Quick read

Assignment – can you just say no?

Gateley Legal

How reasonable are you if, as a landlord, you refuse to allow your tenant to transfer (assign) its leasehold interest on the basis that you consider that your own interest in the property will be adversely affected by the proposed new tenant’s covenant strength – ie are they going to be as good a financial bet as your current tenant?

An easy question to answer? 

Your first port of call is the lease: almost all leases now say that the tenant can only assign with the consent of the landlord (and, of course, you’re not allowed to unreasonably withhold or delay that consent).

Even if the lease does not say this, however, it will be implied[1].  Landlords have a statutory duty to act reasonably[2]: in addition to which you must give, or reasonably withhold, the consent within a reasonable time after the tenant’s application.  All sounding very reasonable?

Can a landlord ‘reasonably’ withhold consent? 

Well, ‘it depends on the facts’ seems to be the answer and most importantly it is for you, as landlord, to prove that it is reasonable to withhold consent.

When you’re asked to agree to an assignment it’s usual to review the proposed assignee’s accounts for evidence of profits exceeding the rents due by three times. But is this lawful? The practice was reviewed some time ago and the court[3] warned against trying to ‘reasonably’ withhold consent in circumstances in which the proposed assignee failed to satisfy this arbitrary test. In any question over reasonableness, the court will be keen to review a number of factors and it is essentially a balancing act between both parties’ interests.  

What if the proposed assignee’s covenant strength is ok but not as good as the covenant strength of the existing tenant?

Even if the value of your own interest in the property might be detrimentally affected by a proposed assignment, if the prejudice to the tenant resulting from a refusal of consent outweighs that of a landlord who has no immediate plans to sell that interest, withholding consent will not be reasonable[4].

By contrast if you do have a firm intention to sell, such that you would suffer an actual loss if an assignment to a reduced covenant tenant took place, this would outweigh the detriment which the tenant would suffer by not being given consent to assign[5]. In this case, you would be able to reasonably withhold consent.

Respectability – not such an old fashioned concept 

But it’s not only detrimental effect on the value of the landlord’s interest which allows you not to agree to the proposed assignment. Landlords are entitled to refuse consent where the proposed assignee does not have a proven record of respectability in circumstances in which the lease specifically requires that the assignee must be ‘respectable and reasonable’. The court has agreed that it’s perfectly okay for the landlord to withhold consent in cases where the assignee is a newly incorporated company with no track record.[6]

So, landlords, if you want to show how reasonable you are in refusing consent to assign to someone who is not as financially sound as you would like, you need to show clearly how the damage to your own interests in granting consent will outweigh the prejudice to the tenant if you do ‘just say no’.

[1]Section 19(1) Landlord and Tenant Act 1927

[2]Section 1  Landlord and Tenant Act 1988

[3] Footwear Corporation Ltd -v- Amplight Properties Ltd [1998] EWHC Ch 313

[4] International Drilling Fluids Ltd -v- Louisville Investments (Uxbridge) Ltd [1985] EWCA Civ 3

[5] Ponderosa International Development -v- Pengap Securities [1986] 1 E.G.L.R. 66

[6] Royal Bank of Scotland Plc -v- Victoria Street (No. 3) Limited [2008] EWHC 3052 (Ch)

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