England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE CCRTF 95/1750/E

(HIS HONOUR JUDGE DIAMOND )

Royal Courts of Justice

Strand

London WC2

7 October 1996

B e f o r e:

LORD JUSTICE PHILLIPS

LORD JUSTICE MUMMERY

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STRAUDLEY INVESTMENTS LIMITED

Plaintiff/Applicant

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MOUNT EDEN LAND LIMITED

Defendant/Respondent

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(Computer Aided Transcript of the Palantype Notes of

Smith Bernal Reporting Limited, 180 Fleet Street,

London EC4A 2HD

Tel: 0171 831 3183

Official Shorthand Writers to the Court)

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MR K LEWISON QC (Instructed by Herbert Smith, London, EC2A 2HS) appeared on behalf of the Applicant.

MR A LEDERMAN (Instructed by Morgan Bruce, London, EC4A 2JB) appeared on behalf of the Respondent.

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J U D G M E N T

(As approved by the Court )

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©Crown Copyright

JUDGMENT

LORD JUSTICE PHILLIPS: The appellant, Mount Eden, owns a substantial block of property which spans from number 67 to 81 Mortimer Street, Central London. The respondent, Straudley, is the tenant of that property under a long lease. The property is subdivided into seventeen units which are sublet. Clause 2.15.2 of the headlease provides:

"The Lessee will not underlet or part with or share the possession or occupation of the Premises or any part or parts thereof without the previous consent in writing of the Lessor such consent not to be unreasonably withheld or delayed."

In or about April 1994 Straudley forfeited the sublease of one of the units, number 77, for non-payment of rent. Straudley found an alternative subtenant and sought the consent of Mount Eden for a new sublease to this tenant. Mount Eden was only prepared to give consent subject to a condition. Straudley contended that this condition was unreasonable and refused to accept it. The sublease did not proceed.

Straudley made an originating application to the Central London County Court claiming a declaration that Mount Eden had withheld consent to the underletting with consequential damages. The principal issue was whether or not the condition required by Mount Eden was unreasonable. On 3 November 1995 Judge Diamond QC resolved this in favour of Straudley granting the declaration sought and made an award of damages which, together with interest, amounted to £20,000. Against that judgment, Mount Eden now appeals.

The only part of the judgment which they now seek to attack is the central finding that the condition which they sought to impose was unreasonable.

The Headlease

The basis upon which rent fell to be paid under the headlease was unusual. The rental payable by Straudley was calculated on the basis of 12.5 per cent of the rentals received by Straudley from the subtenants in the previous year. This explains the following provision of the lease.

"2.15.6 That the Lessee shall from the date hereof and throughout the term of this Lease use its best endeavours to underlet or procure the underletting of the said premises as a whole or in part or parts and will keep it so underlet both in relation to initial lettings and at rent reviews at the Open Market Rent and the Lessee will use its reasonable endeavours to recover the Open Market Rent at all times in accordance with the principles of good estate management and to the mutual interest and best commercial advantage of the parties hereto."

The condition

The condition which forms the bone of contention in this case relates to a rental deposit of £13,500, which was 9 months' rent that the subtenant was prepared to pay to Straudley under the proposed sublease. On 9 November 1994 Mount Eden's solicitors wrote to the solicitors acting for Straudley. After expressing their client's dissatisfaction with certain aspects of Straudley's conduct they stated that Mount Eden were prepared to agree in principle to the subletting. They went on to hold, however:

"You have advised us that the proposed sub-tenant will pay a rental deposit of £13,500. Please confirm that 50% of this sum will be held by our clients."

Straudley's solicitors replied that Straudley were not prepared to agree to this condition. On 29 November Mount Eden's solicitors wrote as follows:

"In principal, our client is willing to agree to a sub-letting to this company but is reasonably asking for:-

....

2. Our client has requested that the deposit monies be in joint names. This is not unreasonable in the light of:

* your clients breaches of the lease - failure to give notice of rental figure prior to agreeing with the prospective tenant.

* our client was not initially informed of the fact that the previous sub-tenant had gone into liquidation and your clients had peaceably re-entered into the premises. Therefore, our clients rental income has been reduced without notice.

* further, the income rent payable to our client depends on the rent received by your client and therefore it is in our clients interest to ensure that the rent is being paid. The rent deposit being in joint names would protect our client.

* our clients have serious concerns about the management and investigation that has been carried out - the manner in which the previous tenant was dealt with and the fact that our client was not informed and the manner in which you requested a licence to underlet.

In addition, if the deposit is held in joint names it gives our client advance warning of any potential arrear problems."

It was common ground before the judge that the relevant condition was that the £13,500 deposit should be held in the joint names of Straudley and Mount Eden. There was, however, some discussion about the implications of this condition. The judge recorded the position as follows:

"I wondered at one stage whether the landlords were saying that they required this deposit to be held in joint names so as to secure the obligations of Straudley under the headlease, which of course was in respect of 17 units. But Mr Brook who appeared for Mount Eden disclaimed any such intention. If then it was not intended to alter the provision that if any rent was not paid to Straudley by Base International, Straudley could draw an equivalent sum from the amount in the deposit account, the effect of placing the deposit in the joint names of Mount Eden and Straudley would simply be that on any default by Base International there would be two signatures necessary - that of Mount Eden and Straudley - to a cheque drawing the equivalent sum out of the deposit account and paying it to Straudley."

Base international were the proposed subtenants. The judge went on to hold that this limited effect of the condition would not have been apparent to Straudley. He said:

"....the condition was proposed in such a way in the correspondence that it would appear, I think, to any prospective solicitor acting for Straudley that Mount Eden was attempting to improve its security position under the terms of the headlease."

