Consent to Assignation
A common issue for landlords is making a decision on whether or not to consent to an assignation of a lease.
Leases commonly provide that the landlord’s consent cannot be ‘unreasonably withheld’ and that an assignee must be of sound financial standing and capable of fulfilling the tenant’s obligations under the lease. Difficulties can arise for a landlord if the incoming tenant (the assignee) is of sound financial standing but the landlord wishes to refuse consent – can they reasonably do this?
A recent Court of Session case, Homebase Limited v Grantchester Developments (Falkirk) Limited, has helped to provide further clarity in this area and also confirms that a landlord is entitled to see details of any rent subsidy and reverse premium being paid to an assignee.
The Background of the Case
In this case, Homebase were the tenants of retail premises in Falkirk under a 25 year lease. They wanted to assign their interest in the lease to a company called CDS (Superstores International) Limited (“CDS”) subject to Grantchester’s (the landlords) consent. The lease provided, as standard, that the “landlords consent shall not be unreasonably withheld … in the case of an assignee of sound financial standing and demonstrably capable of fulfilling the tenant’s obligations in terms of this Lease”.
It was agreed between the parties that CDS were of sound financial standing. However, Grantchester still refused consent on the basis that they had requested details of any rent subsidies or reverse premiums which had been agreed between Homebase and CDS and this information had not been made available.
Homebase raised an action against Grantchester on the basis that they had unreasonably withheld consent. They argued that the terms of the lease were clear and the requested information was a ‘collateral matter’ and could not be used as a basis for withholding consent. If CDS were of sound financial standing, which it was agreed they were, then the Landlords could not reasonably withhold consent.
Grantchester argued that payment to the assignee of a rent subsidy or reverse premium was material as it might affect the rent receivable after the next review date; thereby impacting on the investment value of the property. As such, they argued that consent had not been unreasonably withheld.
Lord Tyre held that there was a two stage test to Homebase’s request for consent to the assignation. Firstly, they had to demonstrate that CDS were of sound financial standing and capable of implementing the obligations of the tenant under the lease. Lord Tyre held that this decision was objective and did not require an ‘exercise of reasonableness’ on the part of Grantchester.
Thus, if CDS met this requirement then the Landlord would automatically move onto the second stage of the test. At this second stage, the Landlord can withhold consent only if it is reasonable to do so. Lord Tyre held that there are many good reasons for withholding consent unconnected with the financial standing of the proposed assignee; an example being diminution in the rental value of the property.
Lord Tyre held that there are ‘ample’ cases which confirm that rent subsidy or reverse premium may affect the rental value of property. As such, Lord Tyre held that the withholding of this information was sufficient grounds for withholding consent and the consent was not withheld unreasonably.
If you are a Landlord and are concerned about a request for assignation please contact Corra Irwin.
This information in this publication only is based on our current understanding of the Law. It has been produced for information purposes only. Professional advice should always be sought before taking any action.
MacLeod and MacCallum cannot take any responsibility for loss incurred for acting or failing to act on the basis of anything contained in this publication.