Landlord and tenant — Claim by tenants that landlords had unreasonably refused consent to assignment of lease — Landlords considered that the financial standing of the proposed assignees and their guarantors was insufficient, not only because of its intrinsic inadequacy but also because the assignment would mean the substitution of a less attractive covenant for that of a group with an international reputation — Tenants argued that, although the market might be influenced by this latter consideration, this attitude was unreasonable as by law the original lessees remained continuously liable, if called upon, despite the assignment — Balcombe LJ’s seven propositions in International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd considered — The actual decision in that case, however, which went in favour of the tenants, was distinguishable from the present case in two respects — In that case there was no prospect or need for the landlords to sell, whereas here the landlords needed to sell, and in that case there was a detriment to the tenants, whereas here there was not as the landlords were willing to consent to a subletting — Consequently, the very principles which in the International Drilling Fluids case led to the decision that the landlords had unreasonably refused their consent led in the present case, subject to two questions, to the conclusion that the landlords had not unreasonably withheld it — The first question was whether the landlords were entitled to take into account the attitude of the market mentioned above despite the contingent liability of original lessees after assignment — Held on this point that the
This was a
motion by plaintiff tenant, Ponderosa International Development Inc, seeking
the same relief as claimed in its action by originating summons against the
defendant landlord, Pengap Securities (Bristol) Ltd. The action sought
declarations that the defendant had unreasonably refused consent to a proposed
assignment of a lease and that the plaintiff was entitled to proceed with the
assignment without the defendant’s consent. The lease was for 25 years from
June 24 1985 of a shop unit at 84/90 King Street, Hammersmith, London W6.
Jonathan Brock
(instructed by Clifford-Turner, appeared on behalf of the plaintiff; Caroline
Hutton (instructed by Manches & Co) represented the defendant.
Giving
judgment, WARNER J said: This is a motion in an action brought by an American
company called Ponderosa International Development Inc against an English
company called Pengap Securities (Bristol) Ltd. I will call them ‘Ponderosa’
and ‘Pengap’ respectively. The action, which is brought by originating summons,
is for a declaration that Pengap has unreasonably withheld its consent to the
assignment of a certain lease by Ponderosa to another English company whose
name is Maturescope Ltd (and which I will call ‘Maturescope’) or alternatively
a declaration that Ponderosa is entitled to assign that lease to Maturescope
without the licence or consent of Pengap. The motion seeks the very relief
claimed in the originating summons, but Pengap raises no objection on that
score.
The lease is
dated September 23 1985. It is a lease of a shop unit at 84-90 King Street,
Hammersmith, for 25 years from June 24 1985. The rent reserved by the lease is
£55,000 per annum payable quarterly in advance, subject to a rent review
clause. The first quarterly payment is to be made on the 23rd of this month.
There is a rent-free period until that date. The reason for that is that 84-90
King Street, Hammersmith, is a new development undertaken by Pengap and the
rent-free period was agreed upon to give Ponderosa time to carry out some
fitting-out works. The only other provisions of the lease that I think I need
mention are clauses 3(21) and 3(30). Clause 3(21) contains a covenant as to
user. It forbids the use of the premises otherwise than as a licensed
restaurant, with ancillary kitchen and storage facilities, or than for such
other use within Class I of the Town and Country Planning (Use Classes) Order
1972 as the landlord may approve (such approval not to be unreasonably
withheld). Class I is, I am told, use as retail premises. Clause (30) is the
important provision for present purposes. It is a covenant as to alienation. It
is a long one. It takes up about two and a half pages in the lease. I do not
propose to read it all. The effect of it (so far as material) is to preclude
the tenant from assigning or underletting the premises without the previous
consent in writing of the landlord, such consent not to be unreasonably
withheld. There is an express proviso:
That in
respect of any proposed assignee or underlessee being a private limited company
the landlord may as a condition of such consent require a guarantor or
guarantors of the covenants.
