Landlord and tenant – Underlease – Assignment – Consent – Respondent wishing to sell apartments held on long underleases – Respondent seeking declarations that appellant head lessor unreasonably delayed consent for assignment of one apartment and unreasonably withheld consent in relation to two others – County court finding for appellant on one issue but in favour of respondent on two others – Appellant appealing – Respondent seeking permission to cross-appeal – Whether judge erring in law – Appeal allowed in part – Cross-appeal dismissed
No 1 West India Quay (the property) was a 33 storey building comprising a hotel and 158 residential apartments let on long leases. The appellant was the head lessor. In 2004, the respondent took 999-year underleases of 42 apartments. Each underlease contained a covenant by the lessee not to assign or underlet the whole of the demised premises without the prior written consent of the lessor, such consent not to be unreasonably withheld. The respondent was a company registered in the British Virgin Islands. The apartments were managed by a company based in north London which granted short-term assured short-hold tenancies of the apartments.
Against a background of disagreement over service charges, and a deteriorating relationship between the parties, the respondent decided to sell its apartments. It brought county court proceedings under Part 8 of the CPR seeking declarations that the appellant had unreasonably delayed consent in relation to one apartment and unreasonably withheld consent in relation to two others. The judge found for the appellant in respect of the first apartment but in favour of the respondents on issues relating to the two others.
The appellant appealed on the grounds that the judge erred: (i) in finding that it was unreasonable for the appellant to seek a bank reference from the respondent in respect of the proposed assignee; (ii) in finding that it was unreasonable for the appellant to require an undertaking from the respondent in the sum of £350 plus VAT in respect of the attendance of a surveyor to inspect the demised premises as part of the consideration of each application for permission to assign, and to require such an inspection as part of its consideration of each application; (iii) in finding that it was not reasonable to charge more than £350 plus VAT by way of legal fees in respect of the appellant’s consideration of each application for consent to assign; and (iv) by not awarding the appellant its costs of a preliminary hearing.
By a respondent’s notice, the respondent in effect sought permission to cross-appeal.
Held: The appeal was allowed in part. The cross-appeal was dismissed.
(1) Section 1 of the Landlord and Tenant Act 1988 applied in the present case. The appellant owed the duty set out in subsection (3) to give consent within a reasonable time, unless it was reasonable not to do so, and to serve a written notice of its decision on the respondent. By virtue of subsection (6), the burden of proof lay on the appellant to show that (in the case of the first apartment) its consent was given within a reasonable time, and (in relation to the other two apartments) that its refusal of consent was reasonable.
The purpose of a covenant against assignment without the consent of the landlord, not to be unreasonably withheld, was to protect the lessor from having his premises used or occupied in an undesirable way, or by an undesirable tenant or assignee. As a corollary, a landlord was not entitled to refuse his consent to an assignment on grounds which had nothing to do with the relationship of landlord and tenant in regard to the subject matter of the lease. The onus of proving that consent had been reasonably withheld was on the landlord. However, it was not necessary for the landlord to prove that the conclusions which led him to refuse consent were justified, if they might have been reached by a reasonable man in the circumstances. Subject to those propositions, it was in each case a question of fact, depending on the circumstances, whether the landlord’s consent to an assignment was being unreasonably withheld. It would normally be reasonable for a landlord to refuse consent or impose a condition if that was necessary to prevent his contractual rights under the lease from being prejudiced by the proposed assignment or sublease. It would not normally be reasonable for a landlord to seek to impose a condition which was designed to increase or enhance the rights that he enjoyed under the lease (the rule against an uncovenanted advantage): International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] 1 EGLR 39 and Mount Eden Land Ltd v Straudley Investments Ltd (1997) 74 P&CR 306 applied.
