Beware over-zealous assignment restrictions

Section 19(1A) of the Landlord and Tenant Act 1927 allows landlords and tenants to agree in leases circumstances in which consent to assignment may be withheld and/or conditions subject to which consent may be given. If factual circumstances or conditions are set out in the lease, they cannot subsequently be challenged under s.19(1)(a) of the 1927 Act on the ground that they are unreasonable. However, s.19(1A) does not apply to “old” leases under the Landlord and Tenant (Covenants) Act 1995, i.e. leases granted prior to 1 January 1996 (and certain others granted after that date).

A covenant in an old lease prohibiting assignment without landlord’s consent is subject to the overriding requirement that consent cannot be unreasonably withheld (s.19(1)(a) of the 1927 Act). In Level Properties Ltd v Balls Brothers Ltd and another [2007] EWHC 744, an old lease contained the following alienation provision:

“[Not to] assign the whole of the demised premises without first having obtained … the Landlord’s written licence which subject to compliance with the following requirements shall not be unreasonably withheld”.

One such requirement was the provision of a surety for the assignee if required by the landlord. Unusually, the landlord itself was arguing that, applying s.19(1)(a), it could only require a surety where it was reasonable to do so. This was because the issue arose in the context of a rent review dispute and the lack of a requirement to act reasonably would be an onerous term which would depress the rent on review.

The High Court held that the requirement to provide a surety was not a condition the landlord could impose as part of giving consent to an assignment. Instead, it was a pre-condition which had to be satisfied by the tenant before it could make an application for consent. As such, s.19(1)(a) was not applicable and no reasonableness requirement applied.

This case serves to emphasise the delicate balance to be struck when negotiating leases between protecting the value of the reversion and ensuring that controls on the tenant do not have an adverse effect at rent review. It would arguably have been far better to expressly limit the landlord’s right to require a surety to those cases where it was reasonable to do so.

…and reviews based on a hypothetical use

In the late 1980s, data centres and dedicated disaster recovery spaces were not as prevalent as now. Consequently, the rent review provisions in a lease of a computer centre provided that the reviewed rent would be 90 per cent of the rent if the premises were assumed to comprise high class offices or 100 per cent of the rent as a computer centre, whichever produced the higher result.

At review, the parties disagreed as to the meaning of the office part of the formulation. The landlord contended that it meant that what was to be reviewed was a hypothetical office building. The tenant argued that the actual premises were to be valued, but on the basis that they were used as offices. The High Court found in favour of the landlord. This meant that other office buildings on the landlord’s business park could be used as comparables. On the tenant’s interpretation, it would have been difficult to determine the specification of the building since various alterations would have been needed in order for it to be suitable for use as offices.

Assumptions in rent review clauses can always give rise to difficulties when they do not reflect the reality of the situation. A clear distinction is drawn in this case between an assumption relating to the premises themselves on the one hand and one regarding the use to which they are to be put on the other.

St Martins Property Investments Ltd v Cable & Wireless UK PLC [2007] EWHC 582