That lease was
executed in pursuance of an agreement for a lease which had been entered into
between the same parties on April 15 1985. I do not think, having regard to the
way in which the argument has proceeded, that I need now trouble with the
detailed provisions of that agreement, save to say that they do foreshadow the
works of fitting out the shop unit that I have mentioned and that they place
the tenant under an obligation to carry out those works. They also make the
benefit of the agreement non-assignable.
I must now say
something about the parties to the lease. Ponderosa, as I indicated earlier, is
an American company. It is a subsidiary of a larger American company, namely
Ponderosa Inc, which is well known in the catering field. It specialises in
operating restaurants of a distinctive kind, which serve steak and salad meals.
Ponderosa Inc has over 650 such restaurants in the United States. Some of those
restaurants are managed by Ponderosa Inc itself and some are operated through
franchising agreements. Ponderosa (the plaintiff) was established to promote
Ponderosa Inc’s interests outside the United States and it has three
restaurants already in the UK, in Watford, Croydon and Chester, which it manages
itself. Pengap is a small development company which carried out this
development at 84-90 King Street. It is, in the jargon of the trade, a ‘single
development’ company. From the outset Ponderosa knew that Pengap’s object,
having developed the property and let its component units, would be to sell the
whole development to an investor.
On July 23
1985, that is between the date of the agreement for the lease and the date of
the lease itself, Ponderosa entered into a franchise agreement with Maturescope
relating to the shop unit that was to be comprised in the lease. It is a very
long agreement. It runs to 30 pages, and I do not propose to read any of it.
Unfortunately Ponderosa took the view that that agreement was confidential as
between itself and Maturescope and did not disclose its existence to Pengap or
its advisers. The result (or so I suspect from what is said in the evidence)
was that those acting on behalf of Pengap felt that they were not being treated
with candour by Ponderosa and suspicions arose of various kinds which may well
have contributed to the relations between the parties becoming soured. However,
that is all water under the bridge now. Miss Hutton, on behalf of Pengap, has
really given up the suggestion that those suspicions can legitimately form part
of the reasons for Pengap refusing the consent sought by Ponderosa for a
licence to assign the lease to Maturescope.
The reasons
now relied upon on behalf of Pengap for refusing such a licence are these. The
directors and advisers of Pengap consider that the financial standing, as now
known to them, of Maturescope and those put forward as guarantors on its
behalf, is inadequate. I will go into the evidence about that in a moment. That
inadequacy might in itself be a ground for refusing the licence to assign, but
the matter goes further than that because, as I have indicated, Ponderosa is a
well-known international company, or at all events the Ponderosa group are a
well-known international group, and of course one knows, although this is not
stated in terms in this evidence, that generally speaking reputable
international groups do not allow their subsidiaries to default on their
obligations. The view taken by those advising Pengap is that, on a sale of the
whole development to an investor, the fact that the rent provided for in this
lease was payable by Ponderosa would be a good selling point. A rent payable by
Maturescope, a new and generally unknown company, would not be such an
attractive asset. Mr Brock argues that, as a matter of law, that is nonsense
because, whatever happens, Ponderosa’s covenant will be there to secure the
payment of the rent, since Ponderosa is the first lessee and so will remain
liable under the covenants in the lease. To someone who understands the law,
says Mr Brock, it cannot matter whether he has the benefit of Ponderosa’s
covenant because Ponderosa is the first lessee or because it is a continuing
lessee. There is, however, evidence from experts who have sworn affidavits, Mr
Burke for Pengap and Mr Jones for Ponderosa, that it is a widely held view in
the property market, and in particular among investors, that, after the
assignment of a lease, the identity of the original lessee is of no interest,
so that, in this case, the development as a whole will be more readily saleable
by Pengap to an investor if Ponderosa remains as the lessee of the shop unit
and sublets it to Maturescope (a course to which Pengap is prepared to consent)
than if Ponderosa assigns the lease to Maturescope. Mr Brock argues that under
the provisions of clause 3(30) of the lease, as modified by section 19 of the
Landlord and Tenant Act 1927, it is not open to Pengap to rely on the attitude
of the market in that respect. The attitude of the market is unreasonable, says
Mr Brock, and therefore the attitude of Pengap in taking it into account is
itself unreasonable. In any case, says Mr Brock, it cannot be legitimate for
Pengap to refuse Ponderosa a licence to assign the lease to Maturescope simply
because Ponderosa is a more desirable tenant than Maturescope.