(2) The stated purpose of the request for a bank reference was to enable the appellant to assess and consider the covenant strength of the proposed assignee. That was, in principle, a matter about which the appellant was clearly entitled to seek reasonable reassurance, and a bank reference would be a standard way of providing it. The relevant test was merely whether a reasonable landlord in the position of the appellant might have required one before deciding whether to grant permission to assign. A landlord could not be expected to speculate about the financial position of a tenant on the mere basis that he had the funds to acquire the apartment. The reassurance which the landlord was entitled to seek was that the relevant covenants would be complied with. It was reasonable for a landlord to seek reassurance about the ability of the assignee to meet the service charge, and to ask for a simple bank reference stating that the assignee was good for the estimated amount. The only advantage which the appellant was seeking to protect was the advantage conferred by the covenants in the underlease and its right to do so flowed from the qualified nature of the tenant’s right to assign the lease. Accordingly, the judge erred in principle in her reasoning and the requirement of a bank reference was a reasonable one for the appellant to impose.
(3) The inspection and payment of a surveyor’s fee of £350 had to be considered in the light of provisions in the underlease. Under clause 3.6, there was a right to inspect but that was a general provision which applied throughout the term, whether or not an assignment happened to be in prospect. Provided the appellant could show that it was reasonable to require an inspection in the context of the proposed assignment, there could be no breach of its duty under section 1(3) of the 1988 Act so long as the inspection was reasonable in its scope and cost. It was not unreasonable for the appellant to instruct a surveyor, when the issue was whether there had been compliance with the repairing and alterations covenants in the underlease. It was also material that neither apartment had been occupied by the respondent but had been let to a succession of short-term tenants without any involvement of the appellant. In principle, therefore, the requirement for inspection by a surveyor was reasonable. Before deciding whether to grant consent to the assignment the landlord was entitled to find out whether the relevant covenants had been complied with, and (if not) whether the breaches were minor and easily remediable.
(4) The appellant’s insistence on payment of its own costs in the sum of £1,250 plus VAT was unreasonable. It was common ground that the fee was an “administration charge” within paragraph 1(1) of Schedule 11 to the Commonhold and Leasehold Reform Act 2002 and, as such, was only payable to the extent that it was reasonable. In the context of a fee charged for consent to an underletting of a short-hold tenancy, a reasonable fee should be assessed by reference to the things that would need to be done in a typical case, or that were in fact done in the case under consideration, rather than by reference to a list of all the things that could conceivably be done in connection with the grant of consent. The purpose of charges for consent to an underletting or assignment was to reimburse the landlord’s reasonable expenses of considering whether to grant consent, including administrative expenses. On the evidence before her, the judge had been entitled to conclude that what was being carried out was no more than an administrative task and that the cost to the appellant was no more than £350. In the absence of any specific evidence directed to the work actually done, her robust and sceptical approach was amply justified: Holding & Management (Solitaire) Ltd v Norton [2012] 2 EGLR 53 and Proxima GR Properties Ltd v McGhee [2014] 2 EGLR 27; [2014] EGILR 20 followed.
(5) The appellant was reasonably entitled to require current UK bank references for the prospective assignees and an inspection of each apartment by a surveyor at a cost of £350 plus VAT; but its insistence on payment of its own costs in the sum of £1,250 plus VAT was unreasonable. Overall, the bad reason vitiated the two good ones, with the consequence that the appellant’s success on those two matters was not enough to render the refusal of consent reasonable: British Bakeries (Midlands) Ltd v Michael Testler & Co Ltd [1986] 1 EGLR 64 and BRS Northern Ltd v Templeheights Ltd [1998] 2 EGLR 182 applied.
(6) The respondent would be granted permission to cross-appeal on the grounds that the judge erred in finding that the appellant had not been in breach of the 1988 Act in relation to the assignment of one apartment; and, having found that £350 plus VAT would have been a reasonable sum to require in respect of legal fees, that the judge was wrong to allow the appellant to retain that amount. However those grounds of appeal would be rejected. Permission to cross-appeal, on the ground that the judge erred in relation to costs by refusing to order the appellant to pay the respondent’s costs on the indemnity basis, was refused: NCR Ltd v Riverland Portfolio (No 1) Ltd (No 2) [2005] 2 EGLR 42 distinguished.
Jonathan Wills (instructed by Trowers & Hamlins LLP) appeared for the appellant; Lina Mattsson (instructed by Penningtons Manches LLP) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read transcript: No 1 West India Quay (Residential) Ltd v East Tower Apartments Ltd
