The Landlord and Tenant Act 1988 applies to leases that prohibit tenants from assigning without their landlord’s consent. It places landlords under a duty to consent to an application for a licence to assign unless it would be reasonable not to do so. Any conditions attached to the landlord’s consent must also be reasonable, and it will not normally be reasonable for a landlord to impose conditions that improve or enhance its rights under the lease.
The decision in Landlord Protect Ltd v St Anselm Development Co Ltd [2008] EWHC 1582 (Ch); [2008] PLSCS 197 offers an insight into the reasonableness of a condition that requires the provision of a guarantee for the assignee of a headlease (which was an “old” lease for the purposes of the Landlord and Tenant (Covenants) Act 1995).
The incoming tenant bid for the property at auction. The auction conditions made completion of the contract conditional upon landlord’s consent. They also provided that the incoming tenant would provide guarantees, a rent deposit or other security if the landlord properly required it to do so.
The incoming tenant had never traded and eventually accepted that it would need to provide a guarantee that was coterminous with its ownership of the headlease. However, the guarantor insisted on obtaining a release from liability on any assignment of the headlease. The landlord initially offered to release the guarantor in exchange for the provision of another, but subsequently agreed to release the guarantor on the provision of “reasonable alternative security”. The guarantor refused to give a guarantee in such terms.
The incoming tenant tried to rescind the auction contract and recover its deposit. The seller argued that the incoming tenant’s refusal to provide a guarantee in the form required by the landlord constituted a repudiatory breach of contract, and forfeited the £105,000 deposit paid at the auction. The case turned on whether it was reasonable for the landlord to require “reasonable alternative security” before releasing the guarantor. The High Court upheld the seller’s claim.
When considering the reasonableness of conditions imposed by a landlord, if a landlord would be entitled to refuse consent on some particular ground, a condition neutralising the landlord’s concern is likely to be reasonable. For example, a landlord would be entitled to refuse to permit an assignment to a financially weak assignee. Consequently, it could reasonably agree to that assignment on condition that the assignee provides a rent deposit or guarantee.
The judge ruled that a requirement for an alternative guarantor was unreasonable because it would have conferred a collateral advantage on the landlord and enhanced the rights that it enjoyed under the lease. However, the landlord’s requirement for “reasonable alternative security” was a reasonable and proper one and the incoming tenant’s refusal to procure a guarantee in those terms was a breach of the auction contract.
Practitioners take note: the judge ruled that a requirement for “reasonable alternative security” can be satisfied solely by the covenant of a prospective assignee of suitable financial standing.
Allyson Colby is a property law consultant