The authority
that seems to me most in point on all this is a very recent judgment of
Balcombe LJ in the Court of Appeal in a case called International Drilling
Fluids Ltd v Louisville Investments (Uxbridge) Ltd in which judgment
was delivered on November 20, that is to say last month. I understand that that
judgment is going to be reported.* It is
a judgment with which Fox LJ and Mustill LJ expressed their agreement. In it
Balcombe LJ distilled from earlier authorities seven propositions which were
relevant in that case and
quote from Balcombe LJ’s judgment omitting his references to, and discussion
of, those earlier authorities:
(1) The purpose of a covenant against assignment
without the consent of the landlord, such consent not to be unreasonably
withheld, is to protect the lessor from having his premises used or occupied in
an undesirable way, or by an undesirable tenant or assignee.
(2) As a corollary to the first proposition, a
landlord is not entitled to refuse his consent to an assignment on grounds
which have nothing whatever to do with the relationship of landlord and tenant
in regard to the subject matter of the lease.
(3) The onus of proving that consent has been
unreasonably withheld is on the tenant.
(4) It is not necessary for the landlord to prove
that the conclusions which led him to refuse to consent were justified, if they
were conclusions which might be reached by a reasonable man in the circumstances.
(5) It may be reasonable for the landlord to
refuse his consent to an assignment on the ground of the purpose for which the
proposed assignee intends to use the premises, even though that purpose is not
forbidden by the lease.
That does not
arise here.
(6) While a landlord need usually only consider
his own relevant interests, there may be cases where there is such a
disproportion between the benefit to the landlord and the detriment to the
tenant if the landlord withholds his consent to an assignment that it is
unreasonable for the landlord to refuse consent.
(7) Subject to the propositions set out above, it
is in each case a question of fact, depending upon all the circumstances,
whether the landlord’s consent to an assignment is being unreasonably withheld.
*Editor’s
note: The Court of Appeal decision is reported at p 39 ante and (1985)
277 EG 62.
In that case
the facts were these. The property comprised in the lease was an office
building, which the tenants had vacated because they no longer wanted to occupy
it. They could find no one prepared to take an assignment of their lease except
a company which wished to use the property for what is called ‘serviced office
accommodation’. There was evidence on which the judge had found that reasonable
professional men might take the view that, if the property were placed on the
market, it could fetch less with that company in occupation carrying on the
business of providing serviced offices than with the property having remained
vacant for more than a year. On the other hand, there was no prospect of the
landlord wishing to place the property on the market or to mortgage it to the
fullest extent possible. Nor was there any possibility that the use of the
building for serviced offices might have a depreciating effect on the letting
value of the property at the end of the lease. The landlord’s main ground for
refusing to grant a licence to assign was that the investment value of its interest
in the property would be detrimentally affected by the proposed use.
The actual
decision in the case and the reasons for it (so far as material for present
purposes) are to be found in two paragraphs of Balcombe LJ’s judgment, which
follows the passage in which he enunciates the seven propositions that I have
read. He said:
In the present
case, the learned judge, having made the findings of specific fact set out
above, carefully considered the relevant authorities. He then reached the
conclusion that the views of the landlord’s expert witnesses about the effect
of the proposed assignment on the value of the reversion, although views which
could be held by reasonable professional men, did not in the circumstances of
this case, where there was no prospect of the landlord wishing to realise the
reversion, constitute a ground for reasonable apprehension of damage to its
interests. That was a decision on the facts to which the learned judge was
entitled to come. He made no error of law in reaching his decision; he took
into account nothing which he ought not to have considered and he omitted
nothing which he ought to have considered. In my judgment, this court ought not
to interfere.
But in any
event in my judgment the learned judge reached the right decision. Although he
did not expressly mention the disproportionate harm to the tenant if the
landlord were entitled to refuse consent to the assignment, compared with the
minimum disadvantage which he clearly considered the landlord would suffer by a
diminution in the paper value of the reversion — ‘paper value’ because he was
satisfied there was no prospect of the landlord wishing to realise the
reversion — he clearly recognised the curious results to which the landlord’s
arguments, based solely upon a consideration of his own interests, could lead.
