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Reasonable refusal

General principles

There are many cases on the subject the most important of which is probably International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1985] EWCA Civ 11. The main principles as stated in that case are as follows (Balcombe J at 325):
    1. The purpose of a covenant against assignment without the consent of the landlord, such consent not to be unreasonably withheld is to protect the lessor from having his premises used or occupied in an undesirable way or by an undesirable tenant or assignee.

    2. As a corollary .. a landlord is not entitled to refuse his consent to an assignment on grounds which have nothing to do with the relationship of landlord and tenant in regard to the subject matter of the lease.

    3. It is not necessary for the landlord to prove that the conclusions which led him to refuse consent were justified, if they were conclusions which might be reached by a reasonable man in the circumstances.

    4. If may be reasonable for the landlord to refuse his consent for an assignment on the ground of the purpose for which the proposed assignee intends to use the premises, even though that purpose is not forbidden by the lease.

    5. There is a divergence of authority on the question, in considering whether the landlord’s refusal of consent is reasonable, whether it is permissible to have regard to the consequences to the tenant if consent to the proposed assignment is withheld … A proper reconciliation of the … [authorities] can be achieved by saying that while a landlord need usually only consider his own relevant interest, there may be cases where there is such a disproportion between the benefit to the landlord and the detriment to the tenant if the landlord withholds his consent to an assignment, that it is unreasonable for the landlord to refuse consent.

    6. Subject to the propositions set out above, it is, in each case a question of fact, depending on all the circumstances, whether consent is being unreasonably withheld.
At the time of International Drilling the onus of proof was on the tenant. He had to prove that the consent had been unreasonably withheld. However, the position has been reversed by s1(6)(c) of the 1988 Act so that the burden is now on the landlord to prove that his refusal was reasonable (Norwich v Shopmoor [1997] EWHC Ch 368).


Breach of covenant as reason for refusal

Ashworth Frazer Ltd v Gloucester City Council (No.2)
[2001] UKHL 59

Landlords often think that they can refuse to give consent to an assignment on the ground that the intended use by the assignee would be a breach of covenant. They used to be wrong. The view taken by the courts was that as the landlord will have the same rights against the assignee as he has against the tenant he would not be prejudiced (Killick v Second Covent Garden Property Co. Ltd [1973] 2 All ER 237, CA). However, in this case the House of Lords overruled Killick and held that a refusal in these circumstances is not automatically unreasonable. Instead one must ask what the reasonable landlord would do in the particular circumstances of the case. The court cannot and should not formulate strict rules as to how a landlord should exercise his power of refusal.

Original tenant still liable

The Royal Bank of Scotland v Victoria Street (No. 3) Limited
[2008] EWHC 3052 (Ch)

Summary

A landlord can object to the covenant strength of the assignee where the landlord is concerned in a practical way about the payment of rent and the performance and observance of the covenants, even where the landlord has the benefit of the original tenant’s covenant.

Facts

The Royal Bank of Scotland (T) is the tenant of office premises in London. Victoria Street (No3) Ltd (L) is the landlord. The lease contains a covenant on the part of T:
    “Not to assign the demised premises or underlet or part with the possession of the demised premises or any part thereof or of this lease without the written consent of the landlord such consent however not to be unreasonably withheld in the case of a respectable and responsible assignee or sub-tenant Provided that the Landlord may require the proposed assignee to enter into direct covenants with the Landlord to perform and to preserve all covenants and conditions herein contained and on the Tenant’s part to be performed and observed.”
T applied for consent to assign to a company that had been incorporated two months previously. One week later, consent was refused by L on the basis that the proposed assignee was (by virtue of its recent incorporation) not a “respectable and responsible assignee”.

T applied to the High Court for a declaration that L had unreasonably withheld consent to the assignment of the lease.

Decision

Morgan J held that the reasons L put forward for refusing consent to the proposed assignment were ones that a reasonable landlord might put forward. A landlord considering those stated reasons would have been acting reasonably by refusing consent, even taking into account the on-going liability of T as original tenant.

