Putting the Sense Back

PUTTING THE SENSE BACK

INTO THE LAW OF CONSENTS

by

Jonathan Seitler QC

After studying PPE at Oxford and taking a Diploma in Law with Distinction, Jonathan was awarded the Duke of Edinburgh Scholarship by InnerTemple. He was called to the Bar in 1985 and joined Wilberforce Chambers in 1995 from the Chambers of George Carman QC.

Jonathan now specialises in disputes which arise from commercial property contracts, in particular commercial leases. He is also known for an expertise in handling professional negligence cases which arise from commercial and property transactions.

He is co-author of Property Finance Negligence: Claims against Solicitors and Valuers and the loose-leaf Commercial Property Disputes: Law and Practice.

He has appeared in a large number of cases involving questions as to the right of a commercial landlord to withhold consent to an assignment or sub-let, in particular the recent case of NCR v Riverland.

Jonathan is also experienced as a mediator and arbitrator in commercial property disputes.

The Legal 500 Directory said that Jonathan’s "easy manner belies a sharp tactical mind which is much in demand”. His ability to work hard and deliver work swiftly, based on detailed preparation, is reflected in the comment in a recent edition of the same Directory that he is “the complete professional”.

Chambers & Partners comment on his ‘delicately incisive courtroom style’ and say that solicitors warm to him for his multifarious qualities. Jonathan believes that this is a coded reference to the fact that he has an unusual ability (inherited from his mother) to calm nutty clients.

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The Consents Chart

1. Types of Covenant:

1.1.The starting point is that without restriction in the lease, the tenant has a basic freedom to dispose of the term, grant a sub-lease, lawfully use or (as long as waste is not involved) alter the premises as it likes. Express covenants in the lease are the source of the restrictions.

1.2.Such covenants fall into three types, absolute covenants, qualified covenants and fully qualified covenants.

1.3.An absolute covenant prohibits absolutely. Only if the landlord is prepared to waive such a clause will the tenant be able to do what is prohibited. A qualified covenant prohibits save with the landlord’s consent. A fully qualified covenant says that what is prohibited may only take place with the landlord’s consent which, the clause specifies, must not be unreasonably withheld.

1.4.It is not uncommon for clauses to include aspects of more than one of these types of covenants. A covenant, for instance, not to sublet save with the landlord’s consent not to be unreasonably withheld save that in no event shall there be an subletting at a rent below the highest of the open market rent or passing rent, combines elements, in the first part of a fully qualified covenant and elements, in the latter part, of an absolute covenant. Similarly in respect of covenants which are absolute in respect of, say, structural alterations but qualified in respect of non-structural alterations. Similarly, a clause prohibiting assignment provided that the tenant shall first offer the landlord a surrender of the lease amounts to an absolute condition precedent to a right to assign: see Adler v Upper Grosvenor Street Properties [1957] 1 All ER 229.

1.5.In the case of most types of alienation and alteration covenant (but not covenants relating to user – where the only restriction is in relation to requiring the payment of a fine as a condition of consent to a change of use in the case of a qualified covenant), there are effectively only absolute or fully qualified covenants. In relation to covenants:

1.5.1.against assigning, subletting, charging or parting with possession of the demised premises or any part of them (but not to other alienation covenants such as covenants against sharing possession or occupation) ; and

1.5.2.which have the effect of restricting improvements (as seen from the point of view of the tenant),

statute has intervened to render qualified covenants into fully qualified covenants. The effect of sections 19(1)(a) and 19(2) of the Landlord and Tenant Act 1927 is that a covenant which prohibits those things, is deemed to be subject to an implied proviso to the effect that the consent is not to be unreasonably withheld. This is so notwithstanding any provisions in the lease to the contrary.

