In this edition, Katie Nixon explains whether a  landlord has to be reasonable when considering  applications by tenants to assign or sub-let their  premises and Eleanor Marsh clarifies the often  confusing issue of interim rents.

Q – Do landlords have to act reasonably when  dealing with a tenant’s application for consent?

A – This is a surprisingly tricky question. The starting  point is always to consider what the lease says about  the landlord’s obligations if the tenant seeks permission  e.g. to assign, underlet or carry out alterations.  However, the lease is not the complete picture as the  impact of various statutes must also be considered.

In relation to assignment, if the lease contains  an absolute prohibition then the tenant is not  permitted to assign. There is no need for the landlord  even to consider consenting to a request from the  tenant for consent. 

If the lease permits assignment with the landlord’s  consent then the landlord will generally have to be  reasonable in granting or refusing consent, even if the  lease says nothing about the landlord being reasonable.  This is because the landlord is obliged, by statute,  to act reasonably in such circumstances. In addition,  the landlord must deal with the tenant’s application  within a reasonable period of time. The position in  relation to underletting is essentially the same as that  in relation to assignment.

For “new” leases granted on or after 1 January 1996,  the parties can agree in advance the “reasonable”  circumstances in which the landlord can withhold  consent to assign, and the “reasonable” conditions  which the landlord can impose. Such leases usually  include a requirement for the tenant to give an  Authorised Guarantee Agreement (or AGA) if it assigns  the lease. An AGA is a guarantee of the assignee’s  performance of the tenant’s covenants in the lease.  Where the parties agree in the lease that it will be  reasonable for the landlord to require the tenant to give  an AGA on any assignment, the landlord will be entitled  to insist on one. When the assignee in turn assigns, the  original tenant will be released, and the assignee may  give a further AGA to the landlord.

With respect to alterations, an absolute prohibition  in the lease will be subject to the potential statutory  right for tenants of commercial property to carry out  improvements upon serving the requisite notice and,  if the landlord objects, making a court application. If the  lease permits alterations with landlord’s consent then,  if the proposed alterations amount to improvements,  statute provides that the landlord cannot unreasonably  withhold consent. In determining whether or not an  alteration is an “improvement” the court will look at  the question from the tenant’s point of view (Lambert v  F.W. Woolworth and Co. Ltd [1938] Ch. 833).

If the lease is entirely silent as to whether the  tenant can assign, underlet or alter then it may do  so without restriction.

Q – I am negotiating a renewal lease with a  tenant of a commercial space who enjoys the  protection of the Landlord and Tenant Act 1954  (the “Act”). The tenant served a section 26 request  and the renewal is unopposed. We are in the  process of agreeing heads of terms for the new  letting. The tenant has requested that the rent  commencement and term start date be backdated  to the day after the contractual expiry of the old  lease rather than the date of completion of the  renewal lease. Should I agree to this?

A – A court has no power to require the new rent to  be backdated. Therefore, you should only agree if it is  commercially appropriate to do so. That will depend  on (1) whether the rent is due to increase or decrease  under the renewal lease and (2) when the tenant  served the section 26 request.

Whilst a tenant holds over under a protected lease,  a landlord is entitled to continue to receive rent. Rent  is payable at the agreed rate under the old lease until  a date six months after service of any section 25  notice or section 26 request or, if later, the contractual  expiry date of the old lease. After that date, an interim  rent becomes payable until the new lease begins.  For example, if the lease contractually expired on 24  March 2014, but the section 26 request was served  on 24 December 2013, rent under the old lease would  be payable until 24 June 2014 and an interim rent  thereafter until the new lease is completed. 

The level of interim rent payable by the tenant depends  on a number of factors and the court ultimately has  jurisdiction to determine the amount. However, the  usual rule for an uncontested renewal of a lease for  the whole premises is that the interim rent will be the  same as the new rent payable under the renewal lease.

In the likely event (given the current market) that  the rent under the new lease will be higher than the  passing rent, interim rent will be payable at that higher  rate. Therefore, using the example above, as the old  lease contractually expired prior to a date six months  after service of the section 26 request, backdating  the term and rent commencement date to the day  after expiry would result in the higher rate being paid  for three months longer than it would otherwise be  payable under the Act.

If the rent is decreasing under the new lease,  you should try to agree the latest term and rent  commencement date possible to maximise the period  during which rent is received at the higher level under  the old lease. However, in the absence of agreement,  the tenant will be entitled to start paying the lower  interim rent six months from the date of the section  26 request.