It is common practice for leases of commercial properties to contain a prohibition on the tenant being able to assign or otherwise transfer their interest in the lease to another party without the prior written consent of the landlord.
The landlord's consent is not to be unreasonably withheld in the case of a sub-tenant or assignee of sound financial standing and demonstrably capable of fulfilling the tenant's obligations in terms of the lease.
In a recent decision in the Court of Session at Edinburgh (Homebase Limited v Grantchester Developments (Falkirk) Limited  CSOH49) the court required to consider whether or not the landlord was unreasonably withholding consent to a proposed assignation where it was accepted by all parties that the proposed assignee was of sound financial standing and demonstrably capable of fulfilling the tenant's obligations. The problem was that the landlord had requested the tenant to confirm further details of the proposed transaction between the existing tenant and the proposed assignee. In particular the landlord requested details of any reverse premium or other intended financial arrangement that would relate to the rent payable under the lease following the transfer. It was recognised that such an arrangement might include, for example, the outgoing tenant agreeing to subsidise the rent payable by the Assignee.
The Homebase lease contained express prohibitions on subletting i) unless the rent payable under the sub-lease was equal to or greater than the open market rent and ii) if there was going to be any unreasonable incentive or rent free period to the subtenant. However there were no similar express prohibitions applicable to an assignation.
The judge relied on the following principles from established case law: -
- a landlord is not entitled to refuse his consent to an assignment on grounds which have nothing whatever to do with the relationship of landlord and tenant in regard to the subject matter of the lease (International Drilling Fluids Limited v. Louisville Investments (Uxbridge) Limited  Ch 513)
- the test requires a two stage approach when assessing the decision of the landlord (Bates v. Donaldson  2QB 241)
In the first stage the landlord requires to carry out an objective exercise in assessing whether or not the prospective tenant is of sound financial standing. If they are, then the landlord moves on to considering other factors that might determine whether or not it is reasonable or otherwise to refuse to give their consent. In relation to that second stage, the landlord's consent can be withheld only if to do so is reasonable, and in order to be so it requires to relate to a matter bearing upon the relationship of the landlord and tenant in regard to the subject matter of the lease, and must not be a matter that is collateral to that.
In the case, the judge held that the landlords were acting reasonably in refusing consent pending disclosure of the proposed financial arrangements between the existing tenant and proposed assignee. The rationale was that such arrangements might well have an impact on any future rent reviews, were not collateral to the landlord/tenant relationship and they therefore might reasonably affect the landlords decision whether or not to grant consent.
In summary, if commercial landlords are considering withholding consent to a proposed assignation or sub-letting, they should firstly ensure that they have fully considered the terms of the lease. Secondly, if it is accepted that on an objective basis the proposed assignee or sub-tenant is in a position to meet the financial and other obligations under the lease then they may at that point be able to move on to consider whether or not it would there are other good reasons why consent should not be given. It is likely that the final stage will require the landlord to act reasonably and so if the decision is to refuse consent the landlord should be prepared to prove that in so doing they have relied upon relevant and material factors.
If you would like further information about the topic discussed above, please get in touch with Graham Reid in our Edinburgh office on 03700 86 8061.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.