Unreasonably withholding consent from tenants – Can landlords really say no?…

For various reasons tenants operating from commercial premises pursuant to a lease seek to assign their leases or to grant subleases of the whole or part of their premises.  The tenant’s lease will have specific provisions determining if that lease can be assigned or a sublease of part or whole of the premises can be granted.

Most leases contain a clause which provides something along the lines that a tenant must not assign, transfer, mortgage or otherwise deal with the lease or its interest in the premises, or sublet or part possession with the premises without the consent of the landlord, which must not be unreasonably withheld or conditioned.

The requirement that the landlord’s consent cannot be “unreasonably withheld or conditioned” can create some uncertainty for the tenant seeking to assign the lease as it does not clearly set out criteria on which the landlord must base its decision to grant or withhold its consent.

Obligation or proviso?

Case law suggests that the requirement that the consent is not unreasonably withheld is not a contractual obligation, covenant or promise by the landlord, and is generally considered a proviso.  It flows from this that if the landlord unreasonably withholds its consent it is not a breach of the lease and does not entitle the tenant to sue the landlord for damages.

Does this mean that if a landlord does unreasonably withhold its consent that the tenant is free to assign or sublease the premises without consequence?  If the clause provides that the tenant cannot assign or sublease without the landlord’s consent, and that consent cannot be unreasonably withheld, then if consent is unreasonably withheld where does that leave the tenant?  The tenant may be in the position of having to seek a declaration from an appropriate court or tribunal clarifying its right to assign or sublease the premises.

In circumstances in which a tenant was seeking to commence proceedings against a landlord for unreasonably withholding its consent, the onus of proof would be on the tenant and the tenant would need to establish that the landlord was unreasonable in withholding its consent.

A tenant that is already in the position of wanting to assign its lease, for reasons which could include its inability to continue to pay the rent, would probably choose not to pursue an action against a landlord.  Any potential court action is likely to be costly and time consuming.  It would involve the tenant having to prove the landlord acted “unreasonably” with, in some instances, little guidance as to how a court may determine the standard of what is reasonable in the circumstances.  Similarly, it could be argued that the landlord has little to gain from refusing an assignment in circumstances in which the current tenant can no longer pay its rent.

Grounds on which consent may reasonably be withheld

There have been some judicial decisions which have helped to clarify some grounds on which a landlord may be able to justify withholding its consent to an assignment of lease.  These grounds include:

• When the character and personality of the proposed assignee is in question, including when references provided by the assignee were inadequate or not satisfactory to the landlord.

• Circumstances in which the financial position of the proposed assignee is in question.  This may apply even in circumstances when the landlord has a reasonable apprehension regarding the assignee’s financial capacity to perform its obligations under the lease.

• If the assignee’s intended permitted use is a use previously not permitted under the lease or a use which can be shown to be illegal or immoral or is likely to devalue the premises.

• When the assignee can be shown to be seeking the assignment for a collateral purpose which goes beyond the acquisition of the lease and may cause financial loss to the landlord (this ground arises primarily from the UK where assignees were seeking assignments of leases to obtain a “protected status” as tenant).

• Circumstances in which the assignee does not provide the landlord with a comprehensive and well documented application when seeking an assignment.  This can include omitting financial statements, references or failing to provide guarantors if requested.

• When the assignee has failed to meet any specific criteria which has been set out in the assignment provision in the lease document.

Grounds on which consent may not reasonably be withheld

Similarly, there have been decisions which have helped to clarify circumstances in which the landlord may not reasonably withhold its consent:

• Circumstances in which the landlord withheld its consent to obtain a collateral purpose or collateral advantage which the landlord is not permitted to obtain under the guise of refusing or approving an assignment.  For example, if a landlord was seeking to obtain an increase in rent from an assignee, the landlord is seeking to resume possession or prefers a different tenant to the proposed assignee.

• The tenant has previously breached the lease and the landlord retains claims against the tenant.

• Circumstances in which the landlord is requiring the resolution of a dispute between it and the tenant as a condition of providing its consent to an assignment.  For example, agreement as to whether a particular item of property in the premises was a fixture, or the requirement that litigation between the parties which was on foot as to the rent payable under the lease was settled.

There is also case law which suggests that a tenant may only require the landlord to consent to an assignment of the existing lease.  There is no obligation on the landlord to agree to grant a new lease to the tenant’s proposed assignee instead of assigning the current lease and the refusal to do so cannot constitute the refusal of a consent to an assignment.

Although these grounds provide some guidance in terms of the circumstances in which a landlord may and may not withhold its consent, it is important that each case is assessed on its individual facts and circumstances.  Clearly, a major factor which must be taken into account by the parties is the wording of the relevant assignment and subleasing provisions in the lease in question.

Tenants should take care when preparing assignment applications that they provide the landlord with all of the information which is required to be given to the landlord pursuant to the relevant assignment provision in the lease.  Failure by the tenant to provide essential information may give the landlord grounds on which it can withhold its consent to the assignment.

**This article does not apply to premises under the Commercial Tenancy (Retail Shops) Agreements Act 1985.

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