With tenant identity and mix becoming increasingly important in development schemes, Paul Tonkin looks at how landlords can maintain their tenant profile when occupiers seek to assign or underlet.

Place-making is increasingly central to any major urban development scheme. In the retail and leisure sector, owners and occupiers are more aware than ever of the need to create places consumers want to visit enhancing footfall, dwell time and, ultimately, profitability.

Retail and leisure locations are increasingly valuable brands in their own right think Westfield, Regent Street or Carnaby Street and those brands, like any other, need to be closely guarded. Tenant-mix is a key aspect of that brand protection. Visitors to major shopping and leisure destinations expect a particular type of experience and mix of offers. If that experience falls short, they will vote with their feet.

At the outset the owner will usually have control over the identity and mix of tenants. However, that control becomes increasingly eroded as time goes on. Virtually all leases permit tenants to assign or underlet with consent not to be unreasonably withheld. Tenants, facing pressures from online competition, increasing costs and subdued consumer spending, are unlikely to have the landlord's interests in mind when seeking to offload unwanted space. What can the landlord do when faced with the willing but unwelcome assignee?

Reasonableness rules

The Landlord and Tenant Act 1927 provides that whenever a lease requires landlord's consent to assignment or underletting, it is implied that consent is not to be unreasonably withheld.

The Landlord and Tenant Act 1988 takes matters further still imposing a statutory duty on landlords not unreasonably to withhold or delay giving consent and exposing landlords to liability in damages if they breach that duty. Refusing consent without reasonable grounds can be a costly mistake to make.

It is well established that a landlord can, in an appropriate case, reasonably refuse consent to an assignment or underletting on the basis of estate management policies. It may be that the landlord has adopted a particular tenant-mix policy and believes that the proposed assignee or undertenant would not fit that policy.

Crown Estate Commissioners v Signet Group plc1 was an example of this. In that case, the tenant, a jeweller on Regent Street, wished to assign its lease to a bureau de change. The landlord refused consent on the basis that the proposals were contrary to its objective of creating an unbroken run of flagship retail stores on Regent Street and would not attract the target clientele onto the street.

The court held that the grounds for refusal were based on legitimate estate management objectives and were reasonable. Importantly, it did not matter that the tenant may not have been aware of the detail of these objectives. It was well known that the Crown Estate was the landlord of Regent Street and that the street was managed as a single unified estate and that was enough. However, the judge did warn that there may be cases in which a tenant's lack of knowledge of the landlord's estate management policies could be an issue.

In Moss Bros plc v CSC Properties Ltd2, the court considered how formal the landlord's policy needed to be. Moss Bros had a lease of a unit in the Metro Centre in Gateshead which it proposed to assign to Game, the computer games retailer. The landlord refused on the grounds that it had a policy of locating fashion retailers within the particular area of the centre in order to create a fashion hub. It argued that an assignment of the lease to Game would be inconsistent with this tenant mix policy. The tenant argued that the refusal was unreasonable and questioned whether the landlord had such a policy at all given that it was not documented and did not appear to have been consistently applied.

The court found that the policy was both genuine and reasonable. The fact that it was treated somewhat informally and was not applied when it conflicted with other policies was not enough to prevent the landlord from relying on it as a reasonable ground for refusal.

Public Policy? 

Whilst a landlord may be able to rely on a tenant-mix policy even if that policy is informal and undocumented, its position will be stronger where it can point to a written policy document which is made available to tenants and, better still, referred to in its leases.

Drafting an effective tenant-mix policy is not a straightforward task. On the one hand, it is a legal document, which may need to be relied on in court. On the other, it is (or at least should be) a PR opportunity setting out the landlord's objectives and aspirations for the development and giving incoming tenants confidence that their customers' experience will not become diluted or downgraded over time.

A well-drafted policy should be a legal document without looking like a legal document and should be the product of a team effort between the landlord and its legal, branding and agency advisers. The temptation may be to produce a very strict and prescriptive policy to give maximum control. However, this has the potential to backfire. A risk of being very specific is that items left out are unlikely to be inferred by the courts.

Moreover, a policy which is arbitrary and inflexible is unlikely to find favour. In Moss Bros the court commented that if the landlord had applied the policy arbitrarily so as to rule out any future change of use, that would be inconsistent with the tenant's rights under the lease to change use with consent and would amount to a derogation from grant. A policy that is drafted in a more flexible and broader way is less likely to be vulnerable to this criticism.

Ahead of the competition?

Since April 2011, the Competition Act 1998 has applied to leases, meaning that clauses deemed anticompetitive may be unenforceable. Where a tenantmix policy operates so as to exclude certain retailers or uses from particular areas then this could, in principle, limit competition. In Martin Retail Group v Crawley Borough Council3 the Court held that a user clause. in a lease restricting use to a newsagents was anti-competitive. The case caused alarm in the industry although it appears to have been decided without any detailed evidence of the competition impact of the clause and many have questioned its correctness. 

More helpfully, the Office of Fair Trading’s guidance states that restrictions which are imposed “in order to achieve a desired retail mix and to ensure the attractiveness of a shopping centre to consumers” are unlikely to be considered anti-competitive. Therefore, landlords should have confidence that a well drafted tenant-mix policy should not fall foul of competition rules. 

Mind the gap

Finally, it is worth bearing in mind that, no matter how robust a tenant-mix policy is, it is only as good as the controls within the lease itself. Most leases impose controls on assignments, underlettings or changes of use but what about changes of brand or concept?

Many retailers operate a number of different brands aimed at different target markets. In the absence of specific controls within the lease a tenant will be free to change its brand or concept without requiring consent. 

Landlords should therefore consider including provisions in leases requiring consent to changes of concept or branding so that these too can be considered on the basis of the landlord’s tenant-mix policy.

An earlier version of this article appeared in EG on 10 June 2017.

 

 

Top Tips for Protecting Tenant-Mix

  • Have a written policy in place
  • Ensure that policy is communicated to tenants and is published (e.g. on a website)
  • Take professional advice to ensure that the policy is robust and reliable while at the same time reflecting and enhancing the brand – Do not be too prescriptive – Apply the policy consistently – but not arbitrarily
  • Keep the policy under review and up to date – Refer expressly to the policy in leases where possible
  • Ensure that applications for consent to assign/ underlet are dealt with promptly and take advice before refusing consent – Consider other controls on assignment/underletting – for example rights of pre-emption
  • Consider controls on changes of brand or concept