The Court of Appeal has released an important decision for landlords and tenants concerning applications for consent to assign a lease, overturning the High Court's earlier decision in No.1 West India Quay (Residential) Ltd v East Tower Apartments Ltd.
The Court of Appeal decided that one bad reason for a landlord refusing its consent will not render the entire decision to withhold consent unreasonable, so long as there are other reasons for the refusal which are good and free-standing.
The case concerned a landlord's refusal of consent to an assignment and looked at whether, where three reasons were given for the refusal, two of which were reasonable and one of which was not, the giving of one unreasonable condition rendered the entire decision unreasonable. The Court of Appeal stated that "the question is whether the decision to refuse consent was reasonable; not whether all reasons for the decision were reasonable. Where, as here, the reasons were free-standing reasons each of which had causative effect, and two of them were reasonable, (…) the decision itself was reasonable."
The tenant, a property investment company, had taken 999-year leases from the landlord of a number of apartments in a development at No.1 West India Quay. The tenant decided to sell the apartments and sought the landlord's consent to the assignment of the leases, which was required by the lease and expressed not to be unreasonably withheld.
The landlord refused to grant consent for the assignment of some of the leases because the tenant had refused:
- to pay the landlord's costs of £1,250;
- to allow a surveyor to inspect the apartment at a cost of £350 to check for any breaches of the lease; and
- to provide bank references for proposed assignees.
The tenant claimed the landlord had unreasonably withheld consent to the assignments and the High Court held in its favour. Although the High Court found that the latter two reasons were valid, the landlord's costs of the assignment were unreasonably high. In the High Court's view, inclusion of this unreasonable reason rendered the refusal of consent unreasonable in its entirety notwithstanding the other two reasonable reasons. The landlord appealed.
The statutory background
The case required the Court of Appeal to interpret the provisions of section 1 of the Landlord and Tenant Act 1988. Where a lease contains a covenant by a tenant not to assign the lease without the consent of the landlord, and that consent is not to be unreasonably withheld, section 1(3) requires a landlord to give consent unless it is reasonable not to. It also requires that, where consent is refused or given subject to conditions, the landlord provides in writing the conditions or the reasons for the refusal. The court had to consider whether section 1 required that every reason given by a landlord must be reasonable, or if it simply required all reasons to be given in writing (whether reasonable or not) and the decision (considered as a whole) to be reasonable.
Deciding in favour of the landlord, the Court of Appeal held that there was nothing in the 1988 Act to suggest that a mix of good and bad reasons would automatically invalidate a refusal of consent. Indeed, the landlord's statutory duty was to give all of the reasons for its refusal, not just the reasonable ones.
The correct question to ask was whether the same decision would have been reached on the good reasons alone.
However, each case needed to be considered on its facts and the Court considered that there may be occasions where a bad reason might "infect" other reasons for the refusal, which would otherwise have been good reasons. For one reason to infect another, a degree of connection between the reasons would be required, which was not present in this case.
How widely does the decision apply?
Whilst the decision concerned an application for consent to assign, it will apply equally to applications for consents to underlet, grant a charge or part with possession, which are also covered by section 1 of the 1988 Act. Although other categories of leasehold consents (e.g. for alterations or for change of use) are subject to their own common law or statutory requirements, the principles behind this decision may be extended by future case law to applications for other types of consent.
What are the practical implications for landlords and tenants?
The decision will be welcomed by landlords who, following the High Court's earlier decision, faced the possibility of having their decisions declared unreasonable if they had insisted (for example) on payment of a specified sum for legal costs which, when challenged, was found to be unreasonable, notwithstanding that they might have objected to the assignment for other compelling and well-founded reasons (such as the proposed assignee's poor financial standing).
However, landlords still need to consider applications for consent to assign carefully and take advice as to whether or not their proposed reasons for a refusal of consent will be deemed reasonable. Following this decision there may be a temptation to overload refusals of consent with multiple reasons, in the mistaken belief that any bad reasons will simply be disregarded, permitting the landlord to rely on the remaining, good, reasons. That is not the case: the more bad reasons included in a refusal, the greater the likelihood of those bad reasons being deemed to "infect" the good reasons, or otherwise that the good reasons will simply be viewed as makeweights not truly forming part of the decision making process.
Another way in which the Court of Appeal suggested it might be possible for a good reason to be infected by a bad reason was where the bad reason acted as a "gateway" to the consideration of the tenant's application for consent. So, for example, where the landlord requires payment of an unreasonable fee before giving any further consideration to the application for consent, any subsequent reasons for refusal would also be considered unreasonable. Landlords should therefore pay close attention to how they structure their responses to applications for consent in order to avoid this potential "gateway" trap.
From the tenant's perspective, notice should be taken of the decision. Careful consideration should be given, and legal advice taken, before launching any legal challenge to a landlord's refusal to consent to an assignment. Whether such a challenge will succeed will depend on the facts of each case and the reasons given by the landlord for refusal. However, following this Court of Appeal decision, it will not generally be sufficient for a Tenant to show that just one of the landlord's reasons is unreasonable if there are other, independent, reasons which are good.