Almost all commercial leases allow tenants to assign with the landlord’s consent, which cannot be withheld unreasonably. This is not an unusual covenant in residential leases, although most residential leases merely provide for the landlord to be notified of any assignment. It is perhaps not surprising, therefore, that residential assignments have not generated much litigation. The recent High Court decision of No 1 West India Quay (Residential) Ltd v East Tower Apartments Ltd [2016] EWHC 2438 (Ch); [2016] PLSCS 261 is the first reported decision on the application of the Landlord and Tenant Act 1988 (“the 1988 Act”) in the residential context. It is not good news for lessees with an unscrupulous landlord.

The facts

The Claimant in the court below / Respondent before Mr Justice Henderson, sitting in the Chancery Division in the High Court, was the lessee of a number of luxury apartments in a prestigious development in Canary Wharf. The apartments were let to the tenant through its managing agent. The Defendant in the court below and the Appellant was the mesne landlord. I will refer to the parties as ‘the Tenant’ and ‘the Landlord’.

The Landlord and the Tenant were not on good terms following a service charge dispute in the First-Tier Tribunal (Property Chamber). The Tenant decided to sell its apartments. Pursuant to the terms of its leases (which were all substantially the same) the Tenant required the Landlord’s consent before any assignment, such consent not to be unreasonably withheld. The Tenant had covenanted to pay the Landlord’s costs “as a result of the Lessee applying for the Lessor's consent or approval under the provisions of this Underlease whether or not that consent or approval is given”.

Consent was approached in an informal manner in relation to the sale of the first 8 apartments. The Landlord’s only conditions were payment of all rents (including the disputed sums subject of the FTT proceedings) and a fee of £1250 plus VAT. One day this changed. On 27 March 2015 the Tenant sent an application for consent to the Landlord. The application was not sent to the Landlord’s registered address, as provided for in the leases, but to the address which the ‘sale pack’ specified as the address to which “An application for the Landlord's written consent for a transfer/assignment should be sent to”. This was not the Landlord’s registered address. No objection was raised by the Landlord. Its agent confirmed that she would “arrange for signature” on 14 April 2015. No signed licence was however forthcoming. Instead on 20 April 2015 the Landlord informed the Tenant that it would need to undertake an inspection of the apartment and required the Tenant to give an undertaking that it would pay £350 plus VAT for the surveyor to inspect. The Tenant refused. After some stern letters from the Tenant’s solicitors, the Landlord capitulated and granted consent for the assignment on 13 May 2015 without the need for an inspection. To protect its position the Tenant’s solicitors had also resent the application for consent to the Landlord’s registered address on 29 April 2016.

The Tenant applied for consent to assign two further apartments. This time the Landlord imposed further conditions. It requested (i) an undertaking in the sum of £1600 plus VAT; (ii) an inspection and an undertaking that the Tenant would pay the fees of the surveyor; and (iii) bank references from the proposed assignees to the effect that they were able to pay £5250 and £6250 per year respectively in service charges (which according to the Landlord was the anticipated service charge for the following year). The Tenant agreed to an inspection on the basis that the Landlord could inspect anytime pursuant to the leases, but objected to the other conditions. On 26 May 2015 the Landlord wrote to the Tenant and said that it would not grant consent for the assignments in light of the Tenant’s refusal to agree to the conditions. The Tenant issued proceedings for a declaration that the refusal was unreasonable and that there had been an unreasonable delay in granting consent between 27 March and 13 May 2015.

The law

Upon an application made by a tenant for consent to assign, the 1988 Act imposes a statutory duty on landlords to give consent within a reasonable time, unless it was reasonable not to give consent, and to serve a written notice of its decision on its tenant. The burden of proof lies on the landlord to show that its consent was given within a reasonable time, and that any refusal of consent was reasonable. Once a decision has been made, the landlord cannot rely upon any reasons not set out in its notice.

