Headlease – Sale at auction – Contract conditional upon obtaining landlords’ consent to assignment – Landlords seeking guarantee by sole director of appellant purchaser to be released on subsequent assignment provided that reasonable alternative security provided – Whether proviso conferring on landlords greater protection than entitled to under headlease – High Court holding that appellant not entitled to return of deposit – Appeal allowed
At an auction in 2006, the appellant contracted to purchase the respondent’s head leasehold interest in a block of flats for £1.05m; it paid a deposit of £105,000. The sale contract incorporated the RICS Common Auction Conditions (2002), general condition 9 of which dealt with the obtaining of landlord’s consent to an assignment. It provided that, inter alia, the appellant was obliged “if properly required under the terms of the lease” to provide “guarantees, a rent deposit or other security”. If within three months of the contract date the landlord’s consent had not been obtained, either party would be entitled to rescind the contract without prejudice to claims for breach of general condition 9.
The appellant was a dormant company that had never traded and thus lacked accounts and bank references. The landlords were willing to consent to the assignment only if the appellant’s sole director, R, acted as guarantor. A dispute arose over the terms of the guarantee. In earlier proceedings, it was held that the landlords had not acted unreasonably in refusing to accept a guarantee that was limited to three years: see Landlord Protect Ltd v Dolman [2007] 2 EGLR 21; [2007] 18 EG 154. By clause 6.6 of the licence to assign, the landlords sought a guarantee that would be released upon any subsequent assignment “provided that a reasonable alternative security is provided by the purchaser”. The appellant objected to that proviso on the ground that the landlords sought protection that was not available under the headlease. It argued that the landlords’ rights were protected by their ability to refuse consent and that the suggested proviso might require a guarantee of equal strength to that provided by R, whereas the headlease conferred no right to a guarantee.
Consent was not obtained within the three-month period and the appellant purported to rescind the contract. The respondent did not accept the rescission and forfeited the deposit, arguing that the appellant was in breach of contract by refusing to agree to a guarantee in the form proposed by the landlords. The High Court dismissed the appellant’s claim for the return of its deposit: see [2008] EWHC 1582 (Ch); [2008] 28 EG 113 (CS). The appellant appealed.
Held: The appeal was allowed.
The landlord’s requirement of a personal guarantee, the discharge of which would be subject to clause 6.6 of its draft licence to assign, was unreasonable under the terms of the lease and was not properly made for the purposes of clause 9.3(c) of the general conditions of the contract of sale. The appellant had been entitled to rescind the contract and was entitled to the return of its deposit.
As a matter of law, it was generally unreasonable for a landlord to require a guarantee of an assignee’s liabilities to extend beyond the period during which the assignee was liable to the landlord by privity of estate. The guarantor could not and should not have to rely upon the landlord acting sensibly and refusing consent to an assignment to an insubstantial assignee. The landlord owed no duty to a lessee not to consent to an assignment to an insubstantial assignee; it was legally free to do so. The head landlord in the instant case might sell the reversion to a party whose reliability was less certain. Moreover, questions could arise as to the guarantor’s liability under the guarantee in the event of one or more further assignments of the term.
Clause 6.6 had the further defect that it exposed the guarantor to a dispute as to whether the landlord had reasonable alternative security. Without the proviso, the effect of the clause was that the head landlord would decide whether a proposed assignee was a suitable lessee; if it decided that it was, it would give consent to the assignment, and the guarantor would automatically be discharged from further liability. As a result of the proviso, the guarantor might be exposed to a dispute as to whether a permitted assignee had provided or was itself reasonable alternative security.
John Furber QC (instructed by McGrigors LLP) appeared for the appellant; Martin Rodger QC (instructed by Guy Clapham & Co) appeared for the respondent.
Eileen O’Grady, barrister
