Wednesday, 13 July 2011

Leasehold Management – Unlocking the Chain of Command

Leasehold management can be a complex business where there is a chain of landlords, often creating situations which require a degree of mental dexterity both to understand and to navigate them.

This is particularly true where a tenant, at the bottom of the chain, applies to its immediate landlord for consent to do something under its lease, such as to assign or sublet, or to carry out alterations or change the use.

In many situations the immediate landlord will be required to act reasonably in deciding whether or not to give its consent – either because that is what the lease says, or because statute imposes a duty to do so.

Where the immediate landlord is itself a tenant, it will also have to take into account what its obligations are under its own lease. Its own landlord might also be a tenant, and so on and so on until you get to the top of the chain – the owner of the freehold.

In those situations you have to look at each lease in the chain of command to see what is permitted.

You need to look at whether the proposal is prohibited absolutely or permitted and, if it is permitted, whether the landlord in question has an absolute discretion or is required to act reasonably (either by the lease or by statute).

What if a superior lease prohibits something absolutely?

This is fairly straightforward, because the immediate landlord will simply have to say no too, because it will be obliged to comply with the superior lease, even though the sublease might be silent on the point. In most cases if something has been prohibited in a superior lease, that prohibition will have been passed down in the sublease.

What if there is an absolute discretion under a superior lease?

There has been a case this year on this point - Eaton Mansions (Westminster) Ltd v Stinger Compania de Inversion S.A. [2011] EWCA Civ 607 – where the tenant of a flat applied for consent to install air-conditioning equipment on the roof of the block.

The landlord was itself a tenant and under the superior lease the freeholder had an absolute discretion whether or not to consent to the air conditioning (so too did the immediate landlord but in the circumstances of the case the immediate landlord had accepted an obligation to act reasonably).

The landlord argued that it was entitled to refuse consent, because installing the air conditioning would put the landlord in breach of the superior lease because the freeholder had not agreed to it.

Where the freeholder had declined to commit itself on whether what was proposed would amount to a breach of the superior lease, or that if it was, the freeholder would not object to it being done, the court decided that the landlord was "entitled to take a cautious line" regarding the attitude of the freeholder and could not be expected to "force the issue" or risk giving consent to something that might expose it to a claim for breach of covenant.

If the freeholder would have confirmed that implementing the proposal would not amount to a breach of the superior lease, or would have waived the breach, then (in the absence of any other reason for refusing consent) it would be unreasonable for the landlord to refuse consent.

But if the freeholder regarded the proposal as a breach, it would not be unreasonable for the landlord to withhold consent.

In this case, although the freeholder had not committed itself one way or the other, it had raised concerns about the size and visibility of the air-conditioning units and the possibility of opening the flood-gates to similar requests by other tenants – and so it was decided the freeholder would not have agreed to the work.

What about where the superior landlord and the landlord must both act reasonably?

This can pose difficult problems. Let’s assume you are the immediate landlord receiving an application from your tenant for consent to some alterations.

Here are some possible scenarios involving your own landlord (who I’ll assume is the freeholder), who is obliged to act reasonably under the superior lease.

·         Your landlord unreasonably refuses consent.

Can you hide behind the superior landlord’s decision and refuse consent unreasonably as well?


Case law from as far back as 1958 says that if the superior landlord is acting unreasonably, then you, as the immediate landlord, cannot withhold consent in reliance on your superior landlord's refusal. You will not be at risk if you give consent, because your superior landlord is being unreasonable in refusing consent.

The key thing in this situation is for you to consider the application on its merits. But in reality that is not an easy position to be in.

·         Your landlord reasonably refuses its consent.

You consider that to give consent yourself would put you in breach of your own lease covenants.

Are you entitled to refuse consent?


·         Your landlord is willing to consent to your tenant’s proposals, but you don’t want to consent to them.

Are you obliged to consent?

No. But you must still act reasonably and consider the application on its merits. You might still have a reasonable case for refusing consent for a reason which perhaps did not affect the superior landlord.

·         Your landlord refuses consent but you don’t know whether he is being reasonable or not and you want to give consent.

This can be very difficult. You are under a duty to respond within a reasonable time to your tenant’s request and so you may not have time to resolve the issue with your superior landlord. What can you do?

In that scenario you have to take advice and try and decide the application on its merits – which means forming a view on whether or not your superior landlord is being reasonable or unreasonable in refusing its consent. Then you have to make your own decision based on that assessment. That is going to be quite a tough call in many situations, and is highly subjective. But there’s no easy way round this.

The conundrums I’ve looked at become even more complicated where the chain of leases is longer, and each landlord takes a different approach.

Ultimately, these situations have to be dealt with in a systematic way and the tenant should be kept fully informed of what is happening higher up the chain.

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