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A lease of commercial property will almost always include covenants (legally binding promises) dealing with assignment, subletting and other forms of passing on the benefit of the lease. Landlords should ensure that any application from a tenant to assign or sub-let a lease complies with the terms of the lease. If the lease includes a covenant by the tenant not to assign, underlet, charge or part with possession without the consent of the landlord or another person then it is implied that the consent is not to be unreasonably withheld or delayed.
Duty to give consent
The Landlord and Tenant Act 1988 imposes obligations on a landlord who receives an application for consent to assign or sublet, where such consent is not to be unreasonably withheld. The landlord must:
The landlord needs to be able to show that these duties have been complied with.
What is a "reasonable period"?
The relevant period will start from the date of the tenant’s application for consent. However, the landlord is entitled to know the true nature of the transaction and to be given sufficient information to enable it to make a decision and so it is generally the case that the relevant time period will not start until this information has been provided to the landlord.
The Court’s current view on what is a reasonable time to respond to an application for consent is that this will usually be measured in weeks rather than days, and even in complicated cases it should be measured in weeks rather than months.
The landlord must notify the tenant promptly once it has made its decision.
When will it be reasonable to withhold consent?
As with the “reasonable period” issue, the question of when it will be reasonable to withhold consent is to be established in each case upon the specific facts. However, there are a number of guiding principles:
If a tenant makes an application for consent to assign or sublet and the landlord delays or refuses this, a tenant has two options:
If the lease provides that the tenant requires the landlord’s consent and that this shall not be unreasonably withheld, a tenant who considers the landlord has acted unreasonably in refusing consent is able to assign or sublet anyway. This then places the burden upon the landlord to take some action to restrain the tenant. The obvious risk is that the tenant misjudges the landlord’s refusal and the landlord is then able to seek damages, an injunction or forfeiture of the lease and significant legal costs.
A more secure route for the tenant is to make an application to the Court for a declaration on the issue. Here, the burden is on the tenant to prove the unreasonableness of the landlord’s conduct at the date consent was withheld or the date of the claim if the landlord did not respond. Those proceedings can include a claim for damages against the landlord if the landlord is in breach of its duties. The damages can also be punitive (i.e. designed to punish the landlord rather than compensate the tenant).
Under the 2007 Lease Code (an industry code of practice), landlords should generally allow assignments where the covenant strength package of the incoming tenant and any guarantor equals that of the outgoing tenant and its surety. Authorised guarantee agreements (being a guarantee by the tenant of the assignee’s performance of the lease covenants) should only be required when the package strength is not equal or the assignee is resident overseas. However, it remains market practice for landlords to require an authorised guarantee agreement as a matter of course.
Inadvertently granting consent
Landlord’s need to be careful to avoid granting consent in correspondence before completing a licence to assign or sublet. The phrase "consent in principle" has been held to amount to the grant of consent. The landlord should therefore make it clear in its initial response that the landlord's consent will not be given unless and until it is embodied in an executed and completed licence to assign.
There are very strict rules and time limits relating to applications by tenants to assign or sublet. Any landlord who receives an application for consent from a tenant must therefore act without delay and take independent professional advice.