FAQs - Dealing with tenant requests for alterations and assignment

Alterations

When is a landlord’s consent required to make alterations?

If the lease contains no restrictions, the tenant has absolute freedom.  If the lease contains an absolute prohibition then the landlord can refuse or impose unreasonable conditions.  If the lease contains a qualified condition then the landlord’s consent is deemed not to be unreasonably withheld where work is “improvement” (s.19 (2) LTA 1927).  If the lease contains a fully qualified covenant, the landlord’s consent is not to be unreasonably withheld.

What are the statutory duties/restrictions?

Under s.19 (2) LTA 1927 (only where qualified or fully qualified covenant), the landlord can require the tenant to:

• pay its costs
• reinstate; and/or
• pay compensation for the diminution in the value of reversion.

What is the burden of proof if the landlord fails to comply with his/her duties?

The burden of proof is on the tenant to show that the landlord is unreasonably withholding consent and to establish losses.

What remedies does the tenant have?

Although damages are not available, the tenant has two remedies:

• Self-help: This is where the tenant carries out the improvements.  Firstly, the tenant should send a letter before action to get the landlord’s consent as this avoids problems later.  The tenant should also ask the landlord to confirm that he/she will not peaceably re-enter.  Although this is less risky than on alienation, the tenant may be required to reinstate.
• Court proceedings: This is for a declaration that the landlord has unreasonably withheld consent and/or no further act of consent is required from the landlord.

What remedies does the landlord have if the tenant uses the self-help remedy?

The landlord has three remedies:

• Forfeit lease: by peaceable re-entry or court proceedings.  If the landlord has complied with his/her duties, the tenant will have to remedy the breach to get relief from forfeiture and pay the landlord’s costs and compensation.  Note that a rent stop should be put on the account and the lease should not be treated as continuing.
• Damages against the tenant: firstly, the landlord can claim for compensatory damages to reflect the sum the landlord might have demanded to relax the covenant against the tenant (Crestfort v Tesco) at the date of the contract/tort of interference with the contract with the tenant by the sub-tenant.
  
  Secondly, it is possible to recover damages from both the tenant under the lease and the sub-tenant under tort of interference with the contract if the sub-tenant had intended to procure that breach (Crestfort v Tesco).
• Injunction: The landlord can apply for an injunction against the tenant such as ordering a surrender of unlawful sub-lease (Crestfort v Tesco). This action would be  particularly appropriate if the landlord does not want to forfeit in a falling market.

Assignment

When is a landlord’s consent required to assign a lease?

If the lease contains no restrictions then the tenant has absolute freedom.  If the lease contains an absolute prohibition then the landlord can refuse or impose unreasonable conditions.  If the lease contains a qualified condition, then the landlord’s consent is deemed not to be unreasonably withheld (s.19 (1) LTA 1927).  If the lease contains a fully qualified covenant, then the landlord’s consent is not to be unreasonably withheld.

What are the statutory duties/restrictions?

Under s.1 LTA 1988 (only where qualified or fully qualified covenant) on written application by the tenant for consent, the landlord must within a reasonable time:

• give consent (unless reasonable not to); and
• give the tenant a written notice of the landlord’s decision stating, where consent is given, any reasons which the landlord imposes or, where consent is refused, the reasons for refusal.

Under s.2 LTA 1988, the landlord must pass on any written application to the superior landlord within a reasonable time.

What is the burden of proof if the landlord fails to comply?

The burden of proof is on the landlord to show that they complied with statutory duties and on the tenant to establish losses.

What remedies does the tenant have?

The tenant has thee remedies:

• Self-help: where the tenant assigns anyway.  Firstly, the tenant should send a letter before action to get the landlord’s consent as this avoids problems later.  The tenant should also ask the landlord to confirm that he/she will not peaceably re-enter.  If the landlord does not confirm, the tenant should consider seeking an injunction restraining the landlord from re-entering until the question of whether there is a breach is resolved by agreement or the courts.
• Tenant issues court proceedings: for a declaration that the landlord has unreasonably withheld consent and/or no further act of consent is required from the landlord.
• Tenant issues a damages claim: for breach of a statutory duty under LTA 1988:
• Consider causation eg would the proposed assignment abort anyway?  If so, there is no loss.
• Consider the foreseeability of losses.
• The tenant must mitigate its loss and must try and remarket the premises in the best terms available in the open market as soon as possible.
• Consider measures of damages: Firstly, compensatory damages such as rent and the liabilities the sub-tenant would have to pay. For example, in Blockbuster v Barnsdale, the tenant recovered £70,000 where the proposed sub-rent was £56,000 because of insurance and rates recovery in addition to  loss of premium, abortive costs, loss of opportunity (if the tenant is able to transfer dilapidations liability).
  
