It is known that the landlord should consent the assignment of a lease. But what is the process followed in doing so, and is he allowed refusing consent without reason? The following discusses aspects related to the landlord’s consent.
In the case of a grant of commercial assignment, the landlord’s consent is a must. In the case of long-term residential lease, it is uncommon to seek the landlord’s permission, unless it is a high value property. Consent would involve the seller’s and the buyer’s involvement.
Covenants that bar the tenant’s freedom to assign also imposes other controls like sub-letting or charging etc. In case, the landlord’s permission is required it should be in the form of a proper licence.
References
When the seller’s permission is required to assign, he takes up references on the buyer to make sure that he is solvent and maintains a good record. He should be asked to supply the names of a few references who can vouch for the buyer. References from the following sources are generally valued higher;
a) A current landlord
b) The Buyer’s Bank
c) The Buyer’s employer
d) A professional person such as an accountant or solicitor
e) A company or person with whom the buyer regularly trades, and
f) Audited accounts for the past three years if the buyer is a company or a self-employed person.
Surety
Sometimes a surety is required to be provided by the guarantor before consenting. In the case of a commercial lease, the landlord may require that the seller enters into an AGA to ensure performance of the covenants. The AGA is sometimes added in the lease itself as a pre-condition for the consent. In such a case, the landlord can insist on the seller entering into the AGA irrespective of the fact that it is reasonable or not. When it is not inserted in the lease, the landlord can demand an AGA only when it seems reasonable. If the tenant has provided a surety, this cannot be required in an AGA to guarantee the obligations of the incoming assignee.
Types of covenants-Absolute covenant
When the terms of the lease clearly mentions that the tenant shall not assign or part with the possession of the property, it is said to be an absolute covenant and any assignment can be considered as a breach causing forfeiture of the lease. Absolute covenants are not subject to any restrictions on its operation except those imposed by the Equality Act 2010.
When an absolute covenant exists, the tenant can ask for the permission of his landlord before undertaking the assignment. But the landlord is not obligated to agree; he can refuse permission even without giving reasons for the same. Such absolute covenants are never accepted in the case of long term leases as these would never be accepted by a prospective lender. Of course, the landlord can waive the covenant and grant permission for assignment, but there is no guarantee that he may consent to a further disposition. Buyers would therefore find the property to be unsaleable.
Types of covenants – Qualified covenants
A qualified covenant allows the tenant to assign if prior permission is obtained from the landlord. This is covered under Section 19 of the Landlord and Tenants Act of 1927 where it is also provided that no landlord may withhold his consent unreasonably. When the landlord refuses consent, the prospective buyer may not usually proceed with the assignment as he runs the risk of his lease being forfeited.
The Landlord and Tenant Act of 1988 provides that after receiving a written request from the tenant, the landlord must give his consent within a reasonable time unless there is sufficient reason to withhold it. This consent should be in the written form stating the conditions (if any) that are attached to the consent, or when the consent is refused the reasons for the same. Breach of the landlord’s duty under the 1998 act is considered as a breach of statutory duty.
With respect to leases of commercial property that were granted on or after 1st of January 1996, the lease itself provides the circumstances in which the landlord is allowed to withhold his consent, along with the conditions that are required for the consent. A landlord cannot withhold his consent unreasonably, if his insists upon compliance of the conditions. Therefore it helps when the buyer and the seller both take effort to understand the conditions and ensure that they can be complied with.
With respect to commercial leases prior to 1st January 1996, buyers are required to enter into a direct covenant with the landlord to comply with the covenants of the lease. This should be explained to the buyer by his solicitor, as he shall remain liable for the covenants even after his subsequent disposition.
Demanding a premium for consent
Unless, the lease specifically mentions that the tenant is required to pay a premium for the grant of consent, the landlord cannot ask for one as a condition.
Undertaking for landlord’s consent
It is within the landlord’s rights to ask the tenant to pay his solicitor any reasonable charges accrued in the process of preparing the consent deed (also called the licence to assign). In fact, upon assignment of a commercial lease the landlord’s solicitors need an undertaking from the seller’s solicitors that the seller shall compensate for the costs involved in preparing the consent licence. The seller’s solicitor should first consult his client and seek his permission before giving the undertaking. And when an undertaking is provided, this should be limited to reasonable costs incurred and a cap for these costs should also be sought.
Standard conditions of sale
As per Standard Conditions 8.3, the seller should apply for the landlord’s permission at his own expenses and use reasonable efforts to obtain such consent. Among the efforts that are required include carrying out conditions set out by the landlord, providing references etc. Unless a breach of obligations has occurred, either party to the contract is allowed to rescind the contract if consent is not provided within 3 days prior to the completion date, or if consent is provided, but the seller does not agree to the conditions set by the landlord. Although parties are allowed to rescind the contract, the uncertainly whether the transaction can proceed or not depends on the consent.
In transactions where timing is very important, it is best not to carry out exchange of contract unless permission is provided. Or else, the transaction may fall through, but the depending transaction would be binding.
Standard commercial property Conditions
The SCPC contains detailed provisions to help tenants and landlords understand situations where permission is required from a landlord or superior landlord to an assignment or sub-letting. The SCPC also requires the seller into an AGA if the same is required under the law. Standard Commercial Property Conditions further provides that when the landlord’s consent was not obtained by the completion date, the completion should be postponed until five working days after the seller informs the buyer that consent has been given, or until four months after the original completion date whichever is the earlier. Also, when the timing of the completion is important, it is better to postpone until consent has been obtained.
Photo courtesy: WalkingGeek
