Commercial property issues to consider when selling your business
Background
If you are a landlord of commercial property, you will have chosen your tenants carefully. A landlord wants to be sure that a tenant will pay the rent and service charge, and that the tenant will comply with the obligations in the lease so that the property is kept in good repair. At the same time, a business tenant will want the right to move out and either pass on the lease or sublet to another business if their circumstances change. There are legal penalties for landlords who are found to be unreasonable in objecting to a tenant’s proposals, so good legal advice is essential for landlords who want to avoid a dispute while still controlling who becomes their tenant.
Letting commercial property is not just about collecting the rent. The income is vital, but landlords are also looking at the credentials of tenants while trying to maintain the attractiveness of their properties. That makes it all the more important to be able to exercise some control over who takes on a lease if the original tenant moves out.
The landlord’s duty to be reasonable
The law on when a landlord can refuse consent to an assignment or underletting has evolved over almost a century. The starting point is the Landlord and Tenant Act 1927. Most leases will state that the tenant may not assign without the landlord’s consent. The 1927 Act says that where landlord’s consent is required, the landlord may not unreasonably withhold it even if that is not set out expressly in the lease. Sixty years later, the Landlord and Tenant Act 1988 turned this into a positive obligation, creating a statutory duty for a landlord to give consent within a reasonable time, unless it is reasonable to refuse it, and not to impose unreasonable conditions. The landlord must also set out in writing any conditions for giving consent or, if consent is refused, the reasons for the refusal.
The concept of reasonableness is intended to allow flexibility to reflect specific circumstances; what is reasonable in one case might not be in another.
Reasonable grounds for refusal
The first place to look is the lease itself. Since 1996, landlords have been allowed to include in a lease specific circumstances in which they will be entitled to refuse consent to an assignment and specific conditions they will be entitled to impose. A circumstance for refusal might be where a proposed assignee is a foreign company; an agreed condition might be that the assignee provides a satisfactory guarantor.
Any of these circumstances or conditions will automatically be reasonable. This applies only to assignments and not to an underletting, but where there is an underletting the landlord can still enforce the lease obligations against the tenant.
The landlord may also refuse consent or impose conditions for other reasons if this is reasonable. The court has established the principle that to be ‘reasonable’, a landlord’s grounds for withholding consent must be linked to the landlord and tenant relationship. That means it is reasonable to withhold consent if the tenant cannot produce accounts and references that show that the proposed assignee is financially sound and able to pay the rent and comply with the rest of the lease.
A landlord may not refuse consent to secure a personal advantage, so it would be unreasonable to refuse consent because the landlord wanted to use the property themselves, or if the landlord wanted to persuade the proposed assignee to take a lease of a nearby unit the landlord also owned.
Another helpful piece of law, decided by the Courts, has made it clear that if a landlord has several units or properties close to each other and has set out a formal ‘tenant mix’ policy, it is reasonable to refuse consent to a proposed assignee or undertenant whose business would not fit with that policy.
How long is too long?
The requirement to give a decision within a reasonable time is another potential trap for landlords. The best practical advice is to move quickly once a tenant makes a formal request for consent. Beyond that, there are some useful pointers:
- As a rule of thumb, the landlord should aim to give a written decision, with reasons, within 21-28 days, although there may be situations where 21 days is too long, or where it would be reasonable to take longer.
- If the tenant explains that there are particular reasons for needing a fast decision, the landlord should take this into account as it could mean that the reasonable period is shorter than it might otherwise have been.
- The clock only starts running when the tenant has provided all the information the landlord needs to make a reasoned decision. If the initial request is accompanied by only sketchy financial information, the landlord should ask for whatever they need and they are entitled to wait for it before giving a decision.
Conclusions
If a tenant’s business is struggling, letting them go and accepting a new tenant could be the best outcome for everyone. A landlord who gets the consent process wrong could be faced with a damages claim for breach of statutory duty and possibly a court order allowing a tenant to assign or underlet without consent. Your solicitor can explain what your lease allows, as well as advising on the best tactics for the particular circumstances, giving you the best chance of a low-cost and amicable transition to a new tenant.
Richard Price
8 August 2022
If you have any construction related enquiries, please contact us as follows:
| Richard Price | richard.price@bracherrawlins.co.uk | 020 7400 1564 |
| Lewis Cohen | lewis.cohen@bracherrawlins.co.uk | 020 7400 1547 |
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.
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