Dealing with an application for consent to assign – when is it reasonable to say no?

If a lease is silent or simply states that a tenant may assign, then the tenant can assign without the need for the landlord's consent.

In reality, most commercial leases prevent the tenant from assigning without first obtaining the landlord’s consent.

Section 19(1) of the Landlord and Tenant Act 1927 (LTA 1927) provides that any qualified covenant in a lease against assigning, underletting, charging, or parting with possession of the premises or any part without the landlord’s consent, is subject to a statutory duty that consent is not to be unreasonably withheld.

The inclusion of this statutory provision raises the question “what constitutes unreasonably withholding?” There is not a straightforward answer. It requires consideration of statute and case law. This is no doubt why this application for consent to assign has landed on your desk this morning!

The impact of The Landlord and Tenant (Covenants) Act 1995

The Landlord and Tenant (Covenants) Act (LTCA 1995) inserted into s19 of the LTA 1927 a new subsection 19(1A) which provides that, in new tenancies, the parties can set out in the lease, or by other documentation, the circumstances in which consent to an assignment can be withheld and/or conditions subject to which consent may be given.

Therefore, your first step is to consider the lease and associated documentation to see whether there is any such provision. If there is such a provision in place at the time the request for consent is made, the landlord will not be held to be unreasonable in either refusing consent if the relevant circumstances exist or imposing any of the listed conditions (that is, entering into an Authorised Guarantee Agreement (“AGA”)) as are set out in the agreement entered into under s19(1A) LTA 1927.

Section 1 of the Landlord and Tenant Act 1988 (LTA 1988)

Sections 1 and 2 of the LTA 1988 impose certain duties on landlords in dealing with a written application for consent to assign, underlet, charge or part with possession.

The landlord must:

• give consent (except where it is reasonable to withhold it) and to do so within a reasonable time
• serve on the tenant written notice of their decision whether or not to give consent. The written notice should detail any conditions that the consent is subject to and if the consent is withheld, the reasons why.
• pass on applications for consent to others whose consent is also needed (that is, superior landlords or freeholders) within a reasonable period of time.

Under the LTA 1988 the burden of proof is on the landlord to show that they are acting reasonably in withholding consent.

When is it reasonable to withhold consent?

A test for reasonableness was laid down by the Court of Appeal in International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] Ch. 513. The following points incorporate the guidance given by the Court of Appeal in this case:

The purpose of a covenant against assignment without the consent of the landlord (not to be unreasonably withheld) is to protect the landlord from having his premises used or occupied in an undesirable way or by an undesirable assignee.

A landlord cannot refuse consent to assign on grounds which have nothing to do with the relationship of landlord and tenant with regard to the lease of the premises

Generally, a landlord cannot refuse consent simply because the landlord is able to identify a breach of covenant in the lease. The question is whether the breach of covenant is of a nature which justifies the refusal of consent and whether the landlord has been prejudiced by the breach (Ansa Logistics Ltd v Towerbeg Ltd [2012] EWHC 3651 (Ch)).

It is not necessary for the landlord to prove that the conclusions which led them to refuse consent are justifiable. What has to be shown is that those conclusions might be reached by a reasonable person in the circumstances.

In the case of No1 West India Quay (Residential) Ltd v East Tower Apartments Ltd [2016] EWHC 2438 (Ch), it was held to be reasonable in the circumstances for the landlord to require a bank reference and to arrange for its surveyor to inspect the property to check for breaches of covenant, despite the fact that these requirements were not actually specified under the lease.

Refusal of consent on the basis of good estate management may be considered reasonable, but the landlord will be expected to provide detailed evidence of the relevant policy (Ashworth v Frazer Ltd v Gloucester City Council [2001] UKHL 59).

It may be reasonable for the landlord to refuse consent because of the purpose to which the proposed assignee intends to use the premises, even though that purpose is not prohibited under the lease.

There is a lot of case law surrounding this point. Some examples of where it has or has not been reasonable to refuse consent to assign are:

• where the landlord reasonably considers that the use proposed by the assignee will result in a breach of user covenant that they could enforce against, it may be reasonable to refuse consent. However, if the lease allows for only one use of the premises and the proposed use falls within that specified use it may not be reasonable to withhold consent (International Drilling Fluids). 
• where the landlord was concerned that the proposed assignee may use the premises in a way that undermines their standing as a high class restaurant, it was held to be reasonable to refuse consent (Rossi v Hestdrive Ltd [1985] 1 EGLR 50).
• where the landlord was concerned that the manner in which the proposed assignee is intending to trade from the restaurant is likely to undermine the premises and the premises around it, it was held to be reasonable to refuse consent (Tollbench v Plymouth City Council (1988) 56 P & CR 194).
• where the assignee is a business rival who may cause an adverse reaction to the landlord’s trade in neighbouring premises, it may be reasonable to refuse consent (see Sargeant v Macepark (Whittlebury) Ltd [2004] EWHC 1333 (Ch)and Sportoffer Ltd v Erewash Borough Council [1999] L & TR 433).

It may be reasonable for the landlord to refuse consent because of concerns that their contractual rights under the lease may be prejudiced by the assignment.

In the case of British Bakeries (Midlands) v Testler & Co [1986] 1 EGLR 64, the judge said: “A reasonable landlord is concerned with the tenant’s ability to meet the obligations under the lease as those obligations fall due”. Therefore, where the proposed assignee’s references call the assignee’s ability to pay the rent and fulfil their obligations under the lease into question, the landlord will normally be justified in withholding consent.

If the proposed assignee refuses to produce accounts or is unable to produce accounts because they are a newly incorporated company, it may be reasonable to refuse consent (Landlord Protect Ltd v Dolman [2007] 2 EGLR 21).

If the purpose of the assignment is that the assignee can take advantage of a break clause, it may be justified for the landlord to withhold consent (see Olympia & York Canary Wharf Ltd v Oil Property Investment Ltd (1995) 69 P & CR 43 and Ashworth Frazer Ltd v Gloucester City Council [2001] UKHL 59).

Landlords usually only need to consider their own interests and not those of the tenant. However, there may be cases where the disproportion between the benefit to the landlord and the detriment of the tenant is such that to withhold consent would be unreasonable.

A landlord can be reasonable in refusing consent if the proposed assignment would bring about the diminution in value of the landlord’s reversion. However, there are important caveats to this principle. There needs to be a genuine foreseeable prospect of the landlord wanting to realise the value of his reversion. Further, if there is a large disparity between the benefit to the landlord and the detriment to the tenant it will not be reasonable to refuse consent (Footwear Corporation Ltd v Amplight Properties Ltd [1999] 1 WLR 551).

What if the landlord withholds consent and the tenant doesn’t agree?

If the landlord withholds consent to the assignment and the tenant thinks they are being unreasonable, there are the following options for the tenant:

• Proceed without obtaining consent. This is risky because the landlord may bring a claim for damages and/or an action for forfeiture.
• Make an application to court for a declaration that consent has been unreasonably withheld and seek damages.

Who bears the burden of proof?

Since the introduction of sections 1 and 2 of the LTA 1988, the burden of proof is on the landlord to justify, with reasons, that they have acted reasonably in refusing consent and within a reasonable time. Therefore landlords should react promptly to an application for consent to assign. They need to consider all the facts of the matter as what is considered “unreasonable” very much turns on the individual facts of each case.

This article was first published in the PLC Property Litigation Blog.