Whether it be due to economic factors or otherwise, applications received by landlords for consent to assign a lease of office or retail premises are regular occurrences. The financial standing of the proposed assignee is usually the most important factor for consideration by the landlord, especially where the assignor is a blue chip tenant.
Typically the landlord (or the landlord’s agent) will receive a request for consent to assign together with the last three years filed accounts for the assignee. References may also be provided. The lease will ordinarily contain a qualified covenant against assignment (that the consent of the landlord to any assignment is required, such consent not to be unreasonably withheld).
It was historically thought that one way of forming a view on financial standing was just to consider the pre tax profits of the proposed assignee. The decision in British Bakeries v Testler (1986) was seen as authority for the proposition that if the pre tax profits of the proposed assignee were less than three times the annual rent then the landlord would be justified in withholding consent. Of course this is not a test that could ever be rigidly applied (consider the example of a proposed assignee with exceptional items in its last accounts that has the effect of reducing pre tax profits) and has since been frowned upon as setting any standard test for considering the financial standing of a proposed assignee. The landlord must take a considered view of the accounts information provided and not rely solely upon the ‘three times’ principle.
Just as a landlord would instruct an accountant to prepare its own accounts, the analysis of the accounts of a proposed assignee should similarly be considered by an accountant. Accounts which appear strong on their face may have hidden messages contained within. The same may apply to accounts which appear weak on their face. The duty on a landlord when considering an application for consent to assign is to act reasonably. Is it acting reasonably to consider the financial strength of a proposed assignee without the assistance of an accountant? It may be if the person reviewing the accounts knows and understands accounting procedures and is able to properly interpret the accounts, but in the majority of cases this will not be so. Also remember that in a worst case scenario a landlord’s decision will be the subject of a legal challenge. This means that the landlord has to demonstrate that he acted reasonably in refusing consent. It does not matter that others might have accepted the proposed assignee if it can be shown that the landlord was reasonable in refusing consent. It is going to be easier for a landlord to do this if he can show that he relied upon an independent professional to review the proposed assignee’s financial information and that independent reviewer raised concerns over the content of the same.
Landlords should be wary of placing reliance upon management accounts and credit reports. Management accounts can provide up to date information since the last filed accounts, but of course these are unaudited documents prepared for internal use only and should be viewed with caution. Credit reports can be useful cross checks but it would be wrong for a landlord to rely upon them to the exclusion of any analysis of the accounts provided. Publicly available credit reports not volunteered by the tenant are (1) not part of the application for consent (2) not prepared by or on behalf of the landlord and (3) not prepared in response to an application for consent to assign. Consequently reliance upon them in favour of the documents produced by the tenant to support the application (or documents prepared on behalf of the landlord in considering the specific request for consent) does leave a landlord exposed in the event that a refusal to grant consent is challenged.
Landlords can sometimes be concerned over the effect on capital value of a proposed assignee. There are two points to make here. The first is that reduction in capital value should only be raised as a basis for refusing consent where the landlord is likely to either sell, mortgage or re-mortgage the asset in question in the near future or where capital value impacts upon the business of the landlord. If the landlord is not intending to realise the capital value of the tenanted asset (or if capital value is of no relevance to the business of the landlord) then why would any possible negative impact on capital value caused by the assignment be of relevance? The second is that in order to rely upon capital value as a basis for refusing consent, the landlord must demonstrate diminution in that capital value with the use of independent valuation evidence.
A proposed assignee with poor accounting records (or indeed no accounting records in the case of a start up) will often be put forward together with a guarantor. In these circumstances the role of the guarantor should always be remembered. It is for the guarantor to meet the obligations of the tenant to the extent that the tenant is unable to meet them itself. Consequently it is always prudent for the landlord to consider the collective financial position of the assignee and guarantor.
The obligations on a landlord when considering the financial standing of a proposed assignee and formulating a response to a request for consent to assign can be onerous. The landlord also has to remember that not only does he have to act reasonably in coming to a decision, he also has to act within a reasonable amount of time. Time starts to run when the application for consent to assign is received and ends when the landlord communicates his decision tin writing together with (if refusing consent or imposing conditions on the granting of consent) reasons. What is a reasonable amount of time depends on the facts of an individual case. It may depend upon whether the tenant provides information in a timely fashion or at all. As a general rule of thumb however, assuming the application is accompanied with all relevant information a landlord should be aiming to produce a written response within three weeks. The Court of Appeal held, in NCR v Riverland Portfolio (No.1) Limited (2005) that ‘in the absence of special exceptional circumstances a period of less than three weeks (particularly in the holiday period) cannot … be categorised as inherently unreasonable’. This was said in the context of an application for consent to sublet but was justified on grounds equally applicable to an application for consent to assign; namely that the landlord, upon receipt of the application, has to consider the financial and legal implications of the disposal (or a refusal) and to report to management. There may of course be circumstances where a period of three weeks is in itself too long.