The Good, the Bad and the Ugly
Refusing consent to assign after No.1 West India Quay (Residential) v East Tower Apartments Limited  EWCA Civ 250
Where a landlord refuses consent to an assignment for a number of separate reasons, it doesn’t matter if some of the reasons are “bad” or unreasonable as long as the other operative reasons are “good”.
The tenant was seeking to assign underleases relating to 42 apartments at No.1 West India Quay. The underleases all contained covenants providing that landlord’s consent was required for any assignment, such consent not to be unreasonably withheld (a “qualified” covenant). The landlord gave consent to assign 8 apartments with the only condition being that service charge arrears and the landlord’s costs of £1,250 plus VAT were paid.
Applications to assign other underleases were made but this time the landlord sought to impose further conditions. These conditions included a requirement that the landlord should be allowed to inspect the apartment, with the tenant providing an undertaking for the costs of that inspection in the sum of £350 plus VAT (in addition to the legal costs undertaking of £1,250 plus VAT) plus a bank reference for the proposed assignee. The tenant complained about these additional requirements and the landlord refused consent on the following grounds:
- The relevant clause of the underlease entitled the landlord to recover its costs and the sum sought was reasonable. The landlord said that it was not willing to proceed until a costs undertaking had been provided.
- The landlord was entitled to inspect the apartment in order to check whether there were any breaches of the underlease.
- The landlord was entitled to a bank reference, especially as major works were planned at the block (the cost of which would be recovered from the tenants via the service charge) and the landlord was entitled to consider and assess the covenant strength of the proposed assignee.
Section 1 of the Landlord and Tenant Act 1988 (the Act) implies certain obligations on landlords where there is a qualified covenant in a lease. On an application for consent to assign or underlet, the landlord owes a duty to the tenant, to do the following within a reasonable time:
- Give consent, except where it is reasonable not to;
- To serve the tenant with written notice of its decision whether or not to give consent setting out:
o The reasons for withholding consent, if consent is refused;
o The conditions for consent, if consent is granted subject to conditions.
The Act goes on to say that it will be reasonable for a landlord not to give consent to a proposed transaction only where, if he withheld consent and the tenant went ahead with the transaction anyway, the tenant would be in breach of lease. Furthermore, the landlord cannot later rely on reasons for refusal that were not communicated to the tenant at the time of the landlord’s decision.
The case was appealed from the County Court to the High Court and then on to the Court of Appeal. The Judge at first instance had decided that none of the reasons given were reasonable and so consent had been unreasonably withheld. On appeal to the High Court, the Judge found that the request for a bank reference and an inspection by the landlord’s surveyor at a cost of £350 plus VAT were reasonable but agreed that the first instance Judge was entitled to find that the requirement relating to legal costs was unreasonable.
The question before the Court of Appeal was: if a landlord refuses consent on three grounds and only two of them are found to be reasonable – is the refusal of consent valid?
The Court of Appeal found that it is, as long as it can be shown that the good reasons are freestanding and not dependent on, or connected to, the bad reason or reasons. This conclusion is consistent with other areas of the law. For example, if a landlord serves a section 146 notice as a precursor to forfeiture alleging multiple breaches of covenant, the fact that some of the breaches are not proven will not invalidate the notice.
There might be a situation where the a bad reason has “infected” the good reason but the Court found that would only be the case if the reasons were connected and the purported good reason was no more than a “makeweight”. If the decision would have been the same without the landlord having to rely on the bad reason, then the decision – looked at overall – would have been good. In such a situation the bad reason will not have infected or vitiated the good reason. Such a conclusion also makes practical sense because it would be rather draconian if a landlord were to get saddled with a tenant of precarious financial standing because the landlord had requested, for example, too much in the way of costs but also fairly refused the application on the basis of the weak financial standing of the proposed assignee.
This decision on refusals is helpful to landlords and confirms the position as many practitioners had understood it to be previously. It should be borne in mind though that when imposing conditions for consent – rather than giving reasons for refusal - the Act makes it clear that all of the conditions must be reasonable otherwise the decision will be deemed to be an unreasonable refusal of consent.
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