Any condition attached to the grant of consent to an assignment by a landlord must be reasonable. Where the sale of a lease is conditional on such consent being obtained, the seller must protect its position so that it does not lose its claim against the landlord for unreasonably withholding consent and the right to forfeit the buyer's deposit, as happened in the recent Court of Appeal case of Landlord Protect Ltd -v- St Anselm Development Co Ltd.

THE FACTS

At an auction in July 2006, Landlord Protect contracted to buy St Anselm's head leasehold interest in a block of flats for £1,050,000 and paid a deposit of £105,000. The head landlord's consent to the assignment was required. The sale incorporated the 1 May 2002 edition of the Common Auction Conditions which made it a condition of the contract that Landlord Protect must "execute such licence or other direct deed of covenant as may be required and provide guarantees, a rent deposit or other security".

Landlord Protect was a dormant company and could not provide any accountant or bank references. The head landlord was therefore only prepared to grant consent to the proposed assignment if Landlord Protect's sole director (Mr Reid) guaranteed Landlord Protect's performance of the tenant's obligations in the lease. Mr Reid was willing to offer a guarantee but only for a period of three years, which was not acceptable to the head landlord.

The head landlord submitted a draft licence to assign which provided that the guarantor was to be released on a subsequent assignment with the head landlord's consent "provided that a reasonable alternative security is provided by the assignee".

This wording was unacceptable to Landlord Protect which then gave notice to St Anselm rescinding the sale contract and requiring the return of its deposit. Landlord Protect argued that the head landlord's requirement as to the terms of the guarantee were unreasonable. St Anselm did not accept that the sale contract had been validly rescinded and contended that Landlord Protect was in breach of its obligations under the sale contract by refusing to complete. St Anselm served a notice to complete on Landlord Protect and treated Landlord Protect as being in breach when it did not comply with the notice. St Anselm also forfeited the deposit. Landlord Protect issued proceedings seeking the return of its deposit.

The High Court held that the head landlord had been acting reasonably. Landlord Protect appealed. The Court of Appeal took a different view.

As a matter of law, it is generally unreasonable for a landlord to require a guarantor of the assignee's liabilities to extend beyond the period during which the term is vested in the assignee. Such a requirement would enhance the rights enjoyed by the landlord under the lease.

The guarantee required by the head landlord in this case envisaged two requirements that had to be met for the guarantor to be released, namely (a) a subsequent assignment with consent and (b) the provision of reasonable alternative security.

The head landlord would always be able to refuse to consent to an assignment if the proposed assignee was not of sufficient financial standing and was unwilling or unable to provide adequate security. The head landlord was therefore protected against an assignment to a weak assignee. Consequently, it was not reasonable to require that Mr Reid's guarantee would only be released on the provision of reasonable alternative security. The head landlord's protection was the right to refuse consent, not the right to refuse to accept the release of the guarantor.

The Court of Appeal held that the head landlord had been unreasonable and that the licence was therefore not "properly required" under the terms of the lease. Landlord Protect was entitled to rescind the contract and to the return of its deposit.

PRACTICAL TIPS

The decision highlights the difficulties a seller may face, particularly in the current market, when attempting to balance the need to obtain its landlord's consent and a reluctance to lose a buyer.

Where landlord's consent is required, a seller should therefore consider the following steps:

  • Review the alienation provision in the lease, in particular whether it includes specific conditions regarding the provision of a guarantee or as to the provisions to be included in any guarantee.
  • Negotiate as best it can and within clear time limits set out in correspondence to clarify all the landlord's terms. Court proceedings should only be brought once the negotiations have reached a conclusion. If it anticipates difficulties arising, the seller should consider contacting the landlord prior to the negotiation of any sale. Equally, once the seller has identified a purchaser, it should obtain from the purchaser all information possible to justify the grant of consent. This should be provided to the landlord at the outset of the application for consent.
  • Ensure that the purchaser is bound throughout the negotiations (and any subsequent proceedings). The seller has nothing to gain if it successfully obtains judgment against the landlord that it has unreasonably withheld consent if the buyer withdraws from the sale.
  • An all party without prejudice settlement meeting if negotiations break down, before resorting to a formal dispute resolution procedure. A landlord will not want to be liable in damages for wrongful refusal of consent. Similarly, the purchaser will require comfort that it will have been acting reasonably if it refuses to accept the proposed terms of the licence (so as not to lose its deposit).