After referring to the relevant evidence on this point, the judge concluded:

"So the first reason why Mount Eden has failed to justify the condition is that the way in which it was put forward did not make it clear that Mount Eden was asking merely to be a bare trustee of the sum held in the account without any power to hinder or prevent the payment of the sum from that account to Straudley in the event of a default by Base International."

I would put the matter rather more positively. The obvious implication of the condition was that Mount Eden intended that the deposit should be available to Mount Eden by way of some form of security for the due performance of the obligations owed to them by Straudley under the headlease. Having the deposit in a joint account would give Mount Eden control over the circumstances in which the deposit should could be used. What was left unclear were the circumstances and manner in which this control could properly be exercised.

The uncertainty as to this is reflected in Mount Eden's grounds of appeal and skeleton argument. Their grounds of appeal include the following:

"Further or in the alternative, the Appellant was reasonable in insisting that the Respondent ensure that, one way or another, the Appellant had the benefit of half the deposit to be paid by the proposed undertenant to the Respondent."

The skeleton argument prepared by Mr Neuberger QC, as he then was, includes the following contention about the condition:

"It gave some protection to Mount Eden: if rent was owing under the underlease from Base to Straudley, it would seem wrong that Straudley should be able to draw on the deposit for its own benefit, if at the same time it owed rent to Mount Eden under the lease."

Mr Lewison QC, who appeared for Mount Eden, did not seek to support the third ground of appeal. He did accept, however, that the condition would entitle Mount Eden to have recourse to the deposit should both the subtenants be in breach of their obligations to Straudley and Straudley be in default under the headlease.

The Law .

The Landlord and Tenant Act 1988 provides as follows:

"Section 1(3) Where there is served on the person who may consent to a proposed transaction a written application by the tenant for consent to the transaction, he owes a duty to the tenant within a reasonable time --

(a) to give consent except in a case where it is unreasonable not to give consent.

(4) Giving consent subject to any condition that is not a reasonable condition does not satisfy the duty under subsection (3)(a) above.

....

(6) It is for the person who owed any duty under subsection (3) above --

....

(b) if he gave consent subject to any condition and the question arises whether the condition was a reasonable condition, to show that it was."

It is thus for Mount Eden to demonstrate that the condition that they sought to impose in this case was reasonable. As to the test as to what is reasonable in this context, there are more authorities that deal with assigning a lease than with subletting. I believe, however, that the basic principles are common to both situations. The principles which apply to the present case may be extracted from a rather longer list in the judgment of Balcombe LJ in International Drilling Ltd v Louisville Investments CA [1986] 1 Ch 513 at p 519:

"(1) The purpose of a covenant against assignment without the consent of the landlord, such consent not to be unreasonably withheld, is to protect the lessor from having his premises used or occupied in an undesirable way, or by an undesirable tenant or assignee: per A L Smith LJ in Bates v Donaldson [1896] 2 QB 241, 247 approved by all the members of the Court of Appeal in Houlder Bros & Co Ltd v Gibbs [1925] Ch 575.

2. As a corollary to the first proposition, a landlord is not entitled to refuse his consent to an assignment on grounds which have nothing whatever to do with the relationship of landlord and tenant in regard to the subject matter of the lease: see Houlder Bros & Co Ltd v Gibbs , a decision which (despite some criticism) is binding on this court: Bickel v Duke of Westminster [1977] QB 517. A recent example of a case where the landlord's consent was unreasonably withheld because the refusal was designed to achieve a collateral purpose unconnected with the terms of the lease is Bromley Park Garden Estates Ltd v Moss [1982] 1 WLR 1019.

....

4. It is not necessary for the landlord to prove that the conclusions which led him to refuse consent were justified, if they were conclusions which might be reached by a reasonable man in the circumstances. Pimms Ltd v Tallow Chandlers Company [1964] 2 QB 547, 564."

From the cases cited, and from these principles, I believe that it is possible to formulate two further propositions:

1. It will normally be reasonable for a landlord to refuse consent or impose a condition if this is necessary to prevent his contractual rights under the headlease from being prejudiced by the proposed assignment or sublease.

2. It will not normally be reasonable for a landlord to seek to impose a condition which is designed to increase or enhance the rights that he enjoys under the headlease.

Mr Lewison argued that the condition was reasonable in that it would ensure that Mount Eden had early warning of any default on the part of the subtenant in paying rent, so that Mount Eden could police the performance of Straudley's obligations under the headlease, in particular the duties to use best endeavours to keep all units of the property sublet and to use reasonable endeavours to recover the open market rent.

I cannot accept that submission. The headlease gave Mount Eden no right to such early warning. Had it been legitimate for Mount Eden to impose an early warning system as a condition of the new sublease, which it was not, it would still have remained unreasonable to attempt to achieve this end by requiring the deposit to be placed in a joint account. The reality is that the early warning point was something of an afterthought. The condition was designed to ensure that if circumstances arose where Straudley would otherwise become beneficially entitled to the deposit, Mount Eden would retain a security interest in it. This was an illegitimate attempt on the part of Mount Eden to improve their position under the terms of the headlease and the condition was unreasonable. It was all the more unreasonable in that it imposed no express restriction upon the circumstances in which, nor the basis upon which, Mount Eden would he entitled to assert rights as joint account holder of the deposit.

For these reasons I would dismiss this appeal.

LORD JUSTICE MUMMERY: I agree.

Order: Appeal dismissed with costs.