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The High Court has held that a landlord’s withholding of consent to an assignment may be unreasonable if the decision is made too soon – even though it might have been reasonable if they had waited. This case, in which Tom Morris acted throughout for the successful Respondent, appears to be the first in which a cause of action for damages for unreasonable refusal under the Landlord and Tenant Act 1988 has been used by the guarantor of a lease to defeat a bankruptcy petition. The decision is an important one for all those acting for landlords and tenants in consent applications.
HHJ Hodge KC, sitting in the High Court yesterday, heard the very important appeal in MMI Properties (Wilmslow) Ltd v Shepherd. Interestingly, though the appeal arose from bankruptcy proceedings, the sole issue was whether a landlord had unreasonably refused consent to the assignment of a lease. The Judge’s decision is particularly important because it underlines the importance of landlords acting reasonably and adopting fair processes when considering applications for consent to assign. The decision is also important in showing that guarantors of leases can rely on the contention that consent to assignment has been unreasonably withheld as a defence to bankruptcy proceedings brought on the basis of the lessee’s rent arrears.
The lease of premises in Wilmslow was granted to a corporate tenant, which operated a wine bar. Mr Shepherd was the director of the company and the manager of the business. Mr Shepherd personally guaranteed the tenant’s obligations under the lease. The business struggled as a result of Covid-19 restrictions and rent arrears accrued over the summer of 2021. Mr Shepherd decided that he no longer wished to operate the business and identified a new company to which he proposed to assign the lease. Through solicitors, an application was made for the landlord’s consent to assign on 20th August 2021. The landlord’s agent first refused to accept that service had been effective. On 2nd September, he accepted that the application had been served. He then raised numerous issues. The tenant’s solicitor asked for clarification – repeatedly. The landlord’s agent refused to give it, telling the solicitor instead that he should refer to the previous correspondence. The landlord asked a number of questions about the financial information provided and demanded that it be provided by 5pm the same day, or the application would be determined. The solicitor said that he would obtain that information. The correspondence became fractious and, at 1446 on 7th September, the solicitor wrote that if the landlord was not prepared to discuss the application, it should give a decision. At 1725, the application was refused on the basis of the covenant strength of the proposed assignee. The landlord then re-entered the property, changed the locks and relet the property to a new tenant.
The landlord served a statutory demand on Mr Shepherd for numerous sums, including arrears of rent. The sums were not paid and a bankruptcy petition was presented. Mr Shepherd applied to set it aside on the basis that (i) the landlord had unreasonably refused its consent to the assignment, (ii) the tenant had a cause of action in damages, which included the premium of £25,000 which the proposed assignee was offering, (iii) Mr Shepherd as guarantor was entitled to rely on that cross-claim in the bankruptcy proceedings, and (iv) the value of the cross claim extinguished the liquidated parts of the debts relied on. Over a year later, following a hearing in 2022, District Judge Sanderson sitting in the county court at Chester dismissed the petition, holding that the cross-claim was more than merely arguable.
The landlord appealed to the High Court, arguing that the District Judge was wrong to find that the cross-claim was more than merely arguable. The landlord’s position was that no reasonable landlord would have consented to the assignment to a new company on the basis of the financial information which was provided, highlighting numerous detailed issues with that information. The landlord also contended that the solicitor’s email of 1446 on 7th September 2021, which stated “we have given you all the information you are entitled to receive” amounted to a representation that the further information requested would not be provided. The test, argued the landlord, was whether it was more than reasonably arguable that the only course reasonably available to the reasonable landlord would have been to give consent to the assignment. Mr Shepherd argued that the test was whether it was more than reasonably arguable that the landlord’s conduct in refusing consent at the time and in the circumstances that it had done so was reasonable.
HHJ Hodge KC said this of the test.
“The question which the District Judge really had to answer was whether it was more than merely arguable that the only course properly and reasonably available to the Appellant as a reasonable landlord would have been to agree to the assignment at the time and in the circumstances that it did. It is not for the court to attempt to predict what might have happened at trial but merely to ask whether it was more than merely arguable that at trial the court might conclude that the only course reasonably available to a landlord at that time would have been to agree to the assignment. That is an extremely high burden to establish. It is not that the landlord might have consented, but that the only course a reasonable landlord would have taken would have been to consent to the assignment… The Appellant is not to be held to have withheld licence unreasonably if in the action that they took at the time and in the circumstances that they did they were acting as a reasonable man might have done”.
Notwithstanding that Mr Shepherd had “an extremely high burden to establish”, HHJ Hodge KC agreed with the District Judge that it had been established. That was because the landlord acted unreasonably in determining the application at the time and in the circumstances that it did, even though the financial information provided with the application “was clearly inadequate”. The Judge observed that the landlord’s agent’s obfuscation in his emails meant that the tenant’s solicitor was “knocking his head against a brick wall”. Had the landlord identified what further information it was seeking in response to the solicitor’s emails, and allowed a reasonable time for the information to provided, the Judge held that “there is no real argument that if no more information had been provided then the landlord would have been acting as a reasonable landlord might have done in the circumstances in withholding its consent”. He added that “what happened in this case was that the landlord did impose a deadline of its own choosing at a time when it had not clearly identified what further information it needed and, when asked to particularise that information, instead of doing so had merely referred back to unspecified earlier correspondence”. The Judge said that this had effectively drawn the tenant’s solicitor “into a pen in which he felt he was unable to make further progress in the provision of further information because he did not know what was being sought”. As a result, HHJ Hodge KC concluded that it was premature of the Appellant to have determined the matter as and when it did. That meant that it was more than merely arguable that the Appellant was not taking the only course that a reasonable landlord could have taken at the time and in all the circumstances. He agreed with the District Judge and dismissed the landlord’s appeal.
The Judge’s reasoning makes clear that it is crucial for landlords to act reasonably when considering applications for consent to assign. If they require further information about a proposed assignee, they must clearly specify what it is that they require. If they fail to do so, a refusal of consent may be unreasonable even if, had the information been specified and provided (or not provided), a reasonable landlord would have refused their consent. Moreover, if information is requested clearly, a landlord must allow a reasonable time for that to be provided. If they impose arbitrary deadlines, then their refusal is likely to be unreasonable even though it may have been reasonable if they had waited.
Tom Morris acted for Mr Shepherd, the successful Respondent, instructed by Richard Glover, Jessica Stanway and Rachel Airrees of JMW Solicitors LLP.
