Applications for Licence to Underlet - The Latest Position - International Law Office

Landlord's Obligations
Facts
Issues
High Court Decision
Court of Appeal Decision
Practical Points

The Court of Appeal recently delivered its judgment in NCR Limited v Riverland Portfolio No 1 Limited, which concerned a tenant's application for licence to underlet. The decision provides valuable guidance to both landlords and tenants dealing with such applications.

Landlord's Obligations

In any tenancy where the tenant has covenanted not to assign or underlet without the consent of the landlord and such consent is not to be unreasonably withheld, the Landlord and Tenant Act 1988 imposes statutory duties on the landlord: (i) to give consent within a reasonable time, except in cases where it is reasonable not to give consent; and (ii) to serve written notice of its decision including, where appropriate, any conditions for the consent or the reasons for withholding the consent.

Facts

NCR (the tenant) had a 25-year lease, which still had 10 years to run. The application for consent was made on June 30 2003. Riverland (the landlord) did not have sufficient information to make a decision until July 28. On August 7 NCR notified Riverland that it required a decision by August 11. Riverland refused consent on August 20.

The rent payable by NCR was £710,000 per year. NCR was permitted to grant an underlease with Riverland's consent provided that the underlease was at "the best rent obtainable in the open market achieved without payment of a premium or other capital consideration". NCR agreed to underlet the premises at £710,000 per year. However, this was coupled with a payment by NCR to the prospective undertenant of a £3 million reverse premium. It was agreed that £710,000 per year was the best rent obtainable.

Riverland refused because (i) the proposed payment of the reverse premium would reduce the rent payable below the level of the best obtainable, and (ii) the prospective undertenant was not of sufficient financial standing.

Issues

The issues between the parties were as follows:

• whether the 11 working day period from July 28 to August 11 was a reasonable time for Riverland to have made its decision;
  
  
• whether the payment of the reverse premium fell foul of the requirement to underlet only at the best rent obtainable in the open market achieved without payment of a premium or other capital consideration; and
  
  
• whether it was reasonable to refuse consent on the basis of the prospective undertenant's financial standing.

High Court Decision

The High Court found that Riverland was in breach of its statutory duty, as it failed to make a decision within a reasonable time and refused consent on unreasonable grounds. The court's reasoning was as follows:

• The 11-day period was sufficient. A period of seven days would likely be sufficient even in the most complex circumstances.
  
  
• As a matter of construction of the lease, a genuine reverse premium payable by NCR to the prospective undertenant, as opposed to the payment of a premium by the prospective undertenant to NCR, was not prohibited.
  
  
• On the facts of the case, the financial standing of the prospective undertenant was not a vital consideration as Riverland would continue to have the benefit of NCR's covenant.

Court of Appeal Decision

Riverland appealed the first and third issues, and won. The Court of Appeal decided that 11 working days was not a sufficient time, following receipt of the properly constituted application for licence, for Riverland to consider the serious financial and legal implications of a refusal with its advisers. In the absence of any special circumstances, a period of less than three weeks - particularly in a holiday period - cannot be categorized as inherently unreasonable for the process. It is in neither side's interest, at least where a refusal is being contemplated, for the decision to be rushed.

Moreover, while it is right to have regard to the fact that the landlord will have the benefit of the tenant's covenant throughout the remainder of the tenancy, undue reliance should not be placed on this. The covenant strength of the prospective undertenant is relevant and may be taken into account, particularly as the prospective undertenant may become the immediate tenant if the underlease is of the whole and attracts the protection of the Landlord and Tenant Act 1954.

Practical Points

The following practical points arise for a landlord:

• Actively consider the application as soon as it is received.
  
  
• As soon as possible, request any further information required in order to consider the application.
  
  
• The application will not be effective and therefore time will not begin to run until all the information reasonably required to consider the application has been received.
  
  
• Always check the terms of the lease, in particular any conditions imposed by the alienation covenant.
  
  
• It is permissible to take account of the covenant strength of the prospective undertenant.
  
  
• Include all reasons for the refusal or all conditions of the consent in the written decision.
  
  
• Commit to writing so that a clear paper trail is laid.

The following practical points arise for a tenant:

• Ensure that the application contains all information which the landlord might reasonably require so as to ensure that it is properly effective and that, on receipt, time will begin to run against the landlord.
  
  
• The information should include material supporting the covenant strength of the prospective undertenant.
  
  
• If there is a special reason for urgency, this should be stated in the application.
  
  
• Ensure that any conditions imposed in the alienation covenant have been or will be met.
  
  
• Actively pursue the application by asking for confirmation of receipt and sending written reminders at appropriate intervals.

For further information on this topic please contact Martin Wright or Mark Race at Ashurst by telephone (+44 20 7638 1111) or by fax (+44 20 7638 1112) or by email (martin.wright@ashurst.com or mark.race@ashurst.com).