As a follow up to the previous blog which discussed the principle of withholding landlord’s consent in theory, this blog article will look at it in practice, and will focus on the recent Outer Court case; Homebase Limited v Grantchester Developments (Falkirk) Limited [2015] CSOH 49. This case relates to a lease of retail premises in Falkirk, where the Landlord was Grantchester, and the Tenant was Homebase.
Background
The Tenant wanted to assign their interest in the Lease to another company called CDS (Superstores International) Limited (“CDS”). Under the Lease, the Tenant was not permitted to assign their interest, without first obtaining the prior written consent of the Landlord. The consent was not to be unreasonably withheld or delayed, in terms of an assignee “of sound financial standing demonstrably capable of fulfilling the Tenant’s obligations” under the Lease.
The Tenant had provisionally agreed to assign their interest to CDS, subject to first obtaining the landlord’s consent to the assignation and the proposed change of use. While making its decision whether to grant consent or not, the Landlord sought clarification of the terms of the proposed agreement between the Tenant and CDS, to assess the impact of the assignation on the Landlord’s interest under the Lease and on account of the fact that the agreement involved the payment of a consideration for the assignation. The Tenant refused to provide the requested information, stating that whether or not a payment was going to be made is irrelevant to the application for consent. Furthermore, it was stated that the Landlord should only be interested in the “identity and character of the proposed assignee and their ability to comply with the Tenant’s obligations under the Lease.” Subsequent correspondence took place between the parties, with the Tenant standing firm and not providing the requested information. As a result, the Landlord refused to consent to either the assignation or the proposed change of use.
The case focussed on whether or not the Landlord’s consent had been unreasonably withheld. What were the arguments given for both the Tenant and the Landlord?
For the Tenant
The Tenant argued that all the Landlord was required to take into account was whether CDS was “of sound financial standing demonstrably capable of fulfilling the Tenant’s obligations” under the Lease. Where the proposed assignee, which in this case was CDS, satisfied this requirement but the Landlord still withheld their consent, then this would be considered unreasonable. Additionally, a failure by the Tenant to provide the Landlord with information relating to “collateral” matters e.g. payment of a consideration between the Tenant and CDS, would not justify the Landlord reasonably withholding consent. The Tenant argued that the current situation was similar to previous cases where Landlords were held to have unreasonably withheld their consent on grounds that had nothing to do with the relationship of the Landlord and the Tenant. In conclusion the Tenant argued that CDS had fulfilled this criteria, and so the Landlord could not unreasonably withhold their consent.
For the Landlord
The Landlord emphasised that the relevant clause regarding assignation in the Lease specified a two-stage test.
1. Firstly, the proposed assignee must be of sound financial standing and demonstrably capable of fulfilling the Tenant’s obligations in terms of the Lease.
2. If and when the first stage is satisfied, you proceed to the second stage, which focusses on whether there are reasonable grounds for the Landlord’s consent being refused.
The Landlord stated that the first stage of the test must be assessed on an objective basis. In terms of the second stage, i.e. the reasonableness of withholding consent, it was proposed that the Court should not determine the grounds on which consent can be refused by following strict rules, instead it requires to be assessed on a case by case basis. The Landlord agreed that it is reasonable for it to want to consider information relating to the payment of a rent subsidy or reverse premium if it is applicable to the particular case, and in fact such consideration was “highly material”. This was on account of the fact that if there was going to be a transfer of collateral value, this may adversely affect the rent achievable and therefore the investment value of the property in the future. The Landlord referred to cases, which supported this argument, and stated that it was reasonable for the Landlord to request the required information, in advance of making a decision on granting or not granting consent. The Landlord was therefore justified in withholding consent to the proposed assignation.
Decision
The judge agreed with the Landlord and held that the payment of a rent subsidy or reverse premium is something which may reasonably form part of a Landlord’s considerations when deciding whether to permit to an assignation. Therefore it is reasonable for a Landlord to ask to see any supporting information in advance of making such a decision on the granting of consent.
The judge agreed that a two-step test applies in this case. The question of whether the proposed assignee is of good financial standing and capable of fulfilling the Tenant’s obligations is to be answered on an objective basis and does not involve reasonableness. Reasonableness only comes into play in the second part of the test. This allows the Landlord to reasonably withhold consent on a basis unconnected to the financial standing of the proposed assignee, so long as the reason is connected to the Landlord-Tenant relationship in respect of the lease.
The full judgment is available by clicking on this link here.
Contact our Commercial Property Solicitors in Glasgow
If you have any concern regarding a real burden affecting your property, or a property that you are looking to purchase or lease, following review of this blog article, please do not hesitate to seek legal advice from the Commercial Property Team at Miller Samuel LLP.
