In the May 2008 edition of property update, we considered the case of Royal Bank of Scotland v Victoria Street (No. 3) Ltd. The tenant had applied for a declaration that the landlord had unreasonably refused consent to an assignment. The tenant's application for summary judgment was dismissed and the case went to full trial.
The proposed assignee was a new company which had only been formed a few months previously. The rent payable under the lease was over £400,000 per annum and no guarantors of the company's liability had been offered. The lease (which was an "old" lease for the purposes of the Landlord and Tenant (Covenants) Act 1995) contained the following restriction on alienation:
"Not to assign the demised premises … without the written consent of the landlord. Such consent however not to be unreasonably withheld in the case of a respectable and responsible assignee…"
In its letter refusing consent, the landlord wrote:
"The … lease … states clearly that consent should not be unreasonably withheld in the case of a respectable and responsible assignee.
With the company in question having only been incorporated some two months ago we do not agree to this assignment."
A number of points were argued at the summary judgment application, but the trial was mainly concerned with two issues. First, were the landlord's reasons for withholding consent reasonable? Secondly, were these reasons adequately notified to the tenant in the landlord's letter of refusal, as required by the Landlord & Tenant Act 1988?
The landlord had mistakenly thought that the effect of the alienation covenant was that, where the assignee was not respectable and responsible, it had an absolute discretion whether or not to grant consent. However, the effect of section 19(1)(a) of the Landlord & Tenant Act 1927 was that the landlord was under an overriding duty not to withhold consent unreasonably.
Notwithstanding this, the landlord understandably did not wish to have the lease vested in a tenant which (as a newly formed company) was not respectable and responsible. The High Court ruled that that was a view which could be taken by a reasonable landlord. That was so even where the landlord could have recourse to a strong covenant provided by an original tenant (such as the Royal Bank of Scotland).
In proving that its grounds for refusing consent are reasonable, a landlord is not entitled to rely on reasons other than those set out in writing to the tenant at the time of refusal. However, the landlord may elaborate on the reasons which it has originally given without falling foul of this rule.
The High Court found that the landlord's reasons for refusing consent were reasonable, and that those reasons were an elaboration of the reasons very concisely stated in the landlord's letter. On that basis the court dismissed the tenant's application.
Things to consider
It is important that landlords consider carefully the reasons why they are refusing consent to an assignment or underletting. Only those reasons adduced in writing to the tenant at the time of the refusal may subsequently be relied on.