1. Scope of the covenant:

2.1.In the context of alienation, a landlord will not have any remedy against a tenant if the act of alienation is not, in fact, in breach of the alienation covenant. Alienation clauses - being for the protection of the landlord - have traditionally been construed against the landlord. An agreement to assign a lease (as opposed to the assignment itself), for instance, will not amount to a breach of a clause prohibiting assignment, nor will a disposition of the equitable interest alone.

2.2.Similarly, a covenant against subletting the whole will not be regarded as having been breached by a parting with possession that involves the grant only of a licence to occupy or a sublet of part (see, as an example, Cookv. Shoesmith [1951] 1 KB 762). To prohibit a sublet of part, the alienation clause must expressly prohibit it (as in Field v. Barkworth [1985] 1 WLR 137) and the tenant must part with possession completely, by ousting himself from all rights to occupy concurrently, to amount to a breach. A sharing of possession is a (tricky) question of fact: see Akici v LR Butlin [2005] EWCA Civ 1296. Only if the covenant prohibits a sharing of occupation will concurrent use necessarily amount to breach of that covenant, as in Hollandv.South London Supp Benefit App Tribunal [1978] 122 SJ 626.

2.3.The same issues arise in the case of alteration covenants. ‘Alterations’ must affect the form or structure of the building: the fixing of a large clock outside a shop to advertise its sale of watches would not amount to an alteration: see, Bickmore v Dimmer [1903] 1 Ch. 158. In this context, restrictions on alterations are often construed against the landlord and in construing the scope of the covenant the Court will have regard to what the parties would have contemplated when the lease was granted. An important element in what the parties can be expected to have contemplated is the purpose for which the lease was granted. There is a strong tendency to construe the lease so as to enable the tenant to carry on the business for which the lease was granted. The bolts that went six inches into the wall in Bickmore were held not to amount to a breach of covenant because it was regarded as wrong to construe the covenant “to prevent a tenant doing those acts which are convenient and usual for a tradesman to do in the ordinary conduct of his business”.

2.4.Restrictions on use are usually also construed narrowly. The principle is that a covenant restrictive of use will be construed in case of ambiguity so as to impose lesser restraints on the tenant rather than greater: see Skillion v. KeltecIndustrial Research [1992] 1 E.G.L.R. 123.

1. The tenant’s request: must be clear, unequivocal and specific. In the case of an alteration, it should include a plan of proposed works. In the case of a change of use, all the details of the change of use should be spelled out. In the case of an alienation, in order to preserve the tenant’s rights under the Landlord and Tenant Act 1988 and in any event as a matter of good practice, the request should:

3.1.be in writing.

3.2.specify what the tenant proposes to do in relation to which parts of the property. In the case of a sub-letting it is advisable to enclose a copy of the proposed sub-lease.

3.3.specify the identity of the proposed sub-tenant, assignee or mortgagee or change of use or proposed alteration.

3.4.enclose sufficient information about what is proposed for the landlord to make an informed decision as to whether or not to grant the consent sought. In the case of the assignment of the lease of a business, for instance, the following would be enclosed, absent which, adverse inferences may be drawn:-

3.4.1.The address of the assignee, the directors and owners.

3.4.2.A bank reference.

3.4.3.A previous landlord’s reference. In Ponderosa International Developments Incv.Pengap Securities (Bristol) Ltd [1986] 1 E.G.L.R. 64 at page 66 it was said that a reference should be detailed and should include the letter which elicited it, unless the reference is entirely self-explanatory.

3.4.4.Three years previous audited/management accounts, which show, roughly, pre tax profits net of salaries and drawings, three times the anticipated outgoings that the proposed assignee would have a liability for, if tenant under the lease or a satisfactory position as regards net assets and the outlook for the proposed assignee’s business generally.

3.4.5.A solicitors or accountant’s reference. The latter is particularly important where the assignee is taking on a rental liability at a level higher than any it previously managed. The reference should explain the basis for confidence that such liability can be maintained.

3.4.6.A trading reference, from a fellow trader of respectable standing, stating the level of business transacted between them, relevant to the proposed business at the premises. If the reference is heavily qualified or unenthusiastic, it will be of limited weight.

