — Reported also at (1982) 266 EG 1189, [1983] 1 EGLR 65.
Lastly Mr
Dibley gave evidence of the defendant’s own position. The defendant developed
the Highbridge Industrial Estate by substantially rebuilding the industrial
buildings, building three new office blocks and refurbishment. The principal
activity of the group to which the defendant belongs is investment, most of its
investments being created by development carried out by the group. The
Highbridge Estate has never been on the market, and there is no intention of
selling any part of it. Mr Dibley carried out the last valuation for the
defendant himself, which was a valuation as at March 31 1985. He placed a value
of £473,500 on Colne House, which reflected the fact that the lease had been on
the market for some time and the property was vacant. If it had been occupied
he would have valued it at £500,000. He did not have the figures for the rest
of the estate with him, but to the best of his recollection the other three
office buildings were valued together at between £3m and £4m, while Colne House
and the industrial buildings together were valued at about £3m. He said that
there was a margin of error, but he would expect to be within 10% of the amount
that could be realised on the market. The importance of the valuation to the
defendant was twofold. First, the total book value of the group’s properties is
published in the accounts and is taken into account by investment analysts. If
the valuation of Colne House was reduced, those affected would be the
shareholders. He agreed, however, that the effect of a reduction from £370,000
to £340,000 (taking Mr Leigh’s figures for the present value and the value once
Euro’s business was established) would be infinitesimal. Second, the vast
majority of the properties owned by the group are used as security for bank
borrowing; and the higher the value the greater the amount that could be
borrowed. Banks and finance companies do not, however, rely on published
accounts: they form their own opinion, and they do not lend 100% of their
valuation. He agreed that a difference of £50,000 in the value of Colne House
would be small in relation to the whole estate — less than 1% — but it would be
about 10% of the value of Colne House alone. The fact that Mr Leigh’s valuation
was over £100,000 less than his own or Mr Shapiro’s did not cause him concern,
and he did not consider that it would cause concern to the shareholders or the
public. He did not know for certain whether Colne House was mortgaged, but he
would expect that it would form part of a group of properties that would be
charged to a lending institution. Asked about the defendant’s initial reaction
in February 1984 to the plaintiff’s request for licence to assign, Mr Dibley said
that the proposed use of the property was thought to be an overwhelming and
good reason for refusal. Other considerations were discussed, but not at great
length. An assignment to a £100 company would in his view affect the value of
the freehold, even if it was for normal office use; but he was advised that
this was not a good reason for refusal in itself. There was no discussion
between the defendant’s directors about the effect of the direct covenant given
by the plaintiff.
On that
evidence Mr Lewison summarised his argument in four propositions:
1. A landlord
is entitled to withhold consent to an assignment if he establishes that the
effect of the assignment will be to cause him detriment in his capacity as
landlord.
2. One of the
ways in which detriment may be established is to show that the use proposed by
the assignee will diminish the value of the reversion.
3. It is no
answer that the proposed use is within the terms of the covenants in the lease.
4. Even if the
landlord does not establish that the effect of an assignment would be to cause
him detriment, it is sufficient if a reasonable person could form that view.
In support of
these propositions Mr Lewison relied principally on the recent decision of the
Court of Appeal in Bromley Park Garden Estates Ltd v Moss and the
earlier cases therein referred to. The Bromley Park case itself was one
in which the tenant of a flat over a restaurant was refused licence to assign
on the ground that the landlord wished to obtain a surrender of the tenancy of
the flat and to let the flat and the restaurant together as a single unit. The
landlord claimed that this was in the interest of good estate management and
that for this reason it was entitled to refuse consent. The Court of Appeal
held that the reason put forward by the landlord was wholly extraneous to the
intention of the parties to the contract when the covenant against assignment
was entered into and that the landlord’s purpose was to secure a collateral
benefit to which it was not entitled. Slade LJ at pp 1034H – 1035B drew a
distinction between cases in which the landlords claimed that the assignment
would cause them to suffer detriment, when it may be reasonable to refuse
consent, and those in which by refusing consent the landlords hoped to obtain a
collateral benefit, when it will normally be unreasonable to refuse consent.
