Full property update

Landlord and tenant – consent to assignment

A lease granted in 1969 contained the following covenant:

"Not to assign the demised premises … without the written consent of the landlord. Such consent however not to be unreasonably withheld in the case of a respectable and responsible assignee…"

The landlord withheld consent to assign on the ground that the proposed assignee was a company which had only been incorporated two months previously. The tenant sought summary judgment of its application for a declaration that consent had been unreasonably withheld.

The tenant conceded that the proposed assignee was not "respectable and responsible" within the meaning of the lease, since it was newly incorporated with no track record and could not demonstrate that it could meet the £400,000 per annum rental. The landlord argued that, under the terms of the assignment provision in the lease, it had an absolute right to refuse consent to an assignment if the proposed assignee was not a respectable and responsible assignee.

The tenant's case was that the landlord was under an overriding duty not to unreasonably withhold consent, by virtue of section 19(1) of the Landlord and Tenant Act 1927. This provides that a covenant prohibiting assignment without consent shall, notwithstanding any express provision to the contrary, be deemed to be subject to a proviso that consent is not to be unreasonably withheld.

The High Court held that the landlord's attempt to restrict the circumstances in which consent could not be unreasonably refused to cases in which the proposed assignee was a respectable and responsible tenant was an "express provision to the contrary" within the meaning of section 19. It therefore held that section 19(1) applied, with the result that the landlord was under a duty not to withhold consent unreasonably.

This being the case, the landlord was also under a duty to communicate its decision to the tenant within a reasonable time (section 1 Landlord & Tenant Act 1988). This duty applies where the tenant applies in writing for consent to assign.

The landlord argued that the tenant's original letter in relation to the assignment was not an application for consent to assign because it contemplated the provision of further information by way of references for the directors of the proposed assignee. The landlord contended that no application had been made until that information had been received. The court pointed out that there is no prescribed form for the making of an application. On reviewing the letter, which invited the landlord to "treat this letter as the tenant's formal application", it was clear that it was intended to be an application.

The landlord then argued that, even if the letter was an application, time did not begin to run until the further information had been received. However, the landlord had communicated its refusal of consent to the tenant a week after the letter had been sent. The landlord's actions indicated that it had had sufficient time to consider the application.

In refusing consent, the landlord had cited as its reason the fact that the proposed assignee was a newly incorporated company. The tenant argued that, rather than refusing consent outright, as part of its duty to act reasonably the landlord should have asked the tenant what further concessions it might be prepared to make in order to overcome the landlord's reservations. For example, the landlord ought to have explored with the tenant the possibility of offering personal guarantees by the directors, or the payment of a larger rent deposit.

The High Court disagreed. The landlord was entitled to make a decision on the basis of the application as presented by the tenant. If the tenant wished to make alternative proposals in order to overcome the landlord's reasons for objection, it was up to the tenant to do so. There is no bar on the making of multiple applications for consent to assign. The Landlord and Tenant Act 1988 did not impose a duty to facilitate the tenant overcoming the landlord's reservations.

Things to consider

This was only a summary judgment application, which the tenant lost as the court thought that the landlord could make out a case at trial that it had acted reasonably.

However, the landlord was clearly under the impression that it had an unfettered discretion whether or not to grant consent, in cases where the assignee was not a respectable and responsible person. By holding that section 19(1) of the 1927 Act applied, the court imposed on the landlord not just a duty not to withhold consent unreasonably, but also the other duties under section 1 of the Landlord & Tenant Act 1988. These include a duty to respond in writing within a reasonable time, a duty to give reasons if consent is refused and, if consent is granted, a requirement that any conditions imposed on that consent be reasonable. The burden of proof is on the landlord to show that he has acted reasonably.

Landlords must ensure that they deal with tenants' applications for consent to assign or underlet in a timely way, and if they wish to withhold consent that they are entitled to do so under the terms of the lease.

Royal Bank of Scotland plc v Victoria Street (No 3) Ltd

Landlord and tenant – Formalities for lease creation

In the last edition of Property update we reported on the decision in Fitzkriston LLP v Panayi, which considered the nature of the requirements for a valid lease. This issue has come up again in the recent case of Looe Fuels Ltd v Looe Harbour Commissioners, where the court adopted a slightly different approach.

Leases normally have to be created by deed. However, certain leases can be created under section 54(2) Law of Property Act 1925 without the need for any writing at all. For a lease to come within section 54(2), it must:

• be for a term not exceeding three years. Periodic tenancies (tenancies which are not for a fixed term, but run e.g. from week to week, month to month, or year to year) fall within this definition;
• take effect in possession. In other words, reversionary leases (where the term starts later than the date the lease is completed) are excluded from this section; and
• reserve the best rent reasonably obtainable without taking a fine. This means the market rent for the premises.

