Author: Jennifer Guest
This article was published in Property Investor News on 1 August 2017 and is reproduced with kind permission.
This case involved a dispute between the tenant (in administration) (TCG) and the defendant (Girdlers) in relation to the proposed assignment of a lease of pub premises in London. The lease contained a provision prohibiting assignment without the consent of the landlord, such consent not to be unreasonably withheld, but prior to seeking consent the tenant was obliged to grant an option to the landlord at its market price.
The tenant went into administration and its administrators entered into a business purchase agreement with a purchaser. The tenant claimed to have made the offer to take back the lease and that the landlord failed to accept it. The tenant also claimed that it sought consent to assign. The landlord disputed that such an appropriate offer was made and also whether the tenant (as opposed to the assignee) had made a valid application for consent. There was also a dispute as to whether the landlord was unreasonably withholding consent in insisting upon a rent deposit or guarantee.
The judge’s comments serve as a useful reminder of the perils of not complying with the exact terms of the lease and incorrectly making an application to assign.
Unusually, the lease provided that if the tenant wished to assign or sublet the pub, it must first grant an option to the landlord. The landlord then had 60 days in which to exercise the option and buy back the residue of the lease term at the current open market rent.
The tenant’s lawyers had written to the landlord offering them the opportunity to buy the lease for the sum of £1.7 million in accordance with the business purchase agreement.
The judged ruled that the buy-back clause could not be operated by a letter of notice as the lease required a formal grant of an option. Additionally, the sum of £1.7 million, although the value attributed to the lease in the business purchase agreement, was not the market value.
The tenant had not then complied with the buy-back clause in the lease and it was therefore not validly triggered. It is therefore important to consider the exact wording of the option in a lease to ensure that the requirements are complied with correctly.
As is often the case with insolvency scenarios, the proposed assignee’s solicitors wrote to the landlord requesting permission to assign. The letter did not give any indication that it was written on behalf of the tenant or written with the tenant’s authority. Whether a valid application had been made impacted on whether the landlord had acted reasonably, but also on when the “clock” started and whether a related first refusal deadline had expired.
The business purchase agreement gave the proposed assignee authority to make the application (on behalf of the existing tenant). However, the application letter did not mention this. The judge ruled that the initial application for consent to assign was therefore invalid on the basis that the application did not explicitly state that it was being made with the tenant’s authority. While the judge ruled that the application was subsequently validated (from the date that authority to make the application was communicated), this resulted in the clock starting at a later date.
This provides a useful reminder that if the proposed assignee does make the application for consent to assign, it needs to be made absolutely clear that the assignee is acting with the authority and on behalf of the existing tenant. Otherwise the clock will not start running, for the purposes of whether the landlord has responded within a “reasonable time”, until the authority is communicated to the landlord.
This could be particularly significant if it is important to commence trading from the site promptly, for example to ensure the continuity of trading or avoid losing any goodwill. As court proceedings often take some time to be determined, a question over the validity of an application can create significant unnecessary uncertainty and costs.
The first application to assign, or indeed any other notice given under the lease, forms an important part of the assignment process and it is therefore important to get legal advice on the content and service of such notice.
The final point that was considered was whether a landlord is unreasonably withholding consent if it requested a rent deposit when this was not specifically allowed under the lease. Although irrelevant in this case, as the option had not been validly granted and the application to assign was not made correctly, if these points had been satisfied then the judge commented that the landlord would have been unreasonably withholding consent in asking for a rent deposit as they were not able to do so under the lease. It is therefore important to consider the conditions that a landlord may wish to impose when granting consent to assign and ensure that these are set out in the lease.
Jennifer Johnson, Associate, Fladgate LLP (firstname.lastname@example.org)