The cases mentioned in the judgments which fall into the latter category are Lehmann
v McArthur (1867) LR 3 Eq 746, where the landlord’s object was to obtain
a surrender of the lease for the purpose of rebuilding; Bates v Donaldson
[1896] 2 QB 241, where again the landlord hoped by refusing consent to obtain a
surrender of the lease; and Houlder Brothers & Co Ltd v Gibbs
[1925] Ch 575, where the landlord refused consent on the ground that he would
lose good tenants of adjoining premises. In the former category falls Premier
Confectionery (London) Co Ltd v London Commercial Sale
Rooms Ltd [1933] Ch 904, where a shop and a kiosk were let to the same
tenant, and the landlord’s refusal of consent to the assignment of the kiosk
separately from the shop was held to be reasonable, Bennett J saying at p 911:
Mr Singer
may, of course, be able to pay the rent of the shop for the residue of the term
for which the defendants have agreed to grant him a lease; but on the other
hand, he may not, and I have no doubt, after hearing all the evidence, in
concluding that if the shop were to come into the possession of the defendants
during the continuance of the agreement relating to the kiosk the defendants would
have the greatest difficulty in finding a tenant for it at anything approaching
the rent which is now reserved.
In the same
category are West Layton Ltd v Ford [1979] QB 593, where the
effect of the assignment would have been to alter the nature of the letting
from a single letting of commercial property with residential property over to
two separate tenancies, the residential tenancy thereafter attracting the
protection of the Rent Acts; and Governors of Bridewell Hospital v Fawkner
(1892) 8 TLR 637, where the landlords reasonably apprehended that the
activities of the proposed assignee would damage their interest in neighbouring
property. Mr Lewison relied on a passage in the judgment of Dunn LJ at p 1032H,
where, after referring to the West Layton and Premier Confectionery
cases, he said:
In both cases
the withholding of consent to the assignments by the landlord were held not to
have been unreasonable. In both cases the landlords were seeking to uphold the status
quo and to preserve the existing contractual arrangements provided by the
leases. In both cases the landlords reasonably believed that they would suffer
detriment if the assignments were made.
So, too, in
the present case, said Mr Lewison, the landlord is seeking to uphold the status
quo, namely the use of the property as offices of a conventional kind, and
it reasonably believes that it would suffer detriment if the assignment were
made. Dunn LJ’s judgment must, however, be read in the context of the facts to
which it was directed. The contrast which he was drawing between the West
Layton and Premier Confectionery cases on the one hand and the Bromley
Park
in which he says:
There is
nothing in the cases to indicate that the landlord was entitled to refuse his
consent in order to acquire a commercial benefit for himself by putting into
effect proposals outside the contemplation of the lease under consideration,
and to replace the contractual relations created by the lease by some
alternative arrangements more advantageous to the landlord, even though this
would have been in accordance with good estate management. West Layton Ltd
v Ford . . . shows that in considering whether the landlords’ refusal of
consent is unreasonable, the court should look first at the covenant in the
context of the lease and ascertain the purpose of the covenant in that context.
If the refusal of the landlord was designed to achieve that purpose then it may
not be unreasonable, even in the case of a respectable and responsible
assignee; but if the refusal is designed to achieve some collateral purpose
wholly unconnected with the terms of the lease, as in Houlder Brothers &
Co Ltd v Gibbs . . ., and as in the present case, then that would be unreasonable,
even though the purpose was in accordance with good estate management.
I do not think
that the landlord’s wish to uphold the status quo is decisive. What is
decisive is the fact that the assignment will cause him detriment in his
capacity as landlord, or the fact that a reasonable person could so believe.
