Contracts – Consent to assignment – Leaseholds – Sale by auction

Landlord Protect Ltd v St Anselm Development Co Ltd: CA (Civ Div) (Lords Justice Waller, Wilson, Stanley Burnton): 20 February 2009

The appellant buyer (L), who had contracted to purchase the residue of a leasehold interest belonging to the seller (S), appealed against a decision ([2008] EWHC 1582 (Ch)) that a condition relating to the assignment and imposed by S was reasonable.

The contract had taken place at an auction. A clause in the lease stated that the head landlord’s consent to assignment was required but that such consent should not be unreasonably withheld. The sale contract incorporated the Common Auction Conditions 2002, which specified that the buyer must provide references and other relevant financial information and also, ‘if properly required under the terms of the lease’, execute a licence and provide guarantees, a rent deposit or other security.

L was a dormant company with a sole director (R) and had never traded. It had no accounts and could not provide accountant or bank references. The head landlord (H) therefore stipulated that R had to guarantee L’s performance of its obligations as assignee, but R was only willing to offer a three-year guarantee, which was unacceptable to H. H then sent L a draft licence to assign, which included a clause that R was only to be released from his guarantee ‘in the event of a subsequent assignment of the lease effected with the consent of the landlord’ and if ‘a reasonable alternative guarantor is provided by the assignee pursuant to such subsequent assignment’.

Disputes arose, as a result of which L gave notice to S, rescinding the sale contract on the ground of H's unreasonableness. S did not accept the rescission, asserting that L was in breach of its obligation to complete a licence, and forfeited L's deposit. Court proceedings ensued, in which it was held that H had not acted unreasonably and that H was entitled to require a guarantee. The issue for determination at the present hearing was whether the condition relating to R’s release from his guarantee was ‘properly... required under the terms of the lease’ in accordance with the ­general conditions of sale.

Held: H’s requirement regarding the guarantee was unreasonable under the terms of the lease and inappropriate for the purposes of the Common Auction Conditions. L had been entitled to rescind its contract with S and was entitled to the return of its deposit. Under section 1(6)(b) of the Landlord and Tenant Act 1988 it was for the landlord to show that his refusal of consent was reasonable. Such reasonableness was a mixed question of fact and law, but in the present case, where there was no dispute that H was entitled to require a guarantee, the issue was mainly one of law and revolved around the true interpretation and effect of H’s requirement.

As a matter of law, a lessor could not normally reasonably require a guarantor of the liabilities of an assignee to undertake a liability extending beyond the period during which the term was vested in the assignee, Straudley Investments Ltd v Mount Eden Land Ltd (No1) [1997] 74 P & CR 306 CA (Civ Div) applied. The words in the draft assignment ‘in the event of a subsequent assignment with the consent of the landlord’ referred to an assignment that had taken place before the proviso came into effect, and the words ‘pursuant to such subsequent assignment’ pointed in the same direction.

There would thus be two requirements for the release of the guarantor, the first being a subsequent assignment with consent, and the second being the provision of reasonable alternative security. H was not reasonably entitled to add the second requirement for the release of R as guarantor. H’s position in doing so was unreasonable because it was thus entirely protected against an assignment to an insubstantial assignee, its protection being the right to refuse consent, not the right to refuse to accept the discharge of the assignor’s guarantor.

A landlord owed no duty to a lessee not to consent to an assignment to an insubstantial assignee. In the present case, H could sell the reversion to somebody whose reliability was less certain and R may be unable to extract from a purchaser of L’s shares a suitable indemnity for his liability under his guarantee. R could also find itself involved in a dispute about whether H had got ‘reasonable alternative security’.

(2) (Obiter) The court considered the construction of ‘reasonable alternative security’.

Appeal allowed.

John Furber QC (instructed by McGrigors) for the appellant; Martin Rodger QC (instructed by Guy Clapham & Co) for the respondent.