Much to consider when negotiating business leases

05 March 2019

When solicitors negotiate legal documents much ink can be spilt over how a discretion conferred upon one party by the other is to be exercised and what conditions can be attached to. In the case of property-related documents such as commercial leases a discretion is often conferred in relation to the giving of approval by one party to a proposed course of action by the other.

Much to consider when negotiating business leases

Common examples include a tenant’s wish to assign its lease or to carry out alterations to the property or to change its use. In such cases the lease will usually provide that the proposed course of action by the tenant cannot be carried out without the prior approval of the landlord and the lease will state whether or not such approval may or may not be unreasonably withheld. The starting point traditionally adopted by lawyers is that unless the lease expressly states that the landlord must not unreasonably withhold his approval then the landlord has an unfettered discretion and may withhold his approval for any reason or for none. Consequently the solicitor acting for the party conferring the discretion will fight hard to qualify the discretion by including the magic words “such approval not to be unreasonably withheld”.

These words allow the party a foot in the door to challenge in court the other party’s refusal to give approval. Since the commencement of the Business Tenancies (NI) Order 1996 any qualifying lease of business premises entered into after 1997 which prohibits the tenant from assigning or subletting its premises or carrying out improvements without the consent of the landlord is subject to the statutory qualification that the consent is not to be unreasonably withheld and the Lands Tribunal can be asked to rule on whether or not consent has been withheld unreasonably in any given case. But apart from that limited statutory intervention, what can come to the aid of a tenant whose lease contains a landlord consent requirement in the numerous other scenarios that can crop up during the life of a lease such as carrying out alterations, changing signage, erecting external equipment or making planning applications?

A recent English Court of Appeal case has given hope to those who have tried and failed to attach an express test of reasonableness to the exercise of discretions in commercial leases. The case of No.1 West India Quay (Residential) Ltd v East Tower Apartments Ltd (2018) concerned an application by a tenant to assign his luxury residential apartments in Canary Wharf held on 999-year leases. Each lease required the landlord’s consent to be obtained before assignment could take place and in each case the landlord refused citing as its reasons, amongst other things, that the tenant had not paid the landlord’s legal costs or provided references for the prospective assignees to show that they were good for the annual service charge.

On the particular facts of the case the Court of Appeal held that the refusal of consent was reasonable but importantly, in coming to that finding, the Court stated that the exercise of a contractual discretion contained in a lease, in this case the power to approve or refuse an assignment, is to be judged by the same principles as the court judges the exercise by a public authority of a statutory discretion (the so-called Wednesbury test). In the case of a contractual discretion in a lease this means that where the lease requires the tenant to obtain the landlord’s consent before taking a certain action, a term will be implied to the effect that the landlord, broadly, must act reasonably. Specifically, the landlord’s decision may be challengeable on the grounds that the landlord failed to take the right matters into account in reaching the decision or, even if it did so, that the decision was so outrageous that no reasonable landlord could have reached it. This should, in principle, make it easier to legally challenge a landlord’s refusal to grant consent. In such challenges evidence will be key. Tenants will seek full disclosure of all the internal notes and emails which may reveal whether the landlord had regard to all relevant matters and disregarded all irrelevant matters. Equally, landlords refusing consent will need to retain evidence that they did in fact base their decisions on the relevant matters alone.

Graham Pierce is a partner in Worthingtons Solicitors, specialising in commercial property and can be contacted by email graham@worthingtonslaw.co.uk or on 02890434015

 

 

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