Section 1 of the Landlord and Tenant Act 1988 imposes a number of duties on landlords when dealing with a tenant's application for consent to assign or underlet. These include a duty to serve written notice on the tenant of the landlord's decision, and to do so within a reasonable time. The burden of proof is on the landlord to show that it has acted reasonably. Under section 4 of the Act, a breach of any of these duties can render the landlord liable in damages for breach of statutory duty.
In Lombard North Central PLC v Remax Herbarne Ltd, the tenant sought damages from the landlord in connection with an application it had made to underlet the premises. The premises had been vacant since the tenant moved out in 2005. Eventually, a company called Lorica expressed an interest in taking an underlease of the premises. The terms agreed between the tenant and Lorica were that the rent commencement date under the underlease would be 25 July 2008, and that there would be a rent-free period commencing at completion. Therefore, the longer it took to complete the underlease, the shorter the undertenant's rent-free period. An application for consent to underlet was made to the landlord on 5 February 2008.
Two misunderstandings then followed. On 6 February, the landlord's managing agent wrote to the tenant, pointing out that there was an absolute prohibition in the lease on underletting, and stating that they would therefore need to take instructions from their client. In fact, the alienation provisions had been amended by a deed of variation to permit underletting (with the landlord's consent). The deed of variation was sent to the managing agents. This invoked a second response from the agents on 8 February, as follows:
"It is stated that any subletting must reserve a rent not less than the rent payable under the head lease. Clearly the transaction agreed with Lorica stands at a substantial discount to the rent reserved under the lease to your clients and on this basis our clients would have grounds for refusing licence to underlet. I trust the above sets out my client's position".
In fact, the agents had again misunderstood the position. The provision referred to applied only on underlettings of part. There was no equivalent provision in the lease for an underletting of the whole. The tenant's solicitors were quick to point out the mistake. However, despite further correspondence, the tenant had still not received a substantive response to its application by 19 February. The tenant's solicitors therefore wrote to the agent, threatening to issue proceedings for a declaration that the landlord was unreasonably withholding consent, and/or was unreasonably delaying. Proceedings were issued in the High Court on 18 March 2008.
Around 21 April, the landlord decided that in principle it would consent to the underletting. However, consent from a superior landlord was also required. A further delay ensued while this was obtained. The consent of both landlords was confirmed formally to the tenant on 7 May. However, on the same day, Lorica withdrew from the transaction. It gave as its reasons the delay in obtaining landlord's consent, which it said had caused unacceptable uncertainty. It also cited that there had been a loss of faith in the landlord due to its behaviour, since this had set the tone for any future dealings. The tenant was unable to find another undertenant.
The landlord raised a number of arguments in its defence. One was that it had not been provided with a copy of the draft underlease until 18 March.
Clause 24E of the lease contained the general restriction on underletting without landlord's consent, but clause 24C also required the tenant to obtain the landlord's prior written approval of the form of the underlease "in form and substance".
The court ruled that the failure to include a draft underlease with the 5 February application for consent did not of itself make the application invalid. Landlords would often be asked to consent before the detailed (as opposed to the essential) terms of the underlease were agreed. Clauses 24C and 24E were quite separate provisions. Crucially, this meant that time had started to run for 1988 Act purposes on 5 February. The landlord was under a duty to give the tenant a written decision within a reasonable period after that date. It would have been open to the landlord to reject the application outright because no agreed form underlease had been supplied; or alternatively to grant consent subject to a condition that its approval of the underlease be obtained, but the landlord had done neither of these. In any case, there was nothing to suggest that the absence of the form of underlease was, in fact, the reason why the landlord had not consented.
The tenant submitted that the communications from the landlord's agent on 6 February and 8 February in fact amounted to a refusal of consent. However, the court disagreed. It held that neither constituted formal written notice of the landlord's decision, as required by the Act. The court noted that the tenant's solicitor had not treated either document as a notice of decision for the purposes of the Act.
The court then considered whether consent had been granted in a reasonable time. What is a reasonable time is a matter of fact depending on the circumstances of the particular case. The judge was satisfied that the period in this case – six weeks from the making of the application on 5 February to the commencement of proceedings on 18 March – was a reasonable time for the landlord to make up its mind. It was plain from the application that the matter was urgent. The landlord knew that the premises had been empty for years and that the tenant faced a substantial loss if the deal with Lorica fell through. It was aware that the undertenant's rent free period was diminishing as a result of the delay. The landlord had been given the essential terms of the underletting.
Finally, the court had to decide whether the landlord's failure to give consent within a reasonable time had caused the underletting to fall through. Having seen correspondence which showed that the undertenant was keen to proceed as at 18 March, the court was satisfied that causation had been established.
Things to consider
In any particular case, much will turn on the wording of the alienation covenant in the lease. Some leases require landlord's approval to the underlease itself; others merely the heads of terms for the underletting.
The court's finding that the correspondence on 6 February and 8 February did not amount to a formal refusal makes for an interesting comparison with Alchemy Estates v Astor, considered in December's property update. In this case a letter from the landlord's solicitor which said "our client in principle is prepared to grant its consent" was held to constitute consent to assignment for the purposes of the lease, notwithstanding that it also stated that it was not intended to do so. It seems that the courts are more willing to find consents than they are refusals.
The managing agents initially dealt with the application swiftly, no doubt mindful of their client's duty under the 1988 Act. Unfortunately they were mistaken as to the legal interpretation of the documents. It is important that landlord, surveyor and solicitor all work together from an early stage when applications for consent are received.