What sort of
detriment is relevant? I was referred to
a number of cases in which, as a result of the proposed assignment, the tenancy
would have attracted the protection of the Rent Acts (West Layton Ltd v Ford
and Dollar v Winston [1950] Ch 236) or the benefits of the
Leasehold Reform Act 1967 (Bickel v Duke of Westminster [1977] QB
517); but nothing of that kind arises here. The mere fact of the assignment
caused detriment to the landlord in two other cases to which I was referred:
the Premier Confectionery case, where the separation of the kiosk from
the shop depreciated the rent obtainable for the shop, and Angus Restaurants
Ltd v Day, unreported, August 13 1982, where a lease provided for a
turnover rent so long as the original lessee held it, but a fixed rent was to
be substituted in the event of an assignment. At the date of the proposed
assignment the turnover rent was considerably greater than the fixed rent; and
Falconer J held that the landlord’s refusal of consent was reasonable, since
the assignment would cause a detriment which would result from the terms of the
lease, and the advantage secured to the landlord by the refusal of consent was
not a collateral advantage of the kind referred to in the Bromley Park
case. The reasoning in those cases has no direct application here, where the
detriment relied upon is said to arise not from the fact of the assignment but
from the use to which the property will subsequently be put. Another case to
which I was referred which I find of little assistance on this point is Killick
v Second Covent Garden Property Co Ltd [1973] 1 WLR 658, where the
landlord’s refusal of consent was based solely on the ground that the use which
the proposed assignee intended to make of the property would necessarily
involve a breach of covenant. The Court of Appeal held that consent was
unreasonably withheld, because the proposed assignee would step into the shoes
of the lessee and would thereupon become subject to the user covenant in the
lease, and the landlord would be in the same position to enforce the user
covenant against the assignee as against the original lessee, so that it could
not be said that if the landlord did consent to an assignment there would as a
necessary consequence be a breach of the user covenant. It is apparent from the
facts of that case that the landlord hoped, by refusing consent, to obtain a
surrender of the lease, which was described as a valuable lease, it being
common ground that the original business of printers which was authorised by
the lease could no longer be profitably carried on in the building. The Court
of Appeal went on to hold that on the true construction of the lease the
landlord could not unreasonably withhold its consent to a change of use, so
that on this ground, too, the landlord’s ground of objection failed. There was
no suggestion that the proposed change of use to offices would itself cause any
detriment to the landlord in the sense of a diminution in the value of the reversion.
No case was
cited to me in which a landlord had withheld his consent to a proposed
assignment on the ground that the use proposed to be made of the property by
the assignee, although authorised by the lease, would cause him detriment in
the form of a diminution of the value of his reversion, though the Bridewell
Hospital case, which seems to me near the borderline, appears to have been
decided on the detriment to the neighbouring property of the landlord. Mr
Lewison relied on Re Town Investments Ltd Underlease [1954] Ch 301,
which is, I think, the strongest case in his favour. In that case the plaintiff
underlessee held certain business premises for which he paid a rent
approximating to a rack rent. He proposed to sublet part of the premises for a
rent substantially below a rack-rent in consideration of a premium. Danckwerts
J held that the defendant landlord’s refusal of consent to the underletting was
reasonable.
He based his
decision on two cases. One was the Premier Confectionery case, of which
he said (at p 314):
It is of
course, true, as pointed out by counsel for the plaintiff, that in that case
Bennett J found on the evidence that the landlords’ apprehension of injury to
their interests as owners of the properties was well founded. But the case is
authority for the proposition that, in considering whether to give or withhold
consent, the landlords were entitled to consider the effect which the
transactions might have upon their ability in the future to let satisfactorily
the different parts of their property, particularly in case of default on the
part of their tenant in performing his obligations.
The other was Shanly
v Ward (1913) 29 TLR 714, where the landlords refused consent on the
grounds that the proposed assignee’s references offered no evidence of their
stability and financial responsibility, and it was held that their refusal was
not unreasonable. Danckwerts J said at p 314:
The case is
of interest because Lord Cozens-Hardy MR said that it was not for the defendants
to prove that they were justified in withholding their consent, but for the
plaintiff to prove that it was unreasonably withheld. ‘What did
unreasonableness mean?’ he said. ‘It was
not enough to show that other lessors might have accepted the proposed
assignees; the lessors were not to be held to have withheld the licence
unreasonably if in the action they took they acted as a reasonable man might
have done in the circumstances.’ Counsel
for the defendants relied upon this decision as showing that it was sufficient
for his purpose if a reasonable man in the defendants’ position might have
regarded the proposed transaction as damaging to his property interests, even
though some persons might take a different view.
Danckwerts J
continued:
I can apply
these decisions to the present case. The dangers to the defendants from the
defendants having to forfeit the plaintiff’s lease, owing to failure to perform
its obligations by the plaintiff or his assigns, may be negligible. The
situation in the event of bankruptcy of the plaintiff or an assign may present
no real difficulty. But those who manage the defendant company think that
notice under section 6 of the Law of Distress Amendment Act 1908 might not
produce sufficient rent to discharge the sums payable in respect of the rent
under the plaintiff’s lease. They are apprehensive also that, if they wish to
realize their investment in the lease of 28 Berkeley Square by sale or to raise
money on it by mortgage, the reduced rent payable by Mr Romain might prove an embarrassment
in their dealings. I cannot say that such a view is unfounded. When a lessor
takes a premium from a tenant as consideration for a reduction in the rent
which he could otherwise obtain on the open market, the lessor subtracts
something, which may be substantial, from the future earnings of the property
in question. It is true that the superior landlords cannot compel him to sublet
at all; but, if he does wish to sublet, why should they assist in and approve a
transaction which they consider is calculated to depreciate the value of their
property in the future? I am unable to
say that the defendants have acted unreasonably in refusing their consent to
the proposed underletting in the present case.