International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] Ch 513 is the leading authority on what amounts to an unreasonable withholding of consent. The decision makes clear, amongst other things that (i) the purpose of a covenant against assignment without the consent of the landlord is to protect the lessor from having his premises used or occupied in an undesirable way, or by an undesirable tenant or assignee; (ii) a landlord is not entitled to refuse his consent to an assignment on grounds which have nothing whatsoever to do with the relationship of landlord and tenant in regard to the subject matter of the lease (iii) it is not necessary for the landlord to prove that the conclusions which led him to refuse consent were justified, if they were conclusions which might be reached by a reasonable man in the circumstances Further, it will not normally be reasonable for a landlord to seek to impose a condition which is designed to increase or enhance the rights that he enjoys under the lease, the so called rule against an uncovenanted advantage. Each case, however, is a question of fact, depending upon all the circumstances.

The first instant decision

HHJ Walden-Smith agreed with the Tenant that the Landlord’s refusal was unreasonable. She was unimpressed with the Landlord’s explanation that the new conditions for consent had been imposed because the Landlord had “reviewed its procedures”. She noted that this explanation did not tally up with the timing for the new conditions being imposed.

She found that the condition to provide bank references was unreasonable for three reasons. First, the Landlord knew that the apartments sold for substantial premiums and that any proposed assignee would therefore be of certain financial standing or, at the very least, be about to acquire a substantial and valuable asset. Secondly, if the assignees would not pay the rent(s)/service charges, the Landlord could forfeit the Lease. It would then make a vast windfall. Thirdly, if the apartments were purchased with the assistance of a mortgage, it is routine for the mortgagee to pay any outstanding service charges in order to protect its security. On these facts she agreed with the Tenant that the Landlord could not have any real concern that the assignees would not meet their financial obligation to pay the annual service charge. The Landlord’s insistence on a bank reference was therefore unreasonable.

In relation to the condition for an inspection by a surveyor, HHJ Walden-Smith held the as the Landlord was free to inspect at any time, it was not reasonable to insist upon an inspection as part of the assignment process in circumstances there was no suggestion that any relevant breaches of covenant might have taken place. She also found that if the Landlord felt that an inspection was necessary before deciding whether to consent to the assignment, it did not require the instruction of an external surveyor at a cost of £350 each time. Such inspection should be undertaken by the Landlord’s own officers or managing agents, who would be well capable of detecting any obvious and substantial breach which might justify a refusal of consent to the assignment.

In relation to fees, she held that as a charge for consent is a variable administration charge within the meaning of para.1(3) of Part 1 of Sch.11 to the Commonhold and Leasehold Reform Act 2002, it was only payable to the extent that its amount is reasonable. The Landlord, however, had not been able to justify a fee of £1250 plus VAT and the burden of proof rested on the Landlord. She held that the works undertaken by the Landlord in relation to the assignment could not reasonably be charged at more than £350.

Finally, she held that although the Landlord had requested that any application for consent be sent to the address specified in the ‘sales pack’, no valid application had been sent until 29 April 2015 when it was sent to the registered address in accordance with the terms of the lease. There was no estoppel by representation as she was bound by E.ON UK Plc v Gilesports Ltd [2012] EWHC 2172 (Ch). There had accordingly been no unlawful delay by the Landlord in granting consent.

She granted the Tenant a declaration that the Landlord was in breach of its statutory duty under 1988 Act in relation to two apartments and ordered that the Landlord pay the Tenant’s costs of the action. She also made a s.20C order. The Landlord appealed.

The Appeal

Mr Justice Henderson upheld HHJ Walden-Smith’s decision that consent had been unreasonably refused. He did however not agree with her analysis in relation to the bank references or the inspection.

Henderson J held that it was not unreasonable for the Landlord to seek bank references to satisfy itself that the proposed assignees were good for the annual service charge. He did not agree that the fact that the assignee was in each case paying a substantial premium necessarily demonstrated that the assignee was a person of financial substance. In his opinion a landlord could not be expected to speculate about the financial position of a tenant on the mere basis that he has the funds to acquire the apartment. Mr J Henderson also held that the fact that the landlord has certain remedies, such as forfeiture, if the covenants are not complied with was irrelevant. The Landlord was entitled to seek is reassurance that the covenants would be complied with by the proposed assignee. The fact that the landlord would get a vast windfall if it was able to forfeit the lease, thus making it highly unlikely that any assignee or mortgagee would allow this to occur, was therefore not a relevant consideration.

