Landlord’s consent: making the right decision

It is very unusual to have a commercial lease which gives the tenant free reign to assign, underlet, charge or part with possession of its lease, without first getting the consent of its landlord.  Most commonly, the consent clause has a proviso that the landlord cannot unreasonably withhold consent, but what does that mean in practice - can the landlord refuse on a whim, insist on conditions or simply not respond?

The answers lie within the Landlord and Tenant Act 1988 (LTA 1988) which governs how landlords should behave when handling a request from a tenant, whether in a written consent or a formal licence.

Under the LTA 1988, the landlord is under three main duties:

• a duty to give consent, except in a case where it is reasonable not to give consent;
• a duty to give written notice of the decision, including whether the consent is subject to any conditions and if refusing consent, the reasons for doing so; and
• a duty to pass on applications for consent to the appropriate people, e.g. a superior landlord or mortgagee.

In addition, when a landlord receives a written application for consent, it is under a statutory duty, within a reasonable time to give consent, except where it is reasonable not to give consent.

When is it reasonable to refuse consent?

The burden of proof is on the landlord to show that it is acting reasonably if it withholds consent, and what constitutes being “reasonable” depends on the circumstances.  This is not always that easy to assess as illustrated in the following examples:

• Breach of covenant: It may be reasonable to refuse consent where the tenant is in breach of covenant, although that in turn, will depend on the seriousness of the breach and how easily it can be remedied e.g. a minor breach of a repairing covenant is unlikely to entitle the landlord to withhold consent.  Although if the landlord reasonably believes that the proposed assignee will commit substantial breaches of covenant if it took over the lease, this could amount to a reasonable refusal of consent.
• Rent: Where a lease provides that any underlease must be at an open market rent approved by the landlord, it will be unreasonable for the landlord to refuse if the tenant can show that the proposed underlease rent is comparable for the property.
• Covenant strength: It is reasonable tor a landlord to want to be satisfied that a proposed assignee is of sufficient covenant strength to pay the rent and perform the covenants and it would be entitled to see evidence of this.  Although in the case of an underletting, the financial standing of the under-tenant has been held to be of less importance, and therefore not automatically a good reason to refuse consent.
• Guarantors: Making consent conditional on providing a guarantor must also be shown as reasonable, but the landlord is entitled to ask for confirmation of the guarantor’s financial position and that it is able to meet all its liabilities (not just the rent under the lease).
• Estate management: This is another tricky ground as it may be reasonable to refuse consent in certain circumstances.  For example, in a shopping centre where maintaining the right mix of retail tenants is important and the proposed assignee would affect that.  However the landlord would have to provide evidence that its policy had been made clear to the tenant.  With a change of use, it may be reasonable to refuse consent if the landlord believes that the assignee’s proposed use of the property will result in a breach of the user covenant.
• Competition: It may be reasonable to refuse consent where the proposed assignee will be in competition with the landlord and this would include competition with any other properties owned by the landlord in the vicinity.  However, it depends very much on whether the damage to the tenant is disproportionate to the likely damage caused to the landlord if consent is given.
• Superior landlord’s consent: Surprisingly, if the lease is an underlease, the fact that the superior landlord unreasonably refuses consent does not entitle the landlord to refuse consent. Although consent can be given subject to a condition that the superior landlord's consent is obtained.
• Payment of costs: An undertaking for the payment of the landlord’s costs is a common condition for giving consent, but again, the request should be to cover the landlord’s reasonable costs.  The landlord cannot insist on receiving the undertaking for costs before dealing with the application for consent.

What is a reasonable time?

A landlord who uses delaying tactics to avoid responding to a request for consent may find this will backfire; if a decision in writing is not given within a reasonable time, consent will be deemed to have been refused.  The consequences can be serious as the landlord is then prevented from relying on any ground for refusal which would have been reasonable, had they given a decision within a reasonable time.

What constitutes a “reasonable time” can differ in each case, but generally, a decision should be made in days or weeks rather than in months.  It can make a difference if the tenant asks for the application to be dealt with urgently, so a request of this type should not be ignored as a shorter timescale may be regarded as reasonable.

Once the landlord gives consent, it must then issue that consent in writing or complete the appropriate licence to assign or underlet promptly.  If the landlord refuses consent, then its reasons must be given in writing; all the reasons should be included as it cannot rely, at a later date, on any reasons not specified in the written notice.

The danger of getting it wrong

A landlord in breach of its statutory duties under the LTA 1988, runs the risk of its tenant suing for damages, which can be punitive, and in some cases, obtaining an injunction.  The tenant can also use existing remedies to apply to the court for a declaration that consent has been unreasonably withheld or delayed.  If granted, the declaration allows the tenant to do what it requested consent for, without formal consent, although this option can be time-consuming.

It is not unreasonable for a landlord to want to protect its valuable assets, but that has to be balanced against the need for its tenants to obtain consents which can be critical to their ability to adapt to changing times, but one thing is clear - taking legal advice is crucial to avoid falling foul of the law.