As he said (at p 19C of the transcript):†
‘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 proposed 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 one of the expert witnesses 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.’
In my judgment the gross unfairness to the tenant of the example
postulated by the learned judge strengthens the arguments in favour, in an
appropriate case — of which the instant case is one — of it being unreasonable
for the landlord not to consider the detriment to the tenant if consent is refused,
where the detriment is extreme and disproportionate to the benefit of the
landlord.
† Editor’s
note: See [1985] 2 EGLR 74 at p 79 A-B.
Mr Brock’s
submission was that that applies here, in that the case put forward on behalf
of Pengap amounted to saying that, because the covenant of Ponderosa was
preferable to the covenant of Maturescope, Ponderosa should not be allowed to
assign the lease to Maturescope. I think that that is not only an oversimplification
of Pengap’s case but also a mistaken way of interpreting the judgment of
Balcombe LJ. What Balcombe LJ was saying was that, although in general a
landlord was entitled to consider only his own interests, there were
exceptional cases where the detriment to the tenant if the landlord withheld
his consent to an assignment was so disproportionate to the benefit to the
landlord from his doing so that it was unreasonable for him to do so. The
learned lord justice mentioned the case of the government department as an
extreme example of that. There are two respects in which this case is
distinguishable from the International Drilling Fluids case. One is that
in that case there was no prospect of the landlord’s wanting or needing to
sell. Therefore the diminution that the expert evidence suggested the
assignment would cause to what Balcombe LJ referred to as the ‘paper value’ of
the reversion did not matter; it was not a real detriment to the landlord. Here
in contrast we know that Pengap wants to sell and indeed needs to sell. There
is evidence that, because of the nature of the arrangements that it made to
finance the development, it will be in difficulties unless it sells fairly
soon. Under the general principles enunciated by Balcombe LJ Pengap is entitled
to have regard to its interests in that respect. The other difference between
this case and that of International Drilling Fluids is in the extent of
the detriment to the tenant. Ponderosa is not in the sort of difficulty that
the tenant was in in the International Drilling Fluids case of being
unable to part with property it did not want unless it assigned it to the
company that the landlord objected to. Pengap has made it perfectly clear to
Ponderosa that Pengap will consent to a sublease by Ponderosa to Maturescope
and there is no problem about that. The detriment that Mr Brock says will arise
to Ponderosa if that course is adopted is that it will lead to administrative
complications. Ponderosa will have to collect the rent from Maturescope and
pass it on to the landlord. When rent reviews come up there will have to be two
rent reviews, one between the landlord and Ponderosa and another between
Ponderosa and Maturescope. The same duplication will occur on claims for
dilapidations and with any other problems that may arise during the subsistence
of the lease. Of course, that is an inconvenience and it may cost some money,
but it is nothing like as grave a detriment as was in question in the International
Drilling Fluids case. Moreover, Miss Hutton mentioned countervailing
administrative disadvantages that might in practice arise for the landlord if,
instead of keeping in quarterly touch with Ponderosa as the source of the rent,
Ponderosa had to be treated merely as a person who would be liable for the rent
in the event of the actual tenant failing to pay. So in my view this case is
distinguishable for those reasons from the International Drilling Fluids case,
and the very principles that led the Court of Appeal in that case to hold that
the landlord had unreasonably withheld its consent lead in the present case,
subject to two questions with which I have yet to deal, to the conclusion that
Pengap has not unreasonably withheld its consent.