  Secondly, exemplary damages if the landlord acted obstructively or to gain an advantage from refusal of consent. For example, there were exemplary damages of £25,000 in Design v Thurloe where the landlord wanted the assignment to fail to get surrender and to then re-let on better terms.

What remedies does the landlord have if the tenant uses self-help remedies?

The landlord has three remedies:

• Forfeit lease: by peaceable re-entry or court proceedings.  If the landlord has complied with duties, the tenant will have to remedy the breach to get relief from forfeiture and pay the landlord’s costs and compensations. Note that a rent stop should be put on the account and the lease should not be treated as continuing.
• Damages against the tenant: firstly, compensatory damages to reflect the sum the landlord might have demanded to relax the covenant against the tenant (Crestfort v Tesco) at the date of the contract/tort of interference with the contract with the tenant by the sub-tenant.  It is also possible to recover the damages from both the tenant under the lease and the sub-tenant under the tort of interference with the contract, if the sub-tenant had intended to procure that breach – see Crestfort v Tesco.
• Injunction against the tenant: for example, ordering a surrender of an unlawful sub-lease (Crestfort v Tesco), particularly if the landlord does not want to forfeit in a falling market.

How may a landlord refuse consent?

The landlord must give reasons for any refusal of consent.  The landlord is confined to the reasons given in his written statement so he cannot add other reasons or later justify refusal on other grounds.  The landlord and tenant may agree (either in the lease or before the application for the licence) any circumstances or conditions subject to which the licence may be granted which are not then subject to a test as to what is reasonable.

What is reasonable?

What is reasonable is a question of fact (Bickel v Duke of Westminster [1977] QB 517).  The landlord need not show that his objections are objectively justifiable, only that reasonable landlords acting prudently and competently would also rely on them (Pimms Ltd v Tallow Chambers Co [1964] 2 QB 547 at 564).

Generally, a landlord need only consider its own interests but, if there is such a disproportion between the benefit to the landlord and the detriment to the tenant in refusing consent, then it may be unreasonable to withhold consent (International Drilling Fluids).  The landlord is entitled to be told the true nature of the proposed transaction and so will not unreasonably withhold consent if this has not happened.  The landlord is fully entitled to look critically at any matter relating to the proposed assignee that would reduce the value of his interest, especially if he intends to sell it.

The purpose of the covenant against assigning without the landlord’s consent is to protect the landlord from having its premises used or occupied in an undesirable way or by an undesirable tenant or assignee (International Drilling Fluids).  A refusal must relate to the landlord and tenant relationship in regard to the subject matter of the lease, so:

• it will normally be reasonable to refuse consent or impose a condition if such refusal or condition is necessary to prevent the tenant from acting to the prejudice of the landlord’s existing rights; and
• it will normally be unreasonable to impose a condition which would increase or enhance the control which the landlord was entitled to exercise under the terms of the lease and the general law (a ‘collateral advantage’).

What are the grounds for refusing alterations (fully qualified covenant)?

If the alterations reduced the value of the reversion, then the landlord should ask the tenant for compensation on that basis.  Reasonable refusal will usually have to be based on:

• evidence of long term structural instability (Igbal v Thakar [2004]); and/or
• the commercial impact on the landlord’s business that cannot easily be qualified (Sargeant v Macepath (Whittlebury) [2004]).

What are the grounds for refusing assignment (qualified/fully qualified covenant)?

There are several ground for refusal including:

• The financial strength of the assignee
• Any breach of covenant by the tenant
• The superior landlord’s consent; and/or
• Any change of use/alterations.