Assignation – how much leeway does a landlord have?

A recent Court of Session decision has considered the circumstances in which it will be reasonable for a landlord to refuse consent to an assignation of a lease.

The facts

In a recent case, the tenant sought to establish that their landlord had unreasonably refused a request for consent to an assignation of their interest in the lease.

The tenant entity, which was in administration, had proposed to assign their interest to a new company. The tenant had offered their parent company as a guarantor. The new company was part of the same corporate group as the existing tenant and had the same parent company, the latter being one of two existing guarantors under the lease.

The tenant’s request was refused as the landlord wasn’t satisfied that the proposed assignee was in a position to satisfy the tenant’s obligations under the lease.

The arguments

The tenant argued that the proposed assignee had a better financial covenant than it did as the existing tenant under the lease. Coupled with the fact that the proposed assignee would have the backing of a guarantor, the tenant’s position was that the proposed assignee was more than capable of fulfilling the tenant’s obligations under the lease. The tenant also claimed that the landlord had misunderstood the financial position of the guarantor, given that its balance sheet demonstrated a net worth of just under £3 million, while the monetary obligations of the tenant under the lease were in the region of £70,000 per annum. On the face of the balance sheet, the guarantor was well able to meet the tenant’s monetary obligations under the lease in the event of a default by the proposed assignee.

The landlord disagreed. It argued that the present covenant of the tenant, as a company in administration, was irrelevant when considering the covenant of the proposed assignee. The fact that the proposed assignee was in a better financial position than the existing tenant simply because the latter had now entered insolvency did not entitle it to an assignation of the lease. The correct comparison to be made, rather, was between the financial strength of the tenant at the time of its entry into the lease and that of the proposed assignee at the date of the assignation, and there was simply no evidence to establish the former.

As to the proposed guarantor, the landlord pointed to the parent company’s deteriorating profit and loss account, which had been in the red for the last three years. Leaving that aside, however, the lease did not require the landlord to consider the financial covenant of any guarantor, only that of the proposed assignee. There was no dispute between the parties that the proposed assignee did not have a sufficient covenant in its own right to satisfy the financial standing test in the lease.

The landlord had further concerns in that the individuals managing the proposed assignee entity were the same as those who had managed the tenant company in administration, and were parties with whom the landlord had had previous dealings. That provided no comfort to the landlord.

The decision

The Outer House found in favour of the landlord. The landlord had properly applied the test set out in the lease, and it wasn’t unreasonable for it to consider the information provided regarding the guarantor with a view to deciding whether its financial strength was sufficient to overcome the inadequacy of the proposed assignee’s covenant. Further, in the context of a lease with fifteen years still to run, the landlord’s concerns about the guarantor’s balance sheet, which showed a steep decline over a relatively short period of time, could not be dismissed as unreasonable.

The importance

The decision reinforces the position that a landlord is entitled to satisfy itself as to the soundness of the proposed assignee, even if it has financial backing from a guarantor or indeed the original tenant. So long as a refusal to provide consent is based on grounds which are central to the landlord-tenant relationship, the landlord will generally need only to consider its own interests. A decision to refuse consent should be upheld if it is one which might have been reached by a reasonable person in the position of the landlord, armed with the information it had and in the circumstances of the case. In this respect, the onus is on the tenant to prove that consent has been unreasonably refused.

If you are in a similar situation and are unsure as to how best to make a decision, we strongly advise consulting an expert who can help guide you through.

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