Henderson J also did not agree with HHJ Walden-Smith’s analysis regarding the request for an inspection. He held that there could be no breach of the 1988 Act so long as the inspection is reasonable in its scope and cost; and £350 plus VAT was reasonable. Having reached the decision that it was reasonable to request an inspection, he held that the costs were recoverable from the Tenant as the costs arose in the context of an application by the lessee for consent to assign and the Tenant had covenanted to pay to pay the Landlord’s costs “as a result of the Lessee applying for the Lessor's consent or approval under the provisions of this Underlease whether or not that consent or approval is given”. The Judge also disagreed with HHJ Walden-Smith’s finding that it was unreasonable for the Landlord to instruct an external surveyor. He held that although a refusal to grant a licence to assign for extant breaches of covenant, such as disrepair or unlawful alterations, is only reasonable if there are substantial breaches of covenant which are not easily remediable, he considered that “not all breaches, even serious ones, are obvious on a cursory or inexpert inspection”.

When considering the Landlord’s charge, Henderson J did however agree that HHJ Walden-Smith’s “robust and sceptical approach” to the Landlord’s costs were amply justified and upheld her decision that only £350 were payable. Applying the test formulated by Mr Justice Neuberger (as he then was) in B.R.S. Northern Ltd v Templeheights Ltd [1998] 2EGLR 182 Mr J Henderson went on to hold that as the Landlord had insisted on an undertaking to pay £1,600 plus VAT as a pre-condition for considering the application, which was unreasonable, the Landlord’s bad reason “infected or vitiated” its two good reasons for the refusal. He therefore dismissed the Landlord’s appeal against the declaration that it had been in breach of the 1988 Act by unreasonably refusing consent.

Lessons to be learnt

So what are the lessons to be learnt by landlords and tenants?

Firstly, although each case will turn on its own facts, Mr J Henderson’s decision indicates that there is little or no difference between what a landlord can reasonably request by way of information in a commercial and residential context. A landlord will thus invariably be entitled to request financial information about a proposed assignee. Based on Henderson J’s reasoning, a demand for a bank reference or bank statements, which is cheap and easy to provide, will always be reasonable. Landlords could, arguably, also be entitled to require credit checks or proof of funds to satisfy themselves about the financial standing of the assignee.

Secondly, and perhaps most worryingly for lessees, is that Mr Justice Henderson held that in the context of a proposed assignment, a landlord is entitled to recover its costs for speculative enquiries. Landlords will thus be entitled to undertake ‘fishing expeditions’ and charge its lessee for doing so. In addition to the cost of a surveyor, a landlord could for example seek to charge the lessee for the costs of an accountant and other professional to gather and assess financial information about the proposed assignee. This may be particularly attractive to large landlords with in-house staff who can be charged out for undertaking the work. The effect may be that the cost of seeking consent for an assignment may now be significant.

Notwithstanding Mr Justice Henderson’s apparent approval of Mr Bartlett QC’s decision in Holding & Management (Solitaire) Ltd v Norton [2012] UKUT 1 (LC) that a reasonable fee should be assessed by reference to the things that would need to be done in a typical case, rather than by reference to a list of all the things that could conceivably be done in connection with the grant of consent, his decision does, in my opinion, fly in the face of Mr Bartlett QC’s reasoning. This leaves Henderson J’s decision open to the criticism that it undermines the protection of para.1(3) of Sch.11 Pt 1 of the Commonhold and Leasehold Reform Act 2002 which provides that a charge for consent is only payable to the extent that it is reasonable.

Thirdly, there is no scope for argument, an application for consent must always be served in accordance with the terms of the lease or it will not engage a landlord’s statutory obligation not to unreasonably refuse or delay consent. An application sent to any other address on the landlord’s request will be treated as a merely informal enquiry which can be ignored by the landlord.

Finally, there is an important lesson for landlords. It is extremely risky to insist upon a specific sum to be payable as a pre-condition for the landlord to consider an application for consent. If such sum is challenged and found to be unreasonable, it will render a landlord’s refusal unreasonable, even if the landlord had other good reasons for refusing to grant consent. To avoid this, landlords are well advised not to insist upon an undertaking for some specific sum as a precondition for processing an application, unless they are certain that the sum demanded is a true reflection of its actual costs of considering the application.