Of those
questions the first is whether Mr Brock is right in saying that Pengap is not
entitled to take into account the attitude of the market to which the expert
witnesses refer because, to anyone properly instructed as to the law, that
attitude would appear unjustified. In my judgment he is not. Bearing in mind
the administrative considerations mentioned by Miss Hutton to which I have just
referred, I am not even sure that Mr Brock is right in saying that the attitude
of the market is unreasonable. Assuming, however, that he is right as to that,
the fact is that Pengap has to live in the real world and to take the market as
it finds it, not as lawyers might wish it to be. In saying that I do not
overlook the evidence of Mr Jones, the expert fielded by Ponderosa, that he
believes that in the present case the reluctance of the market to take
Maturescope’s covenant could be overcome. He says in his affidavit:
I believe
that in this instance a strong case could be made to an investor that
any difference that might actually or be perceived to exist between an
assignment and a sub-letting would be offset by the fact that the proposed
assignee is a UK registered company and is contractually linked by way of the
franchise agreement with the assignor.
Mr Jones
explains that, to his mind, the franchise agreement:
demonstrates
a close contractual relationship between the parties designed to ensure that
Ponderosa, in lending its name and expertise to the development of the
business, has proper control over the assignee from a trading and standards
point of view.
He goes on:
Thus, unlike
many assignors, whose intention is to rid themselves of any continuing
commitment to a property (save their underlying obligations as original
tenant), Ponderosa will maintain a continuing and detailed interest in the
success of the business and the proper maintenance of the premises for that
purpose . . . I would be surprised if, in entering a very competitive market,
Ponderosa do not ensure that everything is done by Maturescope Ltd, both
operationally and in the conduct of their affairs as tenants, so as not to
prejudice the reputation of Ponderosa in the eyes of the public or other
potential landlords.
Mr Jones does
appear to have seen the franchise agreement, but he seems to have overlooked
that Ponderosa and Maturescope are under no obligation to Pengap or to any
future landlord to keep that agreement in force. They can, by agreement between
them, bring it to an end at any time. There are, moreover, in the franchise
agreement provisions enabling Ponderosa to withdraw from it unilaterally in
certain events, and that goes for Maturescope too. So there can be no guarantee
to any landlord that the relationship of franchisor and franchisee will
continue between Ponderosa and Maturescope (or anyone else who may run a
restaurant at those premises) for the next 25 years.
So I come to
the last question, which is in a sense the first: whether Pengap is being
unreasonable in taking the view that it does of the financial standing of
Maturescope and of its proposed guarantors. In considering that question I have
in mind in particular the fourth proposition enunciated by Balcombe LJ, viz
that it is not necessary for a landlord to prove that the conclusions which led
him to refuse his consent were justified, if they were conclusions which might
be reached by a reasonable man in the circumstances.
I look first
at Maturescope itself. Maturescope is what is generally called an ‘off the peg’
company. It was incorporated on February 18 1985 and bought by two gentlemen
called Thakkar in April 1985. They are Mr Mahendra Thakkar and Mr Arvind
Thakkar. From a company search that was done by Pengap’s solicitors it appears
that on April 5 1985 a Mr Nadir Lalani and a Dr Manoobai Amin were appointed
co-directors with the two Thakkars. Dr Amin is resident in the United States
but the other three directors are, it seems, resident here. So far there is no
evidence of any issue of any substantial amount of share capital. Mr Henderson,
who is the property manager of Ponderosa, has sworn an affidavit to which he
exhibits a document called a ‘funding schedule’ showing that what is intended
is that the four directors should put up between them share capital of £250,000
and that various institutions should put up in addition £62,500 by way of share
capital and a total of £287,500 by way of loan capital. Mr Brock confirmed to
me that those loans would be provided on the security of debentures. The
document shows that there will be initial expenditure of the order of £600,000,
of which we know from other evidence that the expenditure on the fitting-out
works that I referred to earlier will absorb between £450,000 and £500,000. So,
on the face of it, this company will start life insolvent.
The guarantees
that are offered are those of the two Thakkars and of Mr Lalani. Information
about their financial standing has been supplied to Pengap in three
instalments.
First, in
accordance with normal practice, Ponderosa’s solicitors, Clifford-Turner,
obtained bank and other references for those three gentlemen and, in September,
sent them to Pengap’s solicitors, Manches & Co. Mr Brock quite rightly
concedes that the bank references provided for the two Thakkars are qualified.
