Dealing with leases Is it time for a more mature approach to applications by tenants for landlords’ consent to assign or sub-let leases- Nicholas Cheffings, Mathew Ditchburn, Guy Fetherstonhaugh QC and J onathan Karas QC propose a new protocol for avoiding disputes
In a perfect world, landlords and tenants would enter into leases for exactly the length of term that each would favour, and tenants would occupy until lease expiry. In practice, landlords usually want to tie their tenants in for long terms in order to secure steady income streams, while tenants desire flexibility.
The only means of keeping both parties (relatively) happy is to have flexible alienation provisions, allowing the tenant to pass on its bargain to a third party when it wants, subject only to the landlord being satisfied that the replacement tenant is an adequate covenant.
For centuries, however, landlords had it all their own way when it came to applications for licence to assign or sub-let. They could stall to their hearts’ content, knowing that their increasingly desperate tenants would often give up, or pay their way out. Because consent provisions almost invariably operate as a proviso to the tenant’s covenant (“such consent not to be unreasonably withheld”), rather than as a positive covenant by the landlord not to withhold consent, the tenant’s only recourse was to sue for a declaration that consent was being unreasonably withheld (or, more riskily, assign without consent).
The Landlord and Tenant Act 1988 was designed to remedy this imbalance, by imposing positive consent obligations on landlords. Now, landlords may not safely tarry – at least, not without exposing themselves to actions for damages. The remedy has largely worked, although not without problems – some of which have been analysed in a series of court decisions. Working through the legislation and overlay of cases is a complex and uncertain process. Tenants who seek licence to assign may now feel that they have at least some law on their side – but may also quail at the sheer bulk and complexity of it. Landlords will not sleep easily, either – for the perils of delaying or being too demanding (eg when attaching conditions to any consent) are substantial.
Against that background, let us introduce the Protocol for Applications for Consent to Assign or Sublet (see overleaf). This Protocol, which applies to commercial property situated in England and Wales, is not intended to be an exhaustive or mandatory list of steps or procedures to be followed in connection with all applications for consent to assign or sublet, regardless of the circumstances. Nor is it intended to be an explanation of the law – for that would duplicate the dense detail in the many texts on the subject.
The Protocol has three purposes.
First, it is intended to improve communication between landlord and tenant, and establish a workable timetable. Compliance with the Protocol should ensure the provision of sufficient information for the landlord to decide whether to consent to the proposed transaction, or whether it would be reasonable to refuse consent. It should also ensure that applications are dealt with within a reasonable timeframe.
Second, parties following this Protocol will be likely to avoid arguments (a) as to the information and documentation that should form part of any application for consent; and (b) as to the period of time within which the landlord should give its decision. The Protocol is intended to save the parties time and expense by allowing them to focus on the substance of any application, rather than wrangling over procedure.
Third, in case disputes do arise, parties are guided towards alternative dispute resolution through an experienced arbitrator or mediation, with recourse to the courts being an option of last resort. Swift resolution of disputes is in the interests of both landlord and tenant. It is in the interest of the landlord because of the risk of liability under the 1988 Act. It is in the interest of the tenant because it wants to get early clearance for the deal before it risks losing the third party, or to know as soon as possible that it cannot proceed. The size of the courts’ backlogs means that traditional litigation will often conflict with these interests. Arbitration provides a speedy and cost-effective solution and an assurance of resolution by highly experienced property specialists.
How, then, should this Protocol be used? We envisage it being disseminated by the legal and (we would hope) surveying professions as, in the first place, a ready reckoner for behaviour at the point of application. As the Protocol becomes embedded in practice, we would hope to see it being referred to in leases and other binding documents, as a behavioural code to which arbitrators and courts will have regard in assessing compliance. It is intended to complement, not replace, the relevant provisions of the Model Commercial Lease (12 July, p88) and the Code for Leasing Business Premises.
We also hope that this Protocol will serve as the first in a series of similar “best practice” documents designed to smooth landlord and tenant relations and to relieve commercial differences of much of their heat (and time, and expense), and we have invited distinguished colleagues in this field to feed in their thoughts as to what other protocols might be devised. We will place such protocols on a dedicated free website (www.propertyprotocols.co.uk). Watch this space.
Nicholas Cheffings and Mathew Ditchburn are partners at Hogan Lovells International LLP; Guy Fetherstonhaugh QC and Jonathan Karas QC are barristers at Falcon Chambers
The Protocol: APPLICATIONS FOR CONSENT TO ASSIGN OR SUBLET
1. PRELIMINARY
1.1 This Protocol applies where a tenant wishes to assign or sublet part or all of its premises, but its lease prohibits such transactions without the landlord’s consent.
1.2 References in this Protocol to “the third party” are shorthand for the proposed assignee or sub-tenant, as the case may be.
