Most modern commercial leases will therefore contain restrictions relating to these matters. Such clauses often allow the tenant to do certain things, but only if the landlord gives its prior consent.
In this article, we consider restrictions where a tenant wants to assign (transfer) the lease to a third party, or sublet, and when it might or might not be reasonable for a landlord to refuse to give its consent.
Although we focus on assignment and subletting, similar principles will apply to restrictions concerning alterations and changes of use.
Restrictions on assignment and subletting
There may be various reasons why a tenant that has signed up to a commercial tenancy for a fixed term may want to assign or sublet the lease to a third party.
A tenant might, for example, want to assign the lease to a buyer as part of a business sale. Alternatively, financial pressures might cause it to look for a third party who will take over some or all of its liabilities under the lease, including the obligation to pay the rent.
If the lease does not contain a specific prohibition, the tenant is free to assign or sublet, and the landlord cannot object.
Most modern commercial leases will, however, expressly restrict the tenant’s ability to assign or sublet.
Commonly, commercial leases will allow the tenant to assign the whole, or sublet the whole or part, of the lease but only with the landlord’s consent. The lease will often specifically confirm that the landlord’s consent is not to be unreasonably withheld, but this will be implied by section 19 of the Landlord and Tenant Act 1927 anyway.
In many cases a tenant that wants to assign or sublet will need to make a formal application to its landlord to obtain consent.
Landlord’s statutory duties
Where the tenant is only allowed to assign or sublet with the landlord’s consent, which is not to be unreasonably withheld, the Landlord and Tenant Act 1988 imposes certain duties on the landlord.
The landlord has a statutory duty to give consent to the tenant (except where it is reasonable not to do so), within a reasonable time, giving written notice of its decision.
The landlord must also pass on the application to anyone else whose consent may be required (such as a superior landlord or lender).
Pre-agreeing conditions to be met and circumstances in which consent may be withheld
It is possible for landlords and tenants to pre-agree the circumstances in which the landlord may withhold its consent, or any pre-conditions that must be complied with before consent can be sought or given.
For example, the lease might state that the landlord can refuse to give consent where the annual rent is outstanding, or if in the landlord’s reasonable opinion a proposed assignee is not of sufficient financial standing.
So far as pre-conditions are concerned, the outgoing tenant will, for example, often be required to enter into an “authorised guarantee agreement” when it seeks consent to assign, under which it will guarantee the performance of the incoming tenant’s obligations under the lease. On a subletting, the lease will usually state that any sublease must be contracted out of the security of tenure provisions of the Landlord and Tenant Act 1954.
In addition to the circumstances and conditions that have been expressly pre-agreed, landlords will often be able to refuse to give consent in other circumstances where it is reasonable to do so, or to impose other reasonable conditions.
When is it reasonable to withhold consent?
One of the main purposes of a covenant against assignment or subletting without the consent of the landlord is to protect the landlord from having its premises used or occupied in an undesirable way or by an undesirable tenant.
A landlord cannot refuse consent on grounds that have nothing to do with the landlord and tenant relationship.
The question of whether the landlord’s conduct was reasonable or unreasonable is one of fact. Each case will be decided on its own particular facts.
For example, it might be reasonable for a landlord to withhold consent where there are serious and long-standing breaches of repairing covenants that the landlord reasonably considers the assignee will not remedy. However, it may not be reasonable to refuse consent where there are only minor disrepairs that can be remedied easily.
It is for the landlord to show that its conduct was reasonable. It does not need to show that the conclusions that led it to refuse consent were right or justified, if they were conclusions that might have been reached by a reasonable landlord in the circumstances.
What is a reasonable period of time?
A failure to give consent within a reasonable time will constitute an unreasonable withholding of consent.
What is a reasonable period of time will depend on the facts and circumstances, but it is generally measured in days and weeks, rather than months.
If there is some particular urgency, the tenant should make this clear in their application.
Time does not start to run, however, until the tenant has served a formal application in accordance with the terms of the lease.
Landlords can require the tenant to pay legal and other expenses when giving consent, but the amount must itself be reasonable.
Landlords will usually therefore request an undertaking from the tenant to pay the landlord’s reasonable costs and disbursements, possibly capped at a certain maximum amount.
What can the tenant do if the landlord unreasonably withholds consent?
If the landlord does not respond within a reasonable period of time, or otherwise unreasonably refuses to give consent, the tenant can in theory go ahead and act without consent. If it turns out that the landlord has unreasonably withheld consent, the assignment or subletting would be lawful.
Proceeding in this way would, however, be very risky. If the court determines that the refusal was reasonable after all, the tenant would be in breach and the landlord could seek to forfeit the lease and claim compensation.
The safer course will be for the tenant to apply to the court for a declaration that the landlord has unreasonably withheld consent. If successful, the tenant can proceed with the assignment or subletting.
Tenants may also be able to seek compensation for breach of statutory duty if the landlord unreasonably refuses consent or fails to give consent within a reasonable period of time.
What can the landlord do if the tenant doesn’t seek or obtain consent?
If a lease is assigned or sublet without the landlord’s consent, the assignment or subletting may still be effective but would be in breach of covenant. The landlord could seek to forfeit the lease and claim compensation accordingly.
As an alternative to forfeiture, the landlord could potentially seek an injunction, for example requiring the surrender of any unlawful sublease.
Applications for consent to assign or sublet should be taken seriously.
Tenants considering applying for consent should obtain legal advice at an early stage. We can advise on how to best present the application to maximise the prospect of securing consent, the appropriate form of the application, and how to serve it in the correct way. If the landlord unreasonably refuses or delays in giving consent, we can prepare and represent you in court proceedings for appropriate declarations.
Landlords who receive applications for consent should similarly seek advice as soon as possible. It is important to respond to the application properly and promptly, including where further information may be required. We can also advise you of your options where a lease may have been assigned or sublet without consent, in breach of the terms of the lease.