Homebase was the tenant of a retail premises in Falkirk under a 25 year lease entered into in 1995. Clause 5.11.2 of the lease contained the commonly encountered tenant’s obligation "not to assign, charge or otherwise dispose of or in any way deal with the Tenant’s interest in the whole of the Premises without the prior written consent of the Landlord which consent shall not be unreasonably withheld (in the case of an assignation) in the case of an assignee of sound financial standing demonstrably capable of fulfilling the Tenant’s obligations in terms of this Lease…".
In 2014, Homebase entered into an agreement in principle to assign the lease to CDS Superstores, but the landlord, Granchester Developments (Falkirk) Limited, refused to consent to the assignation. It was accepted by Grantchester that CDS was an "assignee of sound financial standing demonstrably capable of fulfilling the Tenant’s obligations". However, it had come to Grantchester's attention that Homebase had offered inducements to CDS to take the assignation, and Homebase had refused to provide Grantchester with details of any rent subsidies or reverse premiums agreed as part of the deal.
The tenant’s action for declarator
Homebase raised a court action seeking declarator that Grantchester had unreasonably withheld consent to the assignation. They argued that the issue of whether a rent subsidy or reverse premium was to be payable to the proposed assignee was a "collateral matter" falling outwith the considerations specified as relevant by clause 5.11.2 of the lease, and that failure to provide such information could not be a ground upon which consent could reasonably be withheld.
The landlord’s argument
Grantchester's argument was that payment to the assignee of a rent subsidy or reverse premium was highly material to Grantchester as it might affect the rent receivable after the next review date, thus impacting on the investment value of the property. Grantchester were accordingly entitled to be provided with details of any such inducements, and the failure by Homebase to provide the information requested was a reasonable ground for the withholding of consent.
Lord Tyre’s judgement
Lord Tyre ruled in favour of Grantchester and refused to grant declarator. In Lord Tyre's opinion the wording of clause 5.11.2 meant that Homebase's application for consent to the assignation had to pass a two stage test. The first stage was for Homebase to demonstrate that the proposed assignee was responsible, that the assignee’s covenant was good, and that the assignee was demonstrably capable of implementing the obligations of the tenant under the lease. This stage fell to be determined on an objective basis and did not require any exercise of reasonable judgment by the landlord. If the proposed assignee failed to meet this test, the landlord had an absolute right to refuse consent.
If, said Lord Tyre, the proposed assignee satisfied the above criteria (and it was accepted by Grantchester that CDS did) the first stage of the test was met, and one then passed to the second stage of the test. Grantchester’s consent could then be withheld only if withholding consent was reasonable. Lord Tyre referred to case law which acknowledged that there may be good reasons, unconnected with the financial standing of the proposed assignee, why a landlord might wish to withhold consent (although he/she will not be entitled to do so if the reasons have nothing to do with the relationship of landlord and tenant in regard to the subjects leased). The case law referred to by Lord Tyre was clear in that a landlord can reasonably refuse consent if an assignment would result in a diminution in the rental value of the property, and he noted that there were a number of judgements which acknowledged that the payment of a rent subsidy or reverse premium may have that effect.
In Lord Tyre's words: “The question in the present case is whether the landlord has reasonably withheld consent on the ground of the tenant’s refusal to provide information as to whether it has agreed with the proposed assignee to make any payment by way of rent subsidy or reverse premium. In my opinion the landlord’s request for this information is reasonable, entitling it to withhold consent unless and until the information is supplied.
“If, as I have held, the payment of a rent subsidy or reverse premium is a matter which might – and I need put it no higher than that – reasonably affect the landlord’s decision whether or not to consent to the proposed assignation to CDS, then it follows that it is reasonable for the landlord to require the supply of that information before making its decision.”
Lord Tyre’s judgement could prove useful to landlords who wish to be provided with details of inducements being offered by their tenants to proposed assignees. It will not be such a welcome judgement for tenants, who may prefer to keep such information confidential.