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Those of you who thought this article was going to be about hypothetical forms of life from another planet or the sociological concept described by Karl Marx as a condition in which men are dominated by forces of their own creation which confront them as alien powers, may need to re-assess your expectations. We’re talking about the transfer of title to real property (AKA alienation) in the context of leases eg assignments and sublettings.
The word alienation comes from the Latin "to be made into a stranger" and feeling like a fish out of water expresses the feeling quite well. Sometimes, even experienced landlords and tenants can feel out of their depth when it comes to dealing with alienation provisions in leases. So, we’ve compiled our top 10 FAQs to help you wade through the murky waters of alienation covenants.
If a lease says that landlord’s consent is required to assign/sublet, can a landlord refuse consent on any grounds?
Some lease clauses will specifically state that where landlord’s consent is required “such consent is not to be unreasonably withheld”. However, even where that express qualification isn’t present, Section 19(1)(a) of the Landlord and Tenant Act 1927 implies such a proviso into qualified covenants (ie those where consent is required to the proposed transaction). This converts it to a fully qualified covenant to the effect that consent cannot be unreasonably withheld - so the landlord can only refuse consent on grounds which are reasonable.
What are the landlord’s duties if he/she is required to give consent?
Where there is a fully qualified covenant against alienation (whether express or implied by statute), the landlord owes statutory duties under the Landlord and Tenant Act 1988 (”LTA 1988”).
The landlord will owe a duty to the tenant, within a reasonable time, to give consent except where it is reasonable not to do so; and to give written notice of its decision on giving consent, specifying any conditions for its consent or its reasons for withholding consent (section 1, LTA 1988).
When will a landlord’s duty to consider an application for consent to alienation be triggered?
Section 1(3) of the LTA 1988 specifies that the tenant’s application must be written. Oral requests will not be sufficient to trigger the landlord’s duties. The application must also contain sufficient details of the transaction to enable the landlord to make a decision. It is a question of fact whether the information provided to the landlord demonstrates the proposed assignee or subtenant’s ability to pay the rent and perform the lease covenants. Tenants should provide as much information as possible with their application including accounts, references for the proposed assignee/subtenant and details of the proposed use.
Can an application for consent be made by email?
Applications are frequently made by email these days. Whilst this will satisfy the statutory requirement that an application must be "written", you will need to check whether service by email is permitted under the lease. If not, a landlord may be able to argue that an application by email is invalid and therefore its duty to consider the application has not been triggered.
How much time does a landlord have to respond to the application?
The Law Commission Report which led to the LTA 1988 recommended that a 28 day period be set as the “reasonable time”, but this was not adopted. The “reasonable time” will therefore depend upon the circumstances of the case.
In Blockbuster Entertainment Limited v Barnsdale Properties Limited (2003) it was held that consent could have been given within one week! In Dong Bang Minerva (UK) Limited v Davina (1994), one month was considered to be a reasonable benchmark. Whilst the reasonable timescale will depend on the circumstances, it is clear that a response should be given in a matter of weeks rather than months once a valid application has been received so landlords need to act quickly.
What effect will any “without prejudice ” negotiations have on the timescale?
The “without prejudice” negotiations will not automatically stop the running of the “reasonable time” under the 1988 Act (see Footwear Corporation Limited –v- Amplight Properties Limited (1998)). Therefore, landlords should still be mindful of the overall timescale if they engage in without prejudice discussions.
Can a landlord consent to the application be granted subject to conditions eg provision of security by way of rent deposit or guarantor?
Under Section 1(4) of the 1988 Act, any such condition must be reasonable and the landlord would need to prove this.
If a lease was entered pursuant to an agreement or Court Order made prior to 1 January 1996 it will be an "old tenancy". If it is a "new tenancy", a landlord may be able to rely on any provision in the lease which says that it is reasonable to impose a certain condition, pursuant to Section 19(1A) of the Landlord and Tenant Act 1927.
This section allows a landlord to specify in the lease at the outset, conditions which it may seek to impose in the event of an application for assignment/ underletting and the imposition of any of those conditions is therefore deemed to be reasonable (see Mount Eden Land Limited v Towerstone Limited (2002)). If there is no such provision or it is an old tenancy, a landlord would have to show that it is reasonable to impose the condition.
Can a landlord refuse consent on grounds of competition with his/her business?
Refusal of consent on the grounds of competition with the landlord can be reasonable where the landlord's trade might be adversely affected. A landlord can legitimately take into account considerations relating to adjoining property of its own. In Whiteminster Estates Limited v Hodges Menswear Limited (1974) and Sportoffer Limited v Erewash BC (1999) the court decided that a landlord had not unreasonably refused consent on the grounds of competition.
Can a landlord rely on other reasons which are not contained in its written response if the tenant disputes a landlord’s decision to refuse to consent?
A landlord cannot seek to rely upon reasons which came to its attention after the date upon which it refused consent; which it did not give in writing; and/or which it did not give within a reasonable time. A landlord will be limited to relying on reasons contained in its written response. Therefore, it is important to ensure that all reasons upon which a landlord may seek to rely are included in the response.
What can the tenant do if he/she considers that the landlord’s consent to the proposed transaction has been unreasonably withheld or delayed?
The tenant may apply to the court for a declaration that the landlord is unreasonably refusing consent. If granted, the declaration allows the tenant to do what it requested consent for, without formal consent. The existence of a statutory duty means that the tenant can seek also remedies in tort for breach of that duty. These remedies are damages and, in appropriate cases, an injunction. It is the availability of damages which gives the LTA 1988 "its teeth". The tenant would, of course, need to show that it had suffered loss in order to recover damages.
The tenant may go ahead and act without consent. If it turns out that the landlord has unreasonably withheld consent, the act would be lawful. If, however, it turns out that the refusal of consent was reasonable, then the tenant would be in breach of covenant and potentially liable in damages and the lease would be liable to forfeiture (so it is not without risk for the tenant). The proposed assignee or subtenant may be unwilling to proceed with the transaction without the landlord’s consent or a court declaration confirming that consent has been unreasonably withheld or delayed.
For more information please contact Mark Smith, Partner
T: +44 (0)20 7427 6722