2. THE APPLICATION
2.1 The application for consent to assign or sublet should be in writing, and should:
• Specify whether the tenant proposes (a) to assign or (b) to sublet (c) the whole or (d) part (and, if so, which part) of the premises;
• Identify the third party, and any guarantor;
• Provide sufficient information about the third party to enable the landlord to consider the application, including, unless obviously irrelevant or disproportionate:
* a description of the trade or business of the third party;
* where the third party is a company, its registered number and office;
* where the third party is an individual, character references;
* (if possible, unqualified) bank and/or accountants’ references; and
* in the case of a proposed assignment, information (such as the last three years’ accounts or, if unavailable, a business plan with profit forecasts) sufficient to demonstrate the ability of the assignee and any guarantor to comply with the obligations in the lease;
• Provide the same information in relation to any guarantor;
• Provide details of the proposed use of the premises by the third party;
• In the case of a proposed sublease, provide a draft sublease or sufficiently detailed information about its proposed terms, having particular regard to any requirements in the lease as to the terms on which a subletting may be permitted;
• Provide a solicitor’s undertaking to meet the landlord’s reasonable and proper legal and professional costs in connection with the application and the grant of consent;
• Provide an explanation as to any circumstances which make the tenant’s application especially urgent; and
• Provide any other information which might be pertinent to the application and to the landlord’s decision.
This is a non-exhaustive list and the tenant should have regard when making its application to all legal and commercial circumstances when considering what further information the landlord might reasonably require.
2.2 The tenant should aim to provide such information in a single package, so that the landlord is able to consider all materials supporting the application as a whole.
2.3 The application should be served on the landlord by the tenant (rather than by the third party) in accordance with the terms of the lease. Wherever possible, the tenant should serve a copy of the application on the landlord’s managing agent.
3. ACKNOWLEDGEMENT AND REQUESTS FOR FURTHER INFORMATION
3.1 Within five working days of receiving the tenant’s application, the landlord should respond to the tenant to confirm receipt of the application. If the landlord either (a) believes that the tenant’s application does not include enough information for a decision; or (b) requires time to ascertain what further information it might require in order to deal properly and reasonably with the application, the landlord should so notify the tenant at the same time.
3.2 Where the landlord is itself a tenant, and the terms of its lease require it to seek its own landlord’s consent to any such proposed transaction, the landlord should consider its obligations in the lease and under statute to pass applications on to its own landlord. Without prejudice to that, the landlord should aim to serve on its own landlord copies of the application and supporting documents within five working days of receiving them from its tenant. This should be done even if the landlord has not yet consented to the application (although it should not be taken to imply that such consent will be given). Any such superior landlord should follow this protocol, communicating with its tenant (ie the landlord to whom the application was made).
4. FURTHER INFORMATION
4.1 Where the landlord has reasonably requested further information from the tenant in support of the tenant’s application, the tenant shall provide that further information as soon as is reasonably possible and in any event before the information already provided in support of the application becomes out of date. The landlord should aim to request and the tenant should aim to provide any further information as a single package.
5. THE LANDLORD’S DECISION
5.1 The landlord should deal with the application expeditiously and communicate its decision and reasons to the tenant in writing within a reasonable time of receiving the application and any further information reasonably requested.
5.2 The landlord should aim to communicate its decision in this way within 21 days of receiving the tenant’s application, but what constitutes a reasonable time in every case is a question of fact having regard to the circumstances of the transaction, including:
• The type and amount of information provided to, and requested by, the landlord;
• The speed with which the tenant responds to requests for information;
• Any particular urgency or time limit constraining the tenant, which has been notified to the landlord;
• The complexity of the transaction, corporate structure and any guarantee arrangements, and the complexity of any unusual legal and estate management issues to be dealt with by the landlord when making its decision; and
• Whether the tenant is likely to suffer loss as a result of a delay.
5.3 The landlord must have regard to these and all other pertinent factors when deciding how quickly to act on the tenant’s application. The tenant must have regard to these and all other pertinent factors when considering whether its landlord is acting with sufficient expedition. As a general rule, the landlord should not assume that a new 21-day period begins when the tenant provides additional information.
5.4 If the landlord believes that it will not be able to communicate its decision to the tenant in writing either within an express time limit requested by the tenant, or within a period of 21 days (whichever is shorter) the landlord should notify this to the tenant as soon as possible, and give reasons.
6. ALTERNATIVE DISPUTE RESOLUTION
6.1 If the tenant believes that its landlord has unreasonably withheld or delayed its consent, the parties should consider whether some form of alternative dispute resolution procedure would be more suitable than litigation and, if so, endeavour to agree which form to adopt. Both the landlord and tenant may be required by the court in subsequent proceedings to provide evidence that alternative means of resolving their dispute were considered.
6.2 The options for resolving disputes without litigation include:
• Arbitration by a suitably qualified and experienced lawyer agreed upon by the parties or appointed in default of agreement from the Property Panel of the Chartered Institute of Arbitrators by the President of the Chartered Institute of Arbitrators;
• Expert determination by an independent third party (for example, a barrister, solicitor or surveyor experienced in the relevant field); or
• Mediation – a form of facilitated negotiation assisted by an independent neutral party.
7. COURT PROCEEDINGS
7.1 If the parties cannot reach agreement after complying with the protocol then the final step will be for the dispute to be referred to the court.
