Landlord and tenant - consent to assignment / refund of deposit
NB the High Court's decision in this case has been overturned by the Court of Appeal - see our March 2009 property update.
In Landlord Protect Ltd v St Anselm Development Company Ltd, a buyer contracted to purchase a leasehold property. The contract was conditional on obtaining landlord's consent to the assignment. If consent was not obtained within three months, either the seller or the buyer could rescind the agreement and the deposit which the buyer had paid on exchange would be returned.
In the sale contract, the seller agreed to use all reasonable endeavours to obtain landlord's consent. The buyer had to execute such licence or other deed of covenant as may be required and provide guarantees, a rent deposit or other security if properly required under the lease. As the buyer was a dormant company which had never traded, the landlord required a guarantee from the buyer's sole director as a condition of giving consent. Unfortunately, the parties could not agree as to the terms of the guarantee.
Under the lease, the landlord could not unreasonably withhold its consent. Pursuant to the Landlord & Tenant Act 1988, this meant that any conditions imposed by the landlord had to be reasonable. The buyer had initially agreed to the provision of a guarantor, but only if the guarantee was released after three years. In previous proceedings, the buyer had argued that the landlord was acting unreasonably in refusing to accept this. This was rejected by the court.
The buyer then agreed to the guarantee, provided that it would automatically be released on an assignment of the lease. The lease pre-dated the Landlord & Tenant (Covenants) Act 1995, which provides for the automatic release of guarantors in this way. The landlord agreed to this, provided that a "reasonable alternative guarantor" was provided by the assignee. This was subsequently amended to a proviso that "reasonable alternative security" was provided by the assignee.
The buyer argued that this requirement was an unreasonable condition. On that basis, after three months it gave notice to rescind the contract and requested the return of its deposit.
The seller disputed that the buyer was entitled to rescind the contract, arguing that the buyer was in breach of its obligation under the sale contract to provide a guarantee. The seller served notice to complete on the buyer, and when the buyer failed to complete, the seller rescinded the contract and forfeited the buyer's deposit.
The question before the court was whether the buyer was entitled to rescind the contract and reclaim its deposit. This depended on whether the condition proposed by the landlord was a reasonable one. The buyer argued that the landlord was trying to improve its position beyond that in the lease, which it was not entitled to do.
The court found that the landlord's requirement was a reasonable and proper one. The condition stipulated a reasonable alternative security, not an equivalent security. The security referred to was capable of being satisfied by the covenant strength of the assignee itself. In this context "security" did not mean an additional asset or something which had to be provided by a third party, such as a rent deposit or guarantee, but bore the natural dictionary meaning of protection and safety. Therefore, the condition did not secure any additional rights than those which the landlord already enjoyed under the lease.
Things to consider
This case illustrates the potential uncertainties of exchanging contracts conditional on a third party's consent. The litigation was drawn out over a period of two years, and ended with the buyer losing a deposit of over £100,000. The buyer was a weak covenant, and should have been able to foresee that a guarantee would be requested.
If there are matters to which a buyer is adamant it cannot agree, it should negotiate a right to withdraw in the event that consent is offered subject to those conditions. Sellers will however resist such attempts on the ground that consent should be governed by the terms of the lease. In this case the property was purchased at auction, and so the contract was not open to negotiation.
The court found that the landlord's original requirement - that a reasonable alternative guarantor should be provided by any purchaser of the lease before the buyer's guarantor would be released - would have amounted to a collateral advantage and would therefore have been unreasonable. The lease did not give the landlord an entitlement to a guarantor throughout the term of the lease. However, this requirement was abandoned in favour of the provision of reasonable alternative security, and this was found to be reasonable.
Landlord Protect Ltd v St Anselm Development Company Ltd (2008)
Landlord Protect Ltd v Dolman (2006)
This article was written by Sarah Allen, associate at Wragge & Co's Real Estate group.
This analysis may contain information of general interest about current legal issues, but does not give legal advice.