The litigation in Royal Bank of Scotland plc v Victoria Street (No 3) Ltd [2008] EWHC 3052 (Ch) [2008] PLSCS 294 illustrates the risks of rejecting an application for a licence to assign a lease without providing a clear explanation for the landlord’s decision to refuse the application.
The dispute concerned a covenant not to assign a lease without the landlord’s consent. Such consent was “not to be unreasonably withheld in the case of a respectable and responsible assignee”. The tenant applied for consent to assign its lease to a newly incorporated company. The landlord replied within a week stating, in the briefest of terms, that the assignee was not a respectable and responsible assignee. The tenant issued proceedings for a declaration that the landlord had acted unreasonably.
The judge reminded the parties that section 19(1)(a) of the Landlord and Tenant Act 1927 applies to covenants prohibiting assignment or underletting without landlord’s consent. Section 19 implies a proviso to the effect that the landlord’s consent must not be unreasonably withheld and overrides restrictions on alienation that seek to interfere with that requirement. Consequently, the test was whether the landlord had acted reasonably, rather than whether the incoming tenant was a respectable and responsible assignee for the purposes of the lease.
The judge ruled that he must focus on the reasons given by the landlord for refusing the application. The landlord could not provide additional reasons for its decision. However, landlords are entitled to elaborate on reasons stated concisely in a notice of refusal. Consequently, the landlord was not confined solely to what it had said in its letter.
The landlord explained that the rent payable under the lease was £405,000 pa. The lease had approximately four years remaining. The property had been left unoccupied for some time and the liability for terminal dilapidations was likely to be substantial. None the less, the only security offered was a rent deposit in the sum of three months’ rent. The judge accepted that the landlord was simply elaborating on the reasons stated in its letter, rather than providing additional reasons for its decision, and ruled that a reasonable landlord might well have withheld its consent in such circumstances.
The landlord’s objections to the covenant strength of the assignee were not abrogated by the continuing liability of the original tenant, who would remain liable for any breaches of the lease (because this was an “old” lease and the law of privity of contract continues to apply to leases granted before 1 January 1996). Holding an original tenant to account is less satisfactory than compliance with the lease.
The judge also rejected the tenant’s arguments that the landlord was not entitled to object to the strength of the assignee’s covenant unless it could also show that the value of its reversion would be diminished and that it intended to sell the property and would suffer as a result. The covenant strength of an assignee is, of itself, a sufficient reason for refusing consent to an assignment.
Allyson Colby is a property law consultant
