27th June 2018
Walker Morris partner and associate Nick Cannon and Andrew Maclean consider the Court of Appeal decision in No.1 West India Quay v East Tower Apartments and explain its practical implications for landlords and tenants.
Commercial leases usually contain provisions preventing a tenant from assigning the lease without first obtaining its landlord’s consent, with such covenants usually qualified by the words ‘consent not to be unreasonably withheld’. In this case, the Court of Appeal (CA) had to consider whether the landlord’s consent was unreasonably withheld where two out of the three grounds for refusal were held to be reasonable but the third ground was not.
If a lease contains a qualified covenant against assignment, then section 1 (3) of the Landlord and Tenant Act 1988 (LTA 1988) comes into play and provides that a landlord must give their consent to the grant of the assignment unless it is unreasonable to do so. In addition, if consent is refused or given subject to conditions, the landlord must serve on the tenant, in writing, the conditions or the reasons for that refusal.
No.1 West India Quay is a 33-storey building comprising a hotel and 158 residential apartments let on long leases by West India Quay (the Landlord). The Landlord granted East Tower Apartments Ltd (the Tenant) 999-year underleases of 42 apartments (the Leases). The Tenant then sought to assign the Leases. Under the terms of the Leases, Landlord’s consent was required, such consent not to be unreasonably withheld. The Landlord refused to grant consent for the assignment of some of the Leases because the tenant had refused:
The County Court held in favour of the Tenant. HHJ Karen Walden-Smith held that all three of the conditions for the grant of consent were unreasonable. Therefore, the Landlord had unreasonably withheld consent to assign. The Landlord appealed.
The High Court ultimately held in favour of the Tenant. Henderson J. held that only condition (1) was unreasonable and conditions (2) and (3) were both reasonable. However, it was held that ‘the bad reason vitiated the two good ones’ and the Landlord’s refusal was unreasonable. The Landlord appealed once more.
The CA reversed the decision of the High Court and held in favour of the Landlord. The CA held that there was nothing in the LTA 1988 that suggested that a mix of good and bad reasons for a refusal of consent automatically invalidated the refusal. The CA held that the correct question to ask was whether the decision to refuse consent was reasonable; not whether all the reasons for the decision were reasonable. If the decision not to grant consent would have been the same without reliance on the bad reason, then the decision (looked at overall) is good and the bad reason(s) will not vitiate or infect the good reasons(s).
In this case, the reasons given for the refusal were free-standing. Two of the three reasons were reasonable so the CA held that the decision itself was reasonable. The same decision would have been reached without reliance on the bad reason. Therefore, the Landlord was entitled to rely on the two good grounds for refusal even though one ground was unreasonable. Each case will turn on its facts, however, and the CA did consider that there may be cases where the real reason for the refusal is a bad one and the good reasons are no more than makeweights, or where the bad reason(s) vitiates the good reason(s).
Landlords will be able to breathe a sigh of relief in light of the CA’s decision. Following the High Court’s earlier decision, there was a risk that a landlord’s entire decision not to grant an assignment would be rendered unreasonable on the basis of one unreasonable reason alone. Depending on the facts of the individual case, such a risk is now unlikely.
However, landlords must be careful not to be lulled into a false sense of security. Landlords may choose to give their tenants a whole bundle of reasons for not granting an assignment in the hope that the good reasons will outweigh the bad. The CA highlighted that, with a scattergun approach, a landlord runs an increased risk that a court will either consider that bad reasons infected good reasons or that some of the purported reasons were not in truth operative reasons at all. Landlords should instead carefully consider every tenant’s application to assign and take specialist legal advice as to whether any reasons for refusing consent are reasonable or not.
Tenants should also take careful notice of this decision, which has largely dashed the hopes of tenants seeking to benefit where a landlord has given a mix of unreasonable and reasonable decisions. In the same vein, tenants would now be well advised to seek specialist legal assistance when considering whether to mount a legal challenge against a landlord’s refusal of consent.