Mr Lewison
submits that that reasoning applies in the present case. The defendant, he
says, is apprehensive that, if the lease were to become vested in Euro and Euro
were to use the premises as serviced offices, this might prove an embarrassment
to the defendant’s ability to raise money by sale or mortgage; and the
defendant does not have to assist in a course of action which may diminish the
value of its interest in this property. The fact that Mr Matthews does not
consider that there would be any diminution in value, and the fact that Mr
Shapiro, Mr Leigh and Mr Dibley place widely differing values on the property
on various assumptions, does not entitle the court to say that the defendant’s
apprehensions are unfounded. The evidence shows that a reasonable man might
consider that the proposed assignment would result in a diminution in the value
of the defendant’s interest in the property, and such a diminution is a
detriment of a relevant character which entitles the defendant to refuse its
consent.
Mr Lewison’s
argument is persuasive, and its logic is not easy to refute. It would, however,
lead to the conclusion that if an experienced professional adviser formed the
view that any factor in the character of a proposed assignee would lead the
market to view the reversion as a less attractive investment, the landlord
would be entitled to refuse his consent to the assignment. Two factors were
referred to in the evidence which, with the increasingly sophisticated analysis
now adopted in the investment market, would have this effect. One, mentioned by
Mr Leigh, is that if the lease were assigned to one or more individuals,
however sound their financial standing, the market would regard this as less
attractive than if it were assigned
he did not regard it as a sufficient reason for refusing consent), is that if
the lease were assigned to a £100 company, however sound the guarantees offered
by its directors, the market would place a lower value on the reversion than if
the company were more substantial. Mr Leigh said that the strength of the
current lessee’s covenant was important; and Mr Dibley confirmed that the
market looked to the identity of the tenant, and it was the tenant in
occupation who had most effect on the market value. It seems to me that, if Mr
Lewison is right, the more substantial the lessee, the more easily the landlord
would be able to justify a refusal of consent to an assignment, since unless
the proposed assignee’s covenant was as strong as the assignor’s, a reasonable man
might form the view that the market would consider the reversion less
attractive if the lease were vested in the proposed assignee than if it were
vested in the assignor. To take the matter to extremes, if a lease was made in
favour of a government department it would be unassignable except to another
government department; for, as Mr Matthews accepted in cross-examination, the
market would prefer to have the Government as the lessee, whether the premises
were being used as serviced offices or not, even if they were standing empty,
rather than a company, however strong its covenant.
I do not
consider that Lord Cozens-Hardy MR in Shanly v Ward, Bennett J in
Premier Confectionery (London) Co Ltd v London
Commercial Sale Rooms Ltd or Danckwerts J in Re Town Investments Ltd’s
Underlease had this kind of detriment to the landlord in mind. In my
judgment what the landlord has to show, or more accurately what the tenant has
to negative, since the burden is on him to establish that consent has been
unreasonably withheld, is a reasonable apprehension of damage or detriment to
the landlord’s property interests, having regard to all the circumstances of
the particular case. If the damage relied upon is a theoretical diminution in
the value of the reversion which has no practical consequences, or practical
consequences which are so small as to be de minimis, the fact that
reasonable professional men carrying out a theoretical valuation might come to
the conclusion that the proposed assignment would result in such a diminution
does not in my judgment constitute a ground for reasonable apprehension of
damage or detriment to the landlord’s property interests which justifies him in
refusing consent to the assignment. In the three cases last mentioned there was
a real and substantial ground on which the landlord could reasonably take the
view that the proposed assignment would cause him detriment. In the present
case, on the other hand, the only practical consequences relied upon by the
landlord are, first, the effect on the total book value of the properties held
by the group of companies of which the defendant is one, which Mr Dibley
accepted was infinitesimal; and second, the possible effect on the total amount
that the defendant could borrow from the bank or other lending institutions. Mr
Dibley did not, however, even know for certain whether Colne House was
mortgaged, although he expected that it would be charged together with other
properties on the Highbridge Industrial Estate owned by the defendant. There
was no suggestion that the defendant was contemplating attempting to raise the
maximum amount possible on the security of its properties or that the
theoretical diminution in the market value of Colne House would have any
practical effect whatever on the conduct of the defendant’s business. I accept
that the valuation evidence shows that reasonable professional men might take
the view that, if Colne House were placed on the market, it would fetch less
with Euro in occupation of the property carrying on the business of providing
serviced offices than with the property having remained vacant for more than a
year, though if it were relevant (which it is not) I should not myself be
satisfied that this would be the case; but in the circumstances of this case,
in which, so far as the evidence shows, there is no prospect of Colne House
being placed on the market or mortgaged to the fullest extent possible, that
does not, in my judgment, constitute a ground for reasonable apprehension of
damage to the defendant’s property interests.
