Landlord and tenant – Assignment – Consent – Covenant in underlease of flat prohibiting assignment or parting with possession without prior written consent of lessor not to be unreasonably withheld – Responsibility for granting such consent passing to RTM company by virtue of sections 98 and 99 of Commonhold and Leasehold Reform Act 2002 – First appellant selling flat to second appellant – Assignment of underlease precluded by objection of respondent landlord to registration at Land Registry – Whether breach of covenant occurring by unlawful parting with possession – Whether RTM company unreasonably withholding consent – Appeal dismissed
The first appellant was the long leaseholder of a flat in a block in London N6. The underlease contained a covenant not at any time to assign, sublet or part with possession of the whole of the flat without the previous written consent of the lessor, such consent not to be unreasonably withheld. The respondent was the first appellant’s landlord but the block was manged by a right-to-manage (RTM) company, which, by virtue of sections 98 and 99 of the Commonhold and Leasehold Reform Act 2002, assumed responsibility for considering any request for consent and was subject to an obligation to notify the respondent of any such request.
In March 2015, the second respondent was appointed as a director of the RTM company. Several other directors subsequently resigned, leaving the second appellant as the only director for a period of several weeks. During that time, the first appellant sold her flat to the second appellant. The sale contract provided for sale with vacant possession and also placed all responsibility for obtaining consent to the assignment on the second appellant. The second appellant did not notify the respondent of the proposed assignment. The sale proceeded to completion and the first appellant moved and gave the keys to the second appellant.
Registration of the transaction did not take place because the respondent submitted an objection to the Land Registry which prevented registration. The respondent also applied to the first-tier tribunal (FTT) for a determination, under section 168(4) of the Commonhold and Leasehold Reform Act 2002, that the first appellant was in breach of covenant by parting with possession of the flat to the second appellant without obtaining prior written consent.
It was common ground that there had been no assignment where the transaction had not been completed by registration. The appellants contended that, as a matter of law, there had not been no parting with possession either, since: (i) the first appellant remained the registered proprietor with all the powers of an owner under section 23 of the Land Registration Act 2002; and (ii) while she held the flat on trust for the second appellant under the Trusts of Land and Appointment of Trustees Act 1996, she retained all the powers of an absolute owner pursuant to section 6 of that Act. Alternatively, they argued that any parting with possession was not a breach of covenant because the RTM company had unreasonably withheld consent.
The FTT made a determination in favour of the respondent and the appellants appealed.
Held: The appeal was dismissed.
(1) A covenant which forbade a parting with possession was not broken by a lessee who in law retained the possession even though she allowed another to use and occupy the premises. The covenant would be breached only the lessee was, in effect, wholly ousted from legal possession in the sense of being completely excluded from the legal possession for all purposes: Lam Kee Ying v Lam Shes Tong [1975] AC 247, Akici v LR Butlin Ltd [2005] EWCA Civ 1296; [2006] 1 EGLR 34 and Clarence House v National Westminster Bank plc [2009] EWCA Civ 1311; [2010] 1 WLR 1216; [2010] 1 EGLR 43 applied. It was therefore important to distinguish between a true parting with possession and a circumstance where a lessee, who in law retained the possession, allowed another to use and occupy the relevant premises.
In the case of a conveyance of unregistered land, the vendor would part with possession on completion of the sale because at that point they would have received the full purchase price, moved out and handed over the property absolutely to the purchaser and would retain no further right to any possession of the property. The sole and exclusive right to possession would be enjoyed by the purchaser. There was no reason why the position should be different in the case of registered conveyancing.
In the instant case, there was a contract for sale with vacant possession, which was completed by the execution of the transfer and the handing over of the purchase price by the second appellant and the flat by the first appellant. The first appellant had handed the flat over to the second appellant for all purposes with the full right to use it thereafter as he wished to the complete exclusion of the first appellant. That was the intention and understanding of the parties and that intention was relevant because the question of whether there had been a parting with possession had to depend, at least in part, on the substance of the matter rather than merely on the legal documentation.
(2) It made no difference that the first appellant remained the owner of the registered estate, namely the underlease, and continued to enjoy the owner’s powers as set out in section 23 of the 2002 Act. She did not enjoy the owner’s powers for her own benefit, since she held the property on trust for the second appellant pursuant to the 1996 Act. While section 6 of the 1996 Act provided that she had all the powers of an absolute owner in relation to the flat, she enjoyed those powers only for the purpose of exercising her function as a trustee. She therefore had no right to exercise any powers of an absolute owner in any way which constituted a breach of trust or contract as between herself and the second appellant. That meant that she had no right to exercise or enjoy any right to possession in respect of the flat unless called on by the second appellant to do so. In her personal capacity, she was completely excluded from the legal possession of the flat for all purposes. The hallmark of the right to possession was the right to exclude all others from the property in question. After the execution of the transfer in July 2015, the second appellant had the right to exclude all others, including the first appellant, from the flat. The first appellant had allowed the second appellant into physical occupation of the flat with the intention of relinquishing her own exclusive possession of the flat to him. It followed that, as a matter of law, the first appellant had parted with possession of the flat to the second appellant.
(3) The first appellant was in breach of covenant by parting with possession without obtaining the consent of the RTM company. She was not relieved of the obligation to obtain consent by virtue of any unreasonable withholding of consent contrary to the duty under section 1(3) of the Landlord and Tenant Act 1988. In circumstances where no notice of the proposed assignment had been given to the respondent, the RTM company was precluded by section 98(4) of the 2002 Act from granting consent. If, on a particular date, the RTM company was subject to a statutory prohibition that it must not grant an approval for an assignment, it could not be said on that date to be unreasonably withholding consent to such an assignment. Any different conclusion would effectively remove the protection for a landlord that section 98(4) was intended to confer. If an RTM company failed promptly to notify the landlord under section 98(4) of a proposed assignment, then it might well be in breach of its duty to the tenant under the 1988 Act. However, that breach would give rise to a claim for damages, rather than resulting in the rights of the landlord under sections 98(4) and 99 being extinguished.
(4) Per curiam: Even if that were wrong, and it was possible for the RTM company to have withheld its consent unreasonably notwithstanding the prohibition in section 98(4), there had been no unreasonable withholding of consent on the facts of the case. The conduct of the first appellant in placing all responsibility for obtaining the RTM company’s consent on the second appellant, coupled with the inaction of the RTM company for which the second appellant, as sole director, was personally responsible, had placed the RTM company in an impossible position. In those circumstances, the appellants were not entitled to say that the RTM company had acted unreasonably in withholding consent by reason of its failure to notify the respondent of the proposed transaction.
Edwin Johnson QC (instructed by Payne Hicks Beach) appeared for the appellants; Brie Stevens-Hoare QC and Stan Gallagher (instructed by Hamlins LLP) appeared for the respondent.
Sally Dobson, barrister