In both Fitzkriston LLP v Panayi and Looe Fuels Ltd v Looe Harbour Commissioners, the question was whether the rent reserved was a market rent.

Looe Harbour Commissioners owned and operated a port at Looe, in Cornwall. The Harbour Commissioners leased a fuel tank to Looe Fuels, which used it to run its business refueling fishing boats. The tank reached the end of its natural life and needed to be replaced.

Looe Fuels argued that the Harbour Commissioners had agreed orally to grant it a three year lease of a site which would contain a new fuel tank. 75% of the funding for the tank was to be obtained through a government grant. The proposal was that Looe Fuels would pay the remaining 25%, spread over the 3 year term. These payments would be classified as rental for the new tank.

Although an agreement for lease must normally be made in writing, there is an exception where the agreement is for a lease which falls within section 54(2) of the Law of Property Act 1925 (see above).

The Court of Appeal held that the oral agreement was for the best rent which could reasonably be obtained, within the meaning of section 54(2). The Harbour Commissioners would recover the whole of their capital outlay within three years, which was a very good bargain. Although the original outlay was only 25% of the overall cost, the judge was entitled to look at the actual, as opposed to the notional, position when deciding whether the rent was the best which could be reasonably obtained for the site. On the facts, the judge was entitled to conclude that the agreed rent almost certainly exceeded the annual market value for the land.

Things to consider

The Court of Appeal's judgment did not refer to any valuation evidence of market rents in the area. The basis for its decision would appear to mean that if the government grant had been for, say, 90% of the cost of the tank, payment by Looe Fuels of the remaining 10% over the three year period would still have been a market rent, even though this would have resulted in a lower figure. This contrasts with Fitzkriston v Panayi, where some (albeit limited) valuation evidence was before the court. In that case the court found that the rent reserved was not a market rent, with the result that no lease had been created.

It is important to comply with the requisite formalities when creating leases and agreements for lease. Any arrangement which is not made by deed must comply with section 54(2) of the Law of Property Act if it is to create a valid lease which will bind purchasers of the landlord's interest and be capable of attracting security of tenure under the Landlord and Tenant Act 1954. Similarly, an agreement for lease should comply with section 2 of the Law of Property (Miscellaneous Provisions) Act 1989, unless the lease when granted will be within the exception in section 54(2) of the Law of Property Act. Section 2 provides that an agreement must be in writing, contain all the terms which have been agreed and be signed by or on behalf of each party.

Where these formalities are not observed, landlords looking to argue that informal arrangements have not given rise to a periodic tenancy which has security of tenure should gather evidence of market rents in the area. It will be easier for the landlord to make its case where the "rent" being paid by the occupier is nominal only.

Landlord and tenant – right to use estate roads

A lease of a unit on an industrial estate granted the tenant a right of way over the roads on the estate, provided that the tenant observed all regulations that the landlord made relating to the parking or unloading of vehicles or the direction of traffic. The permitted use of the premises was as a café, and the lease contained the usual covenant by the landlord for quiet enjoyment.

An estate road led directly from the main road to the café. However, it was also possible to reach the café by a more circuitous route, from a different exit off the main road and via a road that went around the estate before reaching the café.

The landlord planned to sell off part of the estate to be developed as private housing. In order to shield the residential area from the industrial area, it erected a large wall across the road forming the main access to the café. This meant that the café could only be accessed via the longer route.

The tenant suffered loss of business at the café as a result, and issued proceedings against the landlord for breach of the covenant for quiet enjoyment and derogation from grant.

The landlord argued that the power to make regulations controlling the direction of traffic included a power to prevent access over one of estate roads. The Court of Appeal disagreed. It found that all that the landlord was entitled to do was direct which way traffic should circulate along the estate roads (e.g. clockwise or anti-clockwise). In any event, since the premises were let as a café, the landlord was in breach of its covenant for quiet enjoyment. Those who wished to use the café should be able to get to it without obstruction along the highway.

Things to consider

It appears that the landlord would have been within its rights if it had directed that traffic must enter the estate from the main road via the other, less convenient, entrance and exit it via the access point nearest the café. Although this would not have achieved the landlord's aim of screening off the industrial estate from the housing, it would have had a similar effect on the tenant's business, and the tenant would not have been able to prevent it. This case emphasises the importance for tenants of scrutinising the rights granted by a lease to check that they are sufficient for the purposes of their business. Landlords need to look to the future when granting leases, so that plans for redevelopment are not inhibited.

Hunte v E Bottomley & Sons Ltd

Restrictive Covenants

In Duffield v Gandy, Mr & Mrs Duffield wanted to build a bungalow on a corner of their land. However, their property was burdened by a restrictive covenant not to erect a residence. The Duffields applied to the Lands Tribunal for the covenant to be modified or discharged. For a list of the grounds on which such an application can be made, see April's Property update.