3.4.7.Valuations of other properties held by the proposed assignee with proof of the level of borrowings against those properties.

1. Service of the tenant’s application:

4.1.The application must be served on the landlord’s address as stated in the lease (usually by reference to section 196 of the Law of Property Act 1925), by leaving it at, or sending it by registered post to, the Landlord’s last known business address or, if the lease is silent as to the service of notices, in accordance with section 23 of the Landlord and Tenant Act 1927 at the landlord’s last known place of business or to its secretary at its registered address (section 5(2) of the Landlord and Tenant Act 1988).

4.2.Norwich Union Linked Life Assurance Ltd v. Mercantile Credit Co Ltd [2004] 04 EG 109 (CS) is authority for the proposition that it is not unarguable that service on a landlord's solicitor is insufficient (without more) for the purposes of section 5(2) of the Landlord and Tenant Act 1988.

1. Taking the law into your own hands:

5.1.A tenant faced with an unreasonable refusal of consent by a landlord can take the prohibited act without consent: in the case of a fully qualified covenant, the tenant is covenanting not to do the thing prohibited without consent only if the landlord’s refusal to an application for consent, is reasonable. This means that if the landlord refuses consent and the tenant calculates that the refusal is unreasonable, the tenant can take commit the act anyway: see Old Grovebury Manor Farm Ltdv. Seymour Plant Sales & Hire Ltd (No. 2) [1979] 1 WLR 1397. It does not mean that the tenant can assign without even asking for consent. Under a fully qualified covenant the tenant is only entitled to commit the prohibited act where the landlord has been unreasonable in withholding it: you cannot say that it has been withheld (unreasonably) if it has not even been sought.

5.2.In the case of an alienation, the legal interest in the lease will pass as intended.

5.3.If the tenant’s assessment of the reasonableness of the landlord’s refusal is misjudged, the landlord will be able to seek damages, claim an injunction or seek to forfeit the lease. There are old cases in which it is stated that where a breach of covenant has been occasioned by a failure to seek consent in circumstances where the landlord could not reasonably have withheld its consent anyway, relief against forfeiture should not be automatic. In Shiloh Spinners v Harding [1973] 1 All ER 90 Lord Wilberforce commented that wilful breaches should not, or at least should only in exceptional circumstances, merit relief. Relief though is a discretionary matter and you can argue strongly that decisions on relief in old cases are not binding. The modern court is much more likely to compare the damage to the landlord from the breach with the advantage to it which would accrue of relief was refused.

5.4.The tenant will also need to anticipate a physical re-entry by asking the landlord to confirm that it will not take that step, otherwise the tenant will have to seek an injunction preventing a physical re-entry until the question of whether the act is in breach of covenant, is resolved (either by agreement between the parties or by determination of the Court).

5.5.The alternative to taking the act without consent is for the tenant to commence proceedings for a declaration that consent has been unreasonably withheld and/or that no further act of consent is required from the landlord.

1. The 1988 Act : timing

6.1.A landlord owes a duty to a tenant to give a decision on an application for consent within a reasonable time: section 1(3) of the 1988 Act.

6.2.The reasonable period of time begins to run when the landlord receives the complete application from the tenant. An incomplete application, or informal exchanges between the landlord and the tenant prior to a formal application being made, will not start time running, but may be relevant to the assessment of what is a reasonable period.

6.3.The reasonable period ends when the landlord makes a decision and notifies the tenant of that decision. Once a decision has been communicated, a landlord is not entitled to more time to consider further issues, even if such consideration leads the landlord to conclude that there are reasonable grounds for refusing consent. Therefore, the reasonable period is that which allows the landlord to consider all the relevant issues and give a compendious response.

6.4.The assessment of whether a reasonable time for a landlord to give a decision has elapsed will be made at the time at which it is claimed that a reasonable time has elapsed, and in the light of the facts at that time: per Sir Richard Scott VC in Norwich Union v. Shopmoor Limited [1999] 1 WLR 531 at page 54517G.