Citations

Morgan J at para 36:
    "… a landlord can object to the covenant strength of the assignee where the landlord is concerned in a practical way about the payment of rent and the performance and observance of the covenants, even where the landlord has the benefit of the original tenant’s covenant. It seems to me that there ought not to be any rule of law on this question, which is essentially a question of fact, where the arguments as to the facts I have already set out point to the conclusion that a reasonable landlord can be concerned about the practical consequences of the tenant in possession not being respectable and responsible. … on the facts of this case the actual reasons which led this landlord to refuse consent were reasons that a reasonable landlord could properly put forward for withholding consent."

Reasons for refusing consent

Two good, one bad

No 1 West India Quay (Residential) Ltd v East Tower Apartments Ltd
[2018] EWCA 250 (Civ)

Summary

The Court of Appeal considered whether landlord’s consent to assign had been unreasonably withheld where two of the grounds for refusal were reasonable, but a third had been held not to be. Answer: No. The question is whether the decision to refuse was reasonable; not whether all the reasons for the decision were reasonable.

Facts

East Tower Apartments Ltd (“ETAL”) is the tenant of 42 apartments in a 33-storey building. Under the terms of its leases, it was required to obtain its landlord’s prior written consent to any assignment, such consent not to be unreasonably refused.

Section 1(3) of the Landlord and Tenant Act 1988 imposes a statutory duty on a landlord, on application being made to it for consent, within a reasonable time:
  • To give consent unless it is unreasonable to do so, and
  • To serve on the tenant “a notice of [its] decision whether or not to give consent”, setting out any conditions for the grant of the consent, or the reasons for refusing it.
Section 1(4) adds that the landlord’s statutory duty is not satisfied if consent is given subject to an unreasonable condition. If the duty is breached and gives rise to loss, it is actionable by way of a claim for breach of statutory duty.

ETAL applied to assign some of the leases and the landlord imposed three conditions on the grant of consent, namely that:
  • The tenant pays a fee of £1,600+VAT for the grant of the licence to assign (which included the inspection fee of a surveyor of £350 + VAT);
  • Inspection by the landlord’s surveyor, to establish whether ETAL was in breach of covenant, be carried out; and
  • A bank reference for the proposed assignee be provided, so that its covenant strength could be assessed.
The tenant disputed the reasonableness of all three conditions and issued proceedings for declarations to that effect.

Issues

The question before the Court of Appeal was whether two good reasons for refusing consent to assign could be – and were - vitiated by the one bad reason.

Decision

The judge held that all three conditions were unreasonable, and that the landlord had therefore breached its statutory duty by unreasonably withholding consent.

Decision on Appeal to the High Court

Henderson J held that the first condition was unreasonable and the second and third were reasonable, but that: “the bad reason vitiated the two good ones, with the consequence that West India Quay's success on those two matters is not enough to render the refusal of consent reasonable”.

Decision on Appeal to the Court of Appeal

Giving the judgment of the Court of Appeal, Lewison LJ, concluded that the refusal of consent was reasonable;
    “the question is whether the decision to refuse was reasonable; not whether all the reasons for the decision were reasonable”
in other words “if the decision would have been the same without reliance on the bad reason, then the decision (looked at overall) is good”.

In reaching that conclusion, Lewison LJ considered the support from three cases:
  • British Bakeries (Midlands) Ltd v Michael Testler & Co Ltd [1986] 1 EGLR 64 where it was common ground between counsel that “If a landlord has a good reason and a bad reason for withholding consent, consent may nevertheless have been reasonably withheld if the good reason is a sufficient reason and is not otherwise vitiated by the bad reason”
  • BRS Northern Ltd v Templeheights Ltd [1988] 2 EGLR 182, in which Neuberger J held, in relation to reasons for refusing consent to assign, that “it may be clear that the bad reason is by far the most important reason, and that the purportedly good reasons were merely makeweights; or it may be that the existence of the bad reason infects or vitiates what would otherwise, in the absence of the bad reason, be a good reason” and
  • Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71, in which Lord Sumption expressed the test as “one of causation”.


Lewison LJ himself formulated that test as:
    “Would the landlord still have refused consent on the reasonable grounds, if it had not put forward the unreasonable ground?”
In ETAL’s case, there was no evidence supporting the conclusion that the demand for an excessive licence fee, which was the bad reason, was the most important reason for the landlord having refused consent to the assignment and had therefore caused the landlord to refuse consent. Nor could it realistically be said that the bad reason had vitiated or infected the good reasons. The bad and the good reasons were freestanding; there was no connection between them. Lewison LJ:
    “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.”


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