Landlords win victory on grounds for refusing a tenant consent to assign

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Emma Wells discusses the recent outcome in No.1 West India Quay (Residential) Limited v  East Tower Apartments Limited [2018] EWCA Civ 250.

The Court of Appeal has held that where a landlord refuses a tenant’s request for consent to assign its lease (in circumstances where it has a duty not to unreasonably refuse consent) based on multiple separate reasons, some of which are reasonable and some of which are not, the overall decision to refuse consent can still be valid, so long as the bad reason(s) don’t vitiate the good ones. There is no obligation on the landlord to prove that each of his reasons for refusal is reasonable.

Landlord and Tenant Act 1988

Where a lease prevents a tenant from assigning a lease without the landlord’s consent, the 1988 Act imposes the following duties on the landlord:

  • to consent to the assignment unless it is reasonable not to in the particular situation; and
  • to give the tenant written notice of whether or not he consents to the assignment, including:
    • if the consent is given subject to conditions, the conditions; or
    • if consent is withheld, the reasons for withholding it.

A landlord who gives consent subject to an unreasonable condition does not satisfy his duty to consent unless reasonable not to. The burden of proof is on the landlord to prove that any conditions are reasonable or, if he refuses consent, that it was reasonable for him to do so. The Act gives the tenant a right to recover damages from the landlord if it can show that the landlord has breached its obligations under the 1988 Act and in doing so has caused him to suffer loss.

Landlord’s refusal to consent to assignment

The tenant owned 999-year leases in a number of flats forming part of a high end residential apartment complex in West India Quay. It sought the landlord’s consent to assign its leases to third parties. The landlord refused consent for the following reasons:

  1. The tenant refused to undertake to pay the landlord’s legal costs in the sum of £1250 plus VAT per flat (each lease contained the usual provision allowing the landlord to recover its costs in relation to an application for consent to assign).
  2. The tenant refused to pay the costs of the landlord’s surveyor inspecting each flat as part of the consent process in the sum of £350 plus VAT per flat (the landlord required an inspection to check whether there were any existing breaches of the lease).
  3. The tenant failed to provide a UK bank reference for each of the proposed assignees, which the landlord required in order to assess their covenant strength (the landlord having served notice of intention on the tenants for proposed works which were estimated to cost over a £1 million and which the proposed assignees would be liable to contribute to through the service charge).The tenant sought a declaration that the landlord has unreasonably refused consent to the proposed assignments or, in the alternative, that it had imposed unreasonable conditions on the assignment.

County Court – Found for the tenant

The County Court held that all three of the landlord’s reasons were unreasonable and it was in breach of its obligations under the 1988 Act:

  • Legal costs – the landlord couldn’t show its costs to be any greater than £350 plus VAT per flat so the sum demanded was too high.
  • Inspection and bank reference – these requests could not be justified given the landlord’s limited reversionary interest in the flats.

High Court – found for the tenant

On appeal, the High Court determined that the County Court was wrong to find that the landlord’s requirements for an inspection of each flat and a bank reference from the proposed assignees were unreasonable. In the circumstances, these were good reasons for refusing consent.

However, the question of whether the legal costs sought by the landlord were reasonable was an assessment for the County Court to make on the factual evidence available to it and it has been entitled to determine that the costs sought were too high.

This led to the question whether the landlord was entitled to rely on its two good reasons for refusing consent?

As a matter of law, “if the landlord has a good and a bad reason for withholding consent, consent may nevertheless have been reasonably withheld if the good reason is a sufficient reason and is not otherwise vitiated by the bad reason. However, there may be cases where the real reason for refusal is a bad one, and the good reasons are no more than makeweights, or where the bad reason vitiates the good one. In the absence of such factors, the landlord is entitled to rely on his good reason”. (Woodfall on Landlord and Tenant)

The High Court found that, on the facts, even if the tenant had complied with the two ‘good requests’, the landlord would still not have consented to the assignment without an undertaking for its costs of £1250. Accordingly, the bad reason vitiated the good ones, and the landlord’s refusal was unreasonable.

Court of Appeal – found for the landlord

The Court of Appeal decided that the landlord was entitled to rely on the two good reasons for refusing consent, even if one of its reasons was unreasonable:

  • The 1988 Act provides that granting consent subject to an unreasonable condition is a breach of the landlord’s duty to give consent – even if other conditions he seeks to impose are reasonable.
  • BUT if the landlord refuses consent all together there is no requirement that all his reasons must be reasonable ones.
  • The landlord is under a statutory duty to notify the tenant of all of his reasons for refusing consent – good and bad.
  • The burden is on the landlord to show that it was reasonable for him to refuse consent, not that each of his reasons for that refusal was reasonable.
  • The Court of Appeal rejected the tenant’s argument that the 1988 Act prohibited the landlord from putting forward a mix of good reasons and bad reasons. It wasn’t always clear cut what was a good reason and what was a bad one, as the different decisions in the County and High Courts in this case demonstrated.
  • If a landlord overloads his refusal notice with bad reasons he increases the risk that the bad reasons will vitiate the good ones.

The High Court judge asked himself the wrong question. The question was not: would the landlord have maintained the unreasonable reason if the reasonable conditions had been complied with? Rather it is: would the landlord still have refused consent on the reasonable grounds, if it had not put forward the unreasonable ground? To put the point another way: the question is whether the decision to refuse consent was reasonable; not whether all the reasons for the decision were reasonable. Where, as here, the reasons were free-standing reasons each of which had causative effect, and two of them were reasonable, the decision itself was reasonable.

The tenant has sought permission to appeal to the Supreme Court.