Assignment of headlease — Residential property comprising flats let on subleases — Freeholders requiring personal guarantee from director of assignee as condition of consent to assignment – Whether three-year guarantee sufficient — Whether income from sublessees adequate security for covenants in headlease — Whether consent unreasonably withheld — Claim dismissed
The claimant agreed, at auction, to purchase a headlease of a property in Mayfair, London W1, by way of an assignment from the existing headlessee. The freehold was owned by the defendants, who held it as trustees. The majority of the 26 flats in the property were let at annual rents on subleases, although four flats were subject to long leases that had been acquired pursuant to the tenants’ leasehold enfranchisement rights under the Leasehold Reform, Housing and Urban Development Act 1993.
Under the terms of the headlease, any assignment required the defendants’ consent, which was not to be unreasonably withheld. As a condition of giving consent to the claimant, the defendants demanded that its sole director, R, give a personal guarantee of its obligations under the headlease. The reason for that demand was that the claimant, as a company that had never traded, and which had been incorporated solely in order to become headlessee, was unable to provide the usual bankers’ references and three years of filed accounts to assure the defendants of its ability to pay the rent and to perform the other covenants under the headlease. The claimant, in turn, proposed that the guarantee be limited to three years, to reflect the usual period of accounts. The defendants declined that offer, expressing concern that the value of the headlease might be dissipated if further flats were sold on long leases in the future, which could occur outside the three-year period.
The claimant brought proceedings in which it argued that the defendants had unreasonably withheld their consent to the assignment. It contended that a three-year guarantee would suffice and that a guarantee was not necessary in cases where, as here, the headlessee received sound rents from reliable sublessees, since it was the strength of the security, not the strength of the claimant’s covenant, that mattered. The claimant sought to distinguish the case from those where a limited company occupied commercial premises in order to trade from them.
Held: The claim was dismissed.
The fact that this was not a case of an occupying company trading from the premises did not mean that the security provided by the subleases was all that was required to protect the freeholders. The claimant had no assets other than the headlease, and it was not trading other than in the very limited sense of dealing as a landlord with the sublessees and turning any vacant properties to some account. Accordingly, payment of the rent under the headlease during the next three-year period did not amopunt to a guarantee that matters would not change after that time in the same way that successful trading by an occupying tenant, which had to continue to occupy in order to trade, would be.
With regard to the strength of the security, it was reasonable for the defendants to ask for a security that exactly matched the covenant by the claimant to pay rent as and when it was due, namely a straightforward guarantee. Such a guarantee supported the covenant that the defendants were entitled to enforce and made that enforcement effective. The availability of forfeiture for failure to pay the rent was not a satisfactory alternative because it would not result in vacant possession. It would, in practice, involve many applications by sublessees for relief from forfeiture and require the defendants to become commercial landlords who had to run a property business, whereas at the moment they were merely individual trustees. It would effectively do away with the entire covenant that the defendants wished to retain. Nor would the alternative remedy of distress by taking the rents of the sublessees avail the defendants if, as was likely, long leases at low rents were granted in future.
It was not unreasonable for the defendants to seek a guarantee in case the claimant chose in the future to gain capital in the form of large premiums for long leases, thereby reducing the value of the headlease. Moreover, a guarantee should normally be for the residue of the term, until future assignment, and there was a much greater need for the guarantee outside the three-year period in the instant case. It could not be said that no reasonable landlord would withhold consent on the basis of the terms offered by the claimant. Each case turned on its own facts and nothing in the instant case departed from established law: Straudley Investments Ltd v Mount Eden Land Ltd (1997) 74 P&CR 306, Re Greater London Properties Ltd’s Lease [1959] 1 WLR 503 and Design Progression Ltd v Thurloe Properties Ltd [2004] EWHC 324 (Ch); [2004] 1 EGLR 121 considered.
Jonathan Brock QC (instructed by Reid Minty) appeared for the claimant; Wayne Clark (instructed by Wedlake Bell) appeared for the defendants.
Sally Dobson, barrister
