Underletting of commercial premises — Appellant landlord refusing consent — Whether refusal reasonable — Reasonable time for giving decision — Relevance of expert evidence — Appeal allowed
The appellant was the landlord and the respondent was the tenant of commercial premises under a 25-year lease. The respondent sought the appellant’s consent for a proposed underletting, which would involve a substantial reverse premium. The appellant was concerned about the possible effect of the underletting on the value of its reversion, and about the financial status and covenant strength of the underlessee. The respondent provided further financial information on the underlessee and set a two-week deadline for the appellant’s decision. This was later extended by several days, although the respondent maintained that the earlier date had allowed a reasonable time in which to reach a decision. The appellant refused consent.
The respondent brought proceedings, contending that the appellant had breached its duty under section 1(3) of the Landlord and Tenant Act 1988 by unreasonably withholding consent and by failing to give its decision within a reasonable time. The judge identified the date upon which the further information was supplied as the effective date of the respondent’s application for consent. He held that the two-week period had allowed the appellant a reasonable time in which to reach a decision. In so finding, he took the view that, in the light of the respondent’s continuing liability under the covenants in the lease, the financial status of the proposed underlessee was of no great importance. Considering the reasonableness of the refusal, the judge dismissed as remote and speculative certain expert evidence that indicated that, at the end of the current lease, the property would realise more if let on several smaller leases than on a single new lease of the whole to the underlessee under the provisions of the Landlord and Tenant Act 1954. The judge did not find that any damage had been done to the reversion, and he concluded that consent to the underletting had been unreasonably withheld. The appellant appealed.
Held: The appeal was allowed.
1. The appellant had given its decision within a reasonable time. It had been entitled to take adequate time following receipt of the completed application in order to consider with its advisers the serious financial and legal implications of a refusal, and, if necessary, to report to the relevant board. In the absence of special circumstances, a period of less than three weeks could not be categorised as being inherently unreasonable for that process. It was in neither party’s interests for the decision to be rushed, and no harm had been caused by the delay between the two deadlines: Go West Ltd v Spigarolo [2003] EWCA Civ 17; [2003] 1 EGLR 133 applied.
2. The appellant had also established the reasonableness of its decision to refuse consent. The judge had set the standard of reasonableness too high and had given inadequate weight to the expert evidence. It was the essence of a reasonable decision that reasons existed for it that could be justified at some level, even if only by showing that they were genuine and not fanciful. Those reasons were not required to be justified by reference to some objective standard of correctness. Accordingly, it was sufficient that a lessor had genuine, and not unfounded, concerns on matters relevant to the value of its interest in the property, even if the prospect of those concerns being realised was small. Although the judge had been entitled to give great weight to the security provided by the respondent’s covenant during the remainder of the current lease, a reasonable lessor could also be expected to take account of the position at the end of the lease. There was no doubt that the underlessee, if still in occupation, would have a right to seek a new tenancy under the 1954 Act. The judge had been wrong to dismiss, as speculation about the distant future, the expert evidence that a material difference would arise between the value attributable to a single new letting to the underlessee, albeit at a market value, and the possibility of smaller leases of a vacant building. Although any such estimate would inevitably be uncertain, the purpose of the evidence was to show how an investor might evaluate that uncertainty, by reflecting it in a current valuation. There was no reason to reject that as an inappropriate valuation technique. Moreover, the question for the judge had not been whether he regarded the evidence as speculative and remote, but whether it had helped to show that the appellant’s concerns about the weakness of the underlessee’s covenant were reasonable. It was not suggested that these concerns were not genuine, and, on the evidence, they could not be said to be unfounded: Ashworth Frazer Ltd v Gloucester City Council (No 2) [2001] UKHL 59; [2002] 1 EGLR 15; [2002] 05 EG 133 applied.
Jonathan Seitler QC (instructed by Berwin Leighton Paisner) appeared for the appellant; Derek Wood QC (instructed by Herbert Smith) appeared for the respondent.
Sally Dobson, barrister
