Assignments and sublets – getting the landlord’s consent

Lease terms

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:

• give consent within a reasonable time, except where it is reasonable to withhold the consent;
• serve notice of its decision on the tenant in a reasonable time specifying any conditions or giving reasons for a refusal; and
• pass on the application within a reasonable period to any relevant third party – it is important to establish at an early stage if there are superior landlords or other third parties whose consent is required.

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:

• A landlord is not entitled to refuse consent to an assignment on grounds that have nothing to do with the landlord and tenant relationship and the subject matter of the lease.
• It will be reasonable to refuse consent or impose conditions if this is necessary to prevent the tenant from adversely affecting the landlord’s existing rights and interest in the property.
• A landlord is entitled to take into account its other property interests as a whole (e.g. good estate management reasons).
• A landlord is entitled to be satisfied that the proposed new tenant (the assignee) is able to pay the rent and comply with the lease covenants on an assignment.  This is particularly relevant where there is disrepair. The landlord may therefore consider additional security (e.g. guarantees and rent deposits).  The financial standing of the proposed undertenant is of less significance in a sub-letting.
• A landlord of a property with numerous units is entitled to consider the type of business of the proposed new tenant and whether this accords with the landlord’s tenant-mix policy.
• A landlord can take into account serious disrepair and persistent failure to remedy breaches of the lease.
• A landlord cannot consider the loss in value of the freehold title where the landlord has no intention of selling it.

Remedies

If a tenant makes an application for consent to assign or sublet and the landlord delays or refuses this, a tenant has two options:

•     Proceed without consent; or
•     Make an application to the Court for a declaration that it is entitled to proceed.

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).

Lease Code

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.

Summary

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.