Mr Morgan,
counsel for the plaintiff, contended in the alternative that, at all events
where the use proposed to be made of the property is not contrary to the
covenants in the lease, any damage to the landlord must result from the
assignment itself; and that what the defendant was trying to do here by
refusing consent was to obtain a collateral advantage in the form of preventing
a use which he originally permitted when the lease was created, or in other
words to use the restriction on alienation in clause 4(28) of the lease to
exclude a particular kind of use which was permitted by the lease. While the
authorities to which I was referred appear to be consistent with this
contention on their facts, some of the dicta in them are not (see, for example,
Bates v Donaldson [1896] 2 QB 241 at p 244 per Kay LJ); and I am
not prepared to accept Mr Morgan’s proposition as universally valid,
particularly where, as here, the proposed use, although not forbidden by the
lease, has only become at all common in recent years and can hardly have been
expressly contemplated by the parties at the date when the lease was granted.
It is not, however, necessary for me to express a final view on this aspect of
the matter in view of my conclusion on the main issue of detriment to the
landlord.
The
defendant’s second contention was that the use of Colne House as serviced
offices would be likely to create problems with regard to car parking. The
defendant’s case was that the problems would be more likely to arise with the
building in multiple occupation than if it were in single occupation, because,
as Mr Lewison put it, there would be more chiefs than Indians, and therefore
the likelihood of more cars, and whatever provisions Euro inserted in its
licences forbidding parking by the licensees, there would be a temptation for
them to park in the spaces beside the building and, if these were occupied, to
park in the estate road. He did not suggest that Euro was likely to permit a
breach of the covenants in clause 4(13) and (26) of the lease, and indeed Mr
Brodie produced a form of licence which had been prepared for use by Euro which
contained a regulation to be observed by the licensees that ‘No motor vehicles
are to be placed on any of the estate roads or forecourt of the building known
as Colne House aforesaid other than visitors’ motor vehicles in the spaces so
provided’. There are in fact two public car parks about 250 yds away from the
property, and Mr Brodie intended to insist that the licensees should park their
cars there, or at any rate should not park them outside Colne House. Mr Dibley
said that his group of companies had had problems over car parking on numerous
estates including the Highbridge Estate, but he accepted that this was a
subsidiary reason for refusing consent. Mr Shapiro, too, thought this a minor
point by comparison with the damage to the reversion, and that it would not be
enough on its own to justify refusal. Mr Leigh did not mention it as a factor
in his valuation.
I accept that
the possibility of cars belonging to people visiting Colne House occasionally
parking on the estate road cannot be ruled out if the assignment takes place,
and that the defendant may not be able to do anything about isolated cases. I
am not satisfied that the problem is likely to be substantially greater than if
the property were assigned to a company which would use it as its own offices.
If there are repeated infringements of the covenant in clause 4(26), which not
only imposes a negative obligation on the lessee but also a positive duty to
use its best endeavours to ensure the free flow of traffic over the roads on
the estate, the defendant will be able to take action against Euro. In a case
of this kind where the evidence shows that there has been difficulty in
disposing of the lease, albeit that part of the difficulty may have been due to
a failure on the part of the plaintiff to maintain the property in full repair,
the landlord must in my judgment show a substantial reason for refusing his
consent to an assignment (cf Bates v Donaldson per Kay LJ at p
244), and I do not consider that the possibility of a small increase in parking
problems is enough, either on its own or in conjunction with the alleged
diminution in the value of the reversion, to justify the defendant’s refusal in
the present case, or that a reasonable man might consider it enough.
It follows
that in my judgment the defendant’s refusal to grant the plaintiff a licence to
assign the lease to Euro was unreasonable, and I will make the two declarations
sought by the plaintiff in the originating summons.
The judge
awarded costs to the plaintiffs.