Mrs Gandy, a neighbour who had the benefit of the covenant, objected on the basis that the privacy of her garden would be disturbed by the proximity of the adjacent garden to the bungalow. The issue in the case was whether the practical benefits secured by the covenant were of substantial value or advantage to Mrs Gandy.

The Duffields pointed out that they could use that part of their property as a garden, without the bungalow being built, and therefore without there being a breach of the restrictive covenant. On this basis, they argued that the restriction did not secure a practical benefit of substantial value or advantage.

The Lands Tribunal refused to modify or discharge the covenant, and this decision was upheld by the Court of Appeal. In terms of practical benefits, the value of the restriction was that Mrs Gandy's privacy would be protected, not only from the erection of the bungalow itself, but also from use of an adjoining part of the property as a garden adjacent to that bungalow. The relevant risk to Mrs Gandy's privacy was the use that would be made of the garden by occupants of the bungalow. It did not matter that this benefit was derived from a restriction against the erection of a residence, rather than a specific restriction on garden use.

Things to consider

Although this decision relates to a small scale residential development, it is interesting to see the approach taken by the Tribunal. The fact that the use to which Mrs Gandy objected would, in other circumstances, be perfectly lawful, did not mean that the covenant did not give her a practical benefit of substantial value or advantage. The Landlord & Tenant (Covenants) Act 1995 enables the landlord of a "new" lease (broadly, a lease granted on or after 1 January 1996, unless granted pursuant to an agreement for lease prior to that date) to set out in the lease circumstances in which it will be deemed reasonable for consent to be withheld. The landlord's intention in the present case could be realised in a new lease by providing that it will be reasonable for the landlord to refuse consent where, in the landlord's opinion, the assignee is not a respectable and responsible person. However, since this is not a factual condition which is objectively ascertainable, the lease must either require the landlord to act reasonably in deciding whether an assignee fits these criteria, or provide for the matter to be determined by an independent third party.

Boundary disputes

In Strachey v Ramage, the parties disputed the boundary between a farmhouse and some neighbouring fields. The two pieces of land were in common ownership until 1988, when the farmhouse was sold off, followed by a sale of the fields to a different purchaser a few months later. At the time of the sales, both properties were unregistered, although they subsequently became registered.

Ms Strachey was the current owner of the fields. She sought a declaration that the boundary was marked by a fence that been erected by the common vendor in 1988. She further sought alteration of both filed plans at Land Registry to reflect what she contended was the true boundary. Her case rested on how the conveyance of the first part of the land to be sold off, the farmhouse, should be interpreted.

The plan attached to the conveyance of the farmhouse showed an area of land which included the fence as forming part of the property being sold. However, the plan was marked for identification purposes only. This means that it is not intended to identify precise boundaries, and in the event of a conflict between the plan and the written description of the property, the latter will prevail.

Since the written description in the conveyance of the farmhouse was inadequate, the court held that the document must be viewed as a whole. In the conveyance, the vendor agreed to maintain the fence that he had erected. The court found that this provision would make no sense if the land on which the fence stood had formed part of the property being sold off. Even if that had been the parties' intention, the vendor would have needed a right of access to carry out maintenance, and no such right had been reserved. The conveyance also described the fence as being a "boundary fence".

Having reached the conclusion that the land properly belonged to Ms Strachey, the court then had to consider the question of whether to order the filed plans at Land Registry to be altered.

A similar issue was before the court in the case of Derbyshire County Council v Fallon. In that case the court considered the effect of the general boundaries rule. The general boundaries rule provides that boundaries as shown on the register are general only and do not show the exact line of a boundary, unless an application has been made to determine them under the Land Registration Act.

Certain protections are given to registered proprietors to prevent an alteration to the register which prejudicially affects their title. However, if the alteration does not affect the title, these protections will not apply. The court in Derbyshire County Council v Fallon held that the effect of the general boundaries rule is that making an alteration to a filed plan to remove land in these circumstances does not affect the title. It merely produces another general boundary in a more accurate position than the current general boundary.

On that basis, the court in the present case ordered that the titles should be altered so as to show Ms Strachey of the proprietor of the land including the fence.

Things to consider

There does not appear to be a limit on the extent of land which can potentially be affected by the general boundaries rule. In this case the area of land in dispute was approximately 12 feet by 24 feet. In Derbyshire County Council v Fallon it was even larger. Buyers should check the Land Registry plan against the position on the ground, and look for discrepancies. Unfortunately, because of the general boundaries rule, even this will not be conclusive.

This analysis was written by Sarah Allen, associate in Wragge & Co's Real Estate group.