R (M) v Secretary of State for Constitutional Affairs and Lord Chancellor and Others

Background

1. The defendant (“Riverland”), which is a member of the Topland Group Limited, is the lessor of premises known as Solar House, 907–925 High Road, Finchley, London N12. The lessee is the claimant (“NCR”). The lease, which was dated 12th December 1984, was for a term of 25 years commencing on 25 ^th December 1984. It provides for 5-year upward only rent reviews. The current rent in the period relevant to this appeal was £710,000. The final rent review was due to take place in December 2004.

2.Clause 3(11) contains provisions relating to the grant of consent for under-letting.Paragraph (a) (i) is an absolute prohibition against under-letting of the premises unless the underlease is granted —

“at the best rent obtainable in the open market without the grantor taking any premium or other capital consideration or (if greater) the rent then payable hereunder…”

It is common ground that at the relevant time the open market rent was equivalent to £16 per square foot, which was less than the current rent, equivalent to £19.30 per square foot. Accordingly, to comply with the clause, the rent on the under-letting would have to be the higher amount. There was an issue as to whether the proposed under-letting complied with that clause, having regard to a proposed reverse premium (see below), but that was resolved in favour of NCR by a judgment of Peter Smith J on 2 ^nd April 2004.

3.Paragraph (a)(iv) of clause 3(11), which is relevant for present purposes required that prior to the grant of the under-letting:

“(iv) the landlord's licence for such underlease has been given under seal (such licence subject to prior compliance with the foregoing provisions not to be unreasonably withheld)…”

4.Section 1(3) of the Landlord and Tenant Act 1988 supplements the contractual requirements provisions. For present purposes, the following are relevant:

“ (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 reasonable not to give consent,

(b) to serve on the tenant written notice of his decision whether or not to give consent specifying in addition –

(i) if the consent is given subject to conditions, the conditions,

(ii) if the consent is withheld, the reasons for withholding it.

…

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

(a) if he gave consent and the question arises whether he gave it within a reasonable time, to show that he did…

(c) if he did not give consent and the question arises whether it was reasonable for him not to do so, to show that it was reasonable. ”

By section 4:

“A claim that a person who has broken a duty under this act may be made the subject of civil proceedings in like manner as any other claim in tort for breach of statutory duty.”

The proposed under-letting

5. By the end of 2002 NCR had decided that the property was surplus to their needs and began looking for a way in which to dispose of or re-negotiate their interest. During the first half of 2003 there were discussions with Riverland and others on a range of possible solutions. It was clear that, because of the difference between the current rent under the lease and the market rent, a substantial reverse premium would be required on any under-letting. By June NCR had identified a potential under-lessee in the form of Telco Global Ltd (“Telco”).

6. On 30 ^th June 2003 Herbert Smith on behalf of NCR wrote to Riverland requesting consent to sub-let to Telco, enclosing draft heads of terms and audited accounts of Telco's holding company. Further accounts and financial information relating to Telco itself were promised under separate cover. The draft heads of terms made clear that a reverse premium of £3m was to be paid by NCR to Telco.

7. Negotiations on the part of Riverland were conducted in the name of Berkley Estates London Ltd (“Berkley”), another member of the Topland Group, principally by Mr Kyte, the Group Management Surveyor. It is necessary to mention only a letter of 17 ^th July 2003, which was the first formal response to the application. In it Mr Kyte requested early provision of the promised accounts for both the proposed lessee and its holding company to enable its “stature” to be considered. He expressed concern about the financial terms of the underletting, in particular the reverse premium, which substantially reduced the effective rent payable by the undertenant, and would have “serious consequences for the valuation of our interest in the premises”. He added that it would be necessary to notify Riverland's bankers, and obtain their consent to the proposed subletting; and that the payment of the premium would have an effect upon the rent review, due to take place in 2004. In the circumstances, he said that Riverland were “minded to refuse consent for this reason”, but would defer a decision until the receipt of the outstanding information and any further comments.

8. On 28 ^th July 2003 Herbert Smith provided further financial information, together with an opinion of Mr Derek Wood QC dealing with the legal issue of compliance with paragraph (a)(i) of clause 3.11. On 7 ^th August 2003 Herbert Smith set a deadline for a decision of 4pm on 11 ^th August 2003. On 8 ^th August, Berwin Leighton Paisner (“BLP”) informed Herbert Smith that they had been instructed on behalf of Riverland, and objected to the 11 ^th August deadline. On 11 ^th August they wrote further:

“In addition to the concerns already expressed, our clients are seriously concerned as to the covenant strength of the proposed undertenant, notwithstanding the offer of a guarantee from the parent company. They are concerned about the loss made by the proposed undertenant and the low value of the net worth of the proposed undertenant and the proposed guarantor.”

They asked if further “information or comfort” could be provided to allay Riverland's concerns.

9. On 14 ^th August Herbert Smith wrote offering “a narrow window of opportunity” to conclude the underletting by 20 ^th August, but “without prejudice” to their contention that a reasonable time had already elapsed. (As emerged from NCR's oral evidence, Telco had by then indicated that it was willing to wait until 20 ^th August for a decision by Riverland.) On 20 ^th August BLP wrote formally confirming the refusal of consent on the following grounds:

“Our clients… remain convinced that the covenant strength of the proposed undertenant is insufficient, despite the offer of a rent deposit and the proposed references. This, combined with the unsatisfactory position with regard to the financial terms of the proposed underletting, which has been the subject of correspondence, combine to lead them to withhold consent to the proposed underletting.”

10. The Judge rightly found the substance of Riverland's reasons for refusal in their solicitors’ letters of 11 ^th and 20 ^th August. I would add, although the Judge had some doubts on this, that the reference in the former to “the concerns already expressed” can in my view fairly be taking as including a reference to the points in Mr Kyte's letter of 17 ^th July.

The judgment below

11. The Judge referred to the summary of the relevant principles given by Lord Bingham in Ashworth Frazer Limited v. Gloucester City Council [2001] 1 WLR 2180 (to which I shall return below). He also quoted extensively from three recent authorities on the effect of the 1988 Act: Norwich Union Life Insurance Society v Shockmore[1999] 1WLR 531 (Sir Richard Scott, V-C), Footwear Corporation v Amplight Properties Ltd[1999] 1WLR 551 (Neuberger J), and Go West Ltd v Spigarolo[2003] QB 1140 (Court of Appeal, substantive judgments being given by Munby J and Pill LJ). From those authorities he derived the following summary, which was not materially in dispute before us:—

“(1) A landlord owes a duty to a tenant to give a decision on an application for consent within a reasonable time: section 1 (3) of the Act.

(2) What will amount to a reasonable time will depend upon all of the circumstances of a particular case: per Munby J. in Go West at page 1149C-F.

(3) The assessment of whether a reasonable time has elapsed in which the landlord has to give a decision will be made at the time at which it is claimed that a reasonable time has elapsed, and in the light of the facts at that time: per Sir Richard Scott V-C in Norwich Union at page 545F-G and Munby J. in Go West at page 1150A-B. Amongst the factors that will be borne in mind in assessing whether a reasonable time has elapsed is that the purpose of the Act is to “ enable there to be fair and sensible dealing between landlords and tenants [and] a state of certainty to be achieved at the earliest sensible moment”: per Sir Richard Scott V-C in Norwich Union at page 545H.

(4) If, within a reasonable time, a landlord gives notice refusing consent, reasons must be given for the refusal: see section 1 (3) (b) (ii) of the Act.

(5) The...