An important process that often accompanies a sale of a business is landlord consent to the assignment of lease. Often it is taken as a given that the landlord will consent without much thought. But what are the parties’ rights and obligations when a landlord does in fact withhold consent?
The provisions relating to landlord consent are contained in sections 224 to 227 of the Property Law Act 2007 (PLA). These sections provide a code for the exercise of the landlord’s discretion.
As a starting point, a landlord cannot unreasonably delay consent. There is no fixed time period as to what might constitute an unreasonable delay and whether a landlord is in breach of this section will depend on the facts of each particular case. However, the landlord must notify the tenant within a reasonable period of time in writing that consent is either approved or withheld.
Aside from the timing of the landlord’s decision any decision by the landlord to withhold landlord consent must be reasonable. The PLA does not provide much guidance on what will be unreasonable but requiring an additional payment (other than standard meeting of legal fees) and imposing a condition of the consent (e.g. variation of the lease terms) are considered on their face unreasonable. Even without these issues if a landlord refuses consent to a solvent and reputable tenant who is to operate the business consistent with the lease then a landlord may find it hard to legitimately withhold consent. In the case of assignment, of primary concern to a bona fide landlord will be the experience and creditworthiness of the incoming tenant and their intended use and occupation of the property. Other factors may come in to play and will depend on the reasonableness of the landlord in the overall factual context.
In any event a landlord must consider their reasons for withholding consent seriously as they are obliged to provide reasons if requested by a tenant. This of course exposes their decision to immediate scrutiny by the tenant. Although it is for the tenant to show the “unreasonableness” and ultimately take legal action to enforce rights under the PLA, a tenant that refers the landlord to the PLA may persuade the landlord to be more “reasonable”. Even an assignee or sublessee can seek damages against an unreasonable landlord so the potential consequences to a landlord for unreasonably withholding consent are high.
The parties cannot contract out of the aforementioned provisions of the PLA. A lease could expressly prohibit assignment, sub-leasing or change of use altogether. A concerned landlord could have an absolute probition on the activity requiring consent and simply waive that requirement should the need arise. Although, for locality based businesses, tenants are unlikely to be accepting of these terms as it effectively prevents a sale of their business.
There are a variety of risks to the landlord in the consent process, knowledge of which arms the landlord to avoid future liability. Conversely knowledge in the tenant’s hands can provide leverage to a disgruntled tenant in the event they do not receive consent particularly in the context of the sale of their business.
James Stewart – Solicitor