To my mind they are so qualified that no landlord in his senses would, in the
circumstances, rely on the guarantee of either of the Thakkars. In the case of
Mr Lalani the bank reference reads: ‘Respectably introduced customer known to
the bank in a private and business capacity and considered good for the amount
and purpose of your inquiry, £55,000 rental — guarantor.’ However, as Miss Hutton points out, we do not
know what the terms of the request for that reference were. In particular,
there may not have been any mention in it of the fact that Mr Lalani is to
subscribe a substantial — albeit, so far as Pengap and this court are
concerned, an unspecified — sum to the initial working capital of Maturescope.
Then there is a reference from Mr Lalani’s solicitors, who are a well-known
firm. The material part of it is: ‘In our opinion our above-named client would
prove a respectable and trustworthy guarantor of the lease, details of which
are mentioned in your letter. We believe that our client would not enter into
any commitment which he believed he could not fulfil.’ There follows a disclaimer of liability on
the part of the firm. There again Miss Hutton points out that we have not got
the text of the letter written by Clifford-Turner to those solicitors. There
are other references given, but they are from people who are certainly unknown
to me, solicitors, accountants and traders of one sort and another. There seems
to have been no attempt to satisfy Pengap or its advisers as to the standing of
those referees. No blame could, I think, attach to anyone who treated
references given by them with some reserve.
Manches &
Co indicated to Clifford-Turner that those references did not ‘give great
comfort’ to Pengap. So, in early October, Clifford-Turner sent to Manches &
Co a bundle of documents dated in June and July 1985. I agree with Miss Hutton
that the receipt of those documents was calculated to increase Pengap’s unease
rather than to dispel it. Those documents consisted firstly of ‘Franchise
Applications’ completed in June by the two Thakkars and Mr Lalani on printed
forms supplied by Ponderosa. There are pages in those forms on which an
applicant is supposed to give details of his financial resources and other
particulars. On the forms completed by the two Thakkars and Mr Lalani those
pages are simply crossed out. The other documents in the bundle consist of
letters from Ponderosa to the proposed guarantors’ respective banks enclosing
authorisations signed by them for the release of personal data and asking
specifically for (and I quote) ‘information on . . . his current assets with
your bank, together with any other financial information you may have that
would be helpful.’ In each case the
bank’s reply conspicuously does not give any specific information. Save that
the reply from Mr Lalani’s bank states that he is ‘chairman of a company with
18 supermarket outlets in London’, the replies are brief and couched in general
terms. A possible inference from them is that each of the gentlemen in question
is overdrawn at his bank.
Third, in
November, Mr Lalani and Mr Mahendra Thakkar swore affidavits as to their own
means. Mr Arvind Thakkar did not do so because, I am told, he was abroad. I am
bound to say that those affidavits are sketchy in the extreme. Mr Lalani’s says
that he is the ‘controlling shareholder in three substantial companies which
employ in total 700 people with an overall annual turnover in excess of £50
million’, but he does not exhibit the accounts of any of those companies. Then
he says: ‘My house, which is jointly owned with my wife, is worth approximately
£1 million on the open market. There is no mortgage over the property, although
it is pledged security in respect of company indebtedness.’ So for aught we know the £1m could be
absorbed by company debts. Finally, he says that his annual income is ‘in
excess of £50,000 per annum’. He does not say whether that is before or after
tax, or what other annual commitments he has.
Mr Mahendra
Thakkar mentions his house, which he says is worth about £100,000, and two
commercial properties worth together about £250,000, all of those assets being
owned jointly with his wife and mortgaged. The mortgages total £90,000 so that,
according to the figures he gives, there is a net equity of £260,000, of which
half would be £130,000. As against that we do not know what Mr Thakkar’s
liabilities are in addition to his commitment to contribute to the share
capital of Maturescope. Mr Mahendra Thakkar adds that his gross annual earnings
are in the region of £60,000 to £70,000. Clearly they are subject to tax and
may be subject to other commitments.
In the result,
I cannot say that Pengap is, in all the circumstances, acting unreasonably in
refusing its consent to an assignment of the lease by Ponderosa to Maturescope,
while offering its consent to a sublease.
The motion
and originating summons were dismissed with costs.