6.5.A failure to give a decision within a reasonable time will be treated as equivalent to a refusal of consent without reasons. This conclusion necessarily follows from the fact that it is the landlord's obligation to make a decision within a reasonable time.

6.6.It also follows that a failure to communicate a decision on a tenant's application within a reasonable time, will also make a landlord liable to pay damages to a tenant. That liability will not be avoided even if a landlord is able subsequently to show that there were reasonable grounds for withholding consent: per Neuberger J in Footwear Corpn v Amplight [1999] 1 WLR 551 and Pill LL in Go West v Spigarolo [2003] 2 WLR 986.

6.7.How long is a reasonable time ?

6.7.1.The landlord is required to deal with the tenant’s application ‘expeditiously’ and ‘at the earliest sensible moment’ as per Sir Richard Scott V-C in Norwich Union.

6.7.2.The Law Commission Report (No. 141) (at paragraph 8.125) which led to the 1988 Act recommended that the reasonable period of time for giving a decision on a tenant’s application for consent be set at 28 days. This was not adopted into the 1988 Act.

6.7.3.The reasonable period may be measured in weeks rather than days where the circumstances justify it, but even in the most complicated cases, it should be measured in weeks rather than months: per Munby J in Go West at page 1156. It was said by Munby J to be hard to imagine that a period of anything like the four months taken by the landlord in Go West could ever be reasonable, save in the most complicated cases.

6.7.4.The more complicated the circumstances and the more there is at stake, the longer the reasonable period for dealing with the application will be. For example, if a proposed assignee or sub-tenant is a company which is part of a group with a complex corporate structure, the landlord may require a longer period of time in which to investigate covenant strength than would otherwise be reasonable.

6.7.5.Similarly, if the application raises difficult legal issues upon which the landlord needs to take legal advice, this will impact upon the reasonable period. In NCR Limited v. Riverland Portfolio No. 1 Limited 2005 WL 607507 it was held that whilst the assessment of the proposed sub-tenant’s financial position was relatively simple, the more difficult issue was whether a refusal based upon misgivings as to covenant strength could be justified under the 1988 Act having regard to the potentially serious consequences of a refusal which in NCR ultimately led to a claim for £3 million. Furthermore, covenant strength was only one aspect of the proposed transaction which included provision for a substantial reverse premium to be paid by NCR to the proposed sub-tenant. This issue “raised unusual legal and estate management issues which merited serious consideration”: per Carnworth LJ at paragraph 20.

6.7.6.During holiday periods it may be reasonable for a landlord to take longer to deal with an application that at other times of the year. In NCR (where the application was considered during the month of August) it was held that a period of three weeks “particularly in the holiday period” was not inherently unreasonable.

1. Reasonableness (alienation):

7.1.Reasons must be given for any refusal of consent under the 1988 Act: see section 1 (3) (b) (ii) of the Act.

7.2.The burden is on the landlord to show that it was reasonable, by reference to the reasons given in the notice, to refuse consent: "..…it is not now open to a landlord to put forward reasons justifying the withholding of consent if those are reasons which were not put forward in accordance with section 1(3)(b), that is they were not reasons which were put forward in writing within a reasonable time ".per Neuberger J. in Footwear Corporation Limited v. Amplight Properties Limited [1999] 1 WLR 551 at page 560A.

7.3.Once a notice has been given by a landlord, that landlord cannot subsequently justify a refusal of consent by referring to reasons which are not set out and relied upon in that notice: see per Pill LL in Go West at page 1158F.

7.4.An unreasonable refusal of consent renders a landlord liable to pay damages to a tenant for breach of statutory duty. The measure of damages will be the reasonably foreseeable losses suffered by the tenant as a result of the landlord’s breach. Exemplary damages are also available, reflecting the landlord’s gain.