Underletting - When a Landlord May Resist

Both landlords and tenants of commercial property will have good reason to take notice of a recent Court of Appeal decision, dealing with the circumstances in which a landlord may refuse to grant consent to an underlease.

If commercial premises are no longer required by a tenant, he will usually seek to assign (transfer) the lease. However, there are a number of reasons why he may wish instead to underlet the premises:

• they may be required by him in the future
• he may wish to reduce the risk of a claim by the landlord if the new tenant defaulted under an assigned lease
• he may be unable to find a new tenant willing to take an assignment of the existing lease at the passing rent and/or for the remainder of the lease term
  

Most commercial leases stipulate that the landlord’s consent must be obtained before an underlease is granted. The Court of Appeal considered whether a landlord might withhold consent and how long he might take to reach a decision.

The tenant held a lease where rent currently payable was higher than the market rent. Although underletting was permitted by the lease, any underlease had to be granted at a rent no lower than the passing rent reserved in the lease.

The tenant found an underlessee (at the passing rent) by offering to it a capital payment of three million pounds - a reverse premium. The tenant approached the landlord on 30th June 2003 for consent to underlet.

The landlord requested further information on 28th July, which the tenant supplied.

The landlord refused consent on the 20th August, upon the basis that the underlessee was of insufficient financial standing and that payment of a reverse premium was ‘unsatisfactory’.

The lower court held that the landlord had:

• failed to respond to the tenant’s request in sufficient time
• unreasonably withheld consent, as the financial standing of the underlessee was irrelevant, bearing in mind the fact that the tenant would still be liable to pay rent to the landlord under the terms of the lease and ruled in favour of the tenant.

The Court of Appeal, however, took a different view.

First, it held that the landlord was entitled to take time, not only to consider the grounds but also the potential legal and financial implications of the refusal. Accordingly, a period of almost eight weeks was not considered unreasonable in the particular circumstances of the case.

Secondly, it held that provided the landlord could show that there were reasonable concerns about the underlessee’s ability to pay, the landlord was entitled to withhold consent to the underletting.

The Court of Appeal’s decision has gone some way towards clarifying the position, but in general the law relating to licences to underlet (and to licences to assign) seems to have swung in favour of the landlord.