Commercial Property Focus - May 2009
Time to assign
Landlord’s consent to
assign
In the current climate, the residential market
is seeing a growing frequency of applications from tenants to their
landlords for consent to assign their leases to third parties. The
current financial pressures on both landlords and tenants mean this
is now an area where disputes are increasing.
From a landlord’s perspective, granting
consent for the tenant to assign is undesirable where that tenant
is already abiding by its covenants and paying the rent as it could
potentially disrupt the existing agreement. For those whose tenants
are finding it difficult to keep up with the rent payments and so
wishing to escape from their rental liability, it may be a better
prospect to consent rather than having an unhappy tenant who is
struggling to abide by their lease covenants.
The law states that landlords are obliged to
respond to a tenant’s written request to assign their lease to a
third party within a reasonable time and provide either an
unqualified approval, approval subject to conditions or refusal
with reasons.
Invariably, speed is paramount to tenants
wishing to assign their interest and complete a deal quickly,
especially when so many transactions are presently failing to reach
the finishing post. In respect of speed, the law is firmly on the
side of tenants, and landlords are ordinarily required to make a
decision within weeks.
Failure to act within such a timescale puts
landlords in breach of their statutory duties and can mean that
tenants are permitted to assign the lease irrespective of the
landlord’s wishes. More commonly, tenants will make an application
to Court for a declaration to this effect with an award for legal
costs and compensation. Accordingly, landlords who have reasonable
grounds for refusal should notify their tenants of that decision
within a reasonable time to avoid losing the right to do so.
Landlords need to be ready to immediately decide upon issues of
consent, taking into account the financial strength of prospective
tenants.
There are two types of covenant relating to
assignment applicable to all leases; first, an absolute covenant
which prohibits assignment absolutely and second a qualified
covenant where the tenant may not assign without the consent or
licence of the landlord. The absolute covenant is rare and the
tenant will be able to assign only if the landlord is prepared to
waive the clause altogether. The qualified covenant means
that assignment may only take place with the landlord’s consent
which must not be unreasonably withheld.
Landlords must begin making their decision as
soon as an application is received and not wait for receipt of an
appropriate undertaking for costs from the tenant’s solicitors. On
a positive note for landlords, they are entitled to base their
decision only upon information provided. Accordingly, unless an
application contains all the relevant financial and covenant
strength information together with any offers of collateral
security if reasonably required, landlords may refuse
consent.
This will effectively stop the clock which
will not re-start until the outstanding information is provided. It
is the tenant’s duty to provide any such additional information and
make further offers of collateral security in order to persuade the
landlord to give consent. Landlords do not have a positive
obligation to tease out information nor state what they require
before they can properly consider a tenant’s application.
In summary, the points to note for landlords
are:
- Clauses in leases for the licence
or consent of the landlord to be obtained prior to assignment
automatically have a proviso added that such consent shall not be
unreasonably withheld.
- The clock begins to tick with
regard to reasonable time as soon as an application is received,
whether this application contains all necessary information or
not.
- They are entitled to reach a
decision based upon the information they have been provided with
and do need to tease out further information from the tenant.
It is best practice for a landlord to make it
clear that consent cannot be provided until a tenant has made a
written application, setting out the details of the assignee and
providing supporting documentation, including evidence of financial
standing, covenant strength and the case for the assignment. The
majority of tenants invariably fail to do this as they are anxious
to set the wheels in motion. In such cases, landlords may lawfully
refuse consent on the basis of the information in front of
them.
The reality is that tenants must have a strong
case to take on landlords, as applying to Court is ordinarily time
consuming, expensive and not without it’s risks. However, those
landlords acting unreasonably will potentially be faced with
significant damages claims being brought against them. The
overriding message to landlords is to act swiftly and reasonably to
avoid potential litigation and further costs.
Peter McHugh
Solicitor
Weightmans LLP
peter.mchugh@weightmans.com