James Souter and Robert Duddridge consider landlords’ right to deny tenant requests
Question
I am the freeholder of a shopping centre in which the anchor tenant is an established department store. It has been experiencing trading difficulties and has applied for consent to assign the lease to a well-known discount store. The lease contains a simple alienation covenant that prohibits assignments without the landlord’s consent, such consent not to be unreasonably withheld. I am concerned about the impact on my investment but can find no other grounds on which to challenge the assignment. Can I withhold consent on financial grounds alone?
Answer
Yes, but the burden of proof will be on you to show that either the proposed assignee is of insufficient covenant strength or that the assignment will damage the value of your reversion, causing you actual loss.
Explanation
The first area to consider is the strength of the proposed assignee’s covenant. You should review the last three years’ audited accounts to ascertain the level of profits. In practice, landlords often look for profits that exceed three times the annual rent and other payments due under the lease.
This is by no means an absolute rule. In Footwear Corporation Ltd v Amplight Properties Ltd [1998] 2 EGLR 38 the court questioned the existence of such a rule and, in any event, warned against applying it blindly. The court will look at a number of factors and hear evidence from the parties before reaching a conclusion. The proposed assignee’s business plan will be important. A company expanding rapidly may have a higher risk factor than one simply moving its main outlet to new premises. If you withhold your consent on this ground, you need to be able to justify your decision by reference to all the financial evidence provided by the tenant.
The second point to consider is the impact of the proposed assignment on the value of your reversion. You are entitled to consider this but its impact will depend on a number of factors and involve a balancing act between your interests and those of your tenant.
The leading authority is the Court of Appeal’s decision in International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] 1 EGLR 39. In that case the Court of Appeal found that while the landlord may have suffered a paper loss by the reduction in the value of its reversion, the prejudice to the tenant in allowing the refusal of consent would have been far greater.
This can be contrasted with Ponderosa International Development Inc v Pengap Securities (Bristol) Ltd [1986] 1 EGLR 66 in which consent was withheld on the same ground and found to be reasonable. The fact that the landlord was about to sell the reversion and would suffer an actual loss outweighed any prejudice caused to the tenant. If you want to rely on this as a ground for withholding consent, you should be prepared to demonstrate how the damage to your reversion if consent is given will outweigh the prejudice to the tenant if consent is withheld.
Question
I am the freeholder of an office block let on a long lease. The lease contains a covenant against making alterations without my consent, such consent not to be unreasonably withheld. The tenant has sought my consent to convert the property into flats. His proposed alterations include works to structural features that are not part of the demise but are retained by me. I am also concerned that, if the property is converted into flats, future tenants may exercise collective enfranchisement. Can I withhold my consent on either of these grounds?
Answer
You are entitled to withhold your consent to alterations that trespass to parts of the property that you have retained. It may be reasonable to withhold your consent on the basis of future collective enfranchisement if there is a real prospect of such enfranchisement, but not if it is wholly speculative.
Explanation
The Court of Appeal considered the circumstances in which a landlord might reasonably refuse consent to alterations in Iqbal v Thakrar [2004] EWCA Civ 592; [2004] 3 EGLR 21, which made it clear that the same principles apply as in other cases concerning the landlord’s consent: for example, consent to assignments of the lease. In each case, it is a question of fact.
Where alterations are concerned, it is particularly important for the tenant to provide sufficient information about his proposals (for example, in the form of detailed drawings) to enable the landlord to make an informed decision. However, the landlord has the right to refuse his consent to any alteration or addition that would trespass on property retained by the landlord, even if that refusal would otherwise be unreasonable. In practical terms, unless your tenant is able to devise alterations that do not involve such trespass, you are entitled to withhold your consent to his alterations on the basis that they will trespass on your property, without being concerned whether it is reasonable on other grounds to refuse consent.
In Henley v Cohen [2013] EWCA Civ 480; [2013] HLR 28, it was held at first instance (among other things) that the landlord had reasonably withheld his consent to the tenant’s conversion of a storeroom above a shop into a flat on the basis that such conversion might lead to enfranchisement of the freehold. The Court of Appeal refused permission to appeal that part of the decision.
That may be contrasted with Mount Eden Land Ltd v Bolsover Investments Ltd [2014] EWHC 3523 (Ch), in which the High Court upheld the decision of the county court that the landlord had unreasonably withheld his consent to the tenant’s conversion of offices into residential units on the basis of possible future collective enfranchisement, because the evidence showed that the possibility of collective enfranchisement was wholly speculative. Unless you can obtain evidence that there is a real possibility of enfranchisement, a court might well find that it is unreasonable for you to withhold consent on this basis.
James Souter is a partner at Charles Russell Speechlys LLP and Robert Duddridge is a barrister at Enterprise Chambers
E-mail questions on any topic to egq&a@charlesrussell.co.uk and egq&a@enterprisechambers.com
