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  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.