Commercial leases commonly contain provisions that the landlord’s consent must be sought before an assignation or sub-let can take place, with the landlord being unable to reasonably withhold consent. In the case of Homebase Limited v Grantchester Developments (Falkirk) Limited the Court of Session considered this test in the context of reverse premiums.
Homebase leased retail premises from Grantchester on a 25 year lease which had commenced in November 1995. They wished to assign their interest in the lease to CDS (Superstores International) Limited but, in terms of the lease, Homebase required “the prior written consent of the Landlord which consent shall not be unreasonably withheld … in the case of an assignee of sound financial standing demonstrably capable of fulfilling the Tenant’s obligations in terms of this Lease…”.
In considering the request for consent to assignation, the landlord asked Homebase to provide further details of a proposed transaction between Homebase and the proposed assignee so that the landlord could assess any impact it may have on their interest in terms of the lease. The landlord specifically requested information about any reverse premium or financial arrangement relating to the payment of sums due under the lease following the assignation.
Homebase’s view was that this information was 'irrelevant' in respect of the application for consent. Homebase contended that the landlord should only be concerned with the identity and character of the proposed assignee and its ability to comply with the tenant’s obligations under the lease. It refused to provide the information, so the landlord refused to grant consent.
Since it was accepted by the parties that the proposed assignee was of sound financial standing and demonstrably capable of fulfilling the tenant’s obligations under the lease, Homebase sought declarator that the landlord had unreasonably withheld consent.
Lord Tyre concluded that the landlord had not unreasonably withheld consent. He agreed with the landlord’s position that the alienation clause set out a two-stage approach. The first stage was to determine whether the proposed assignee met the financial test specified in the lease. If the proposed assignee failed to meet this test, then the landlord had an absolute right to refuse consent. If, as here, the proposed assignee does meet the financial test, the second stage applies, which is that the landlord’s consent can only be withheld if withholding is reasonable.
There may, for example, be good reasons, unconnected with the financial standing of the proposed assignee, why a landlord wishes to withhold consent, although he will not be entitled to do so if the reasons have nothing to do with the landlord/tenant relationship and the subject matter of the lease.
In this particular case, consent was withheld because of Homebase’s refusal to provide information about whether it had agreed some sort of reverse premium or rent subsidy with the proposed assignee. Since these may affect the rental value of a property, Lord Tyre concluded that the landlord’s request for this information was reasonable, and refusal to provide it gave the landlord good grounds to withhold consent. Lord Tyre did not accept the tenant’s argument that the landlord’s concern about the impact of any premium/subsidy was a collateral issue.
This case follows existing authority in Scottish cases such as BurgerKing Ltd v Rachel Charitable Trust and BurgerKing Ltd v Castlebrook Holdings Ltd, and makes clear that, because the payment of a rent subsidy or reverse premium is a matter which might reasonably affect the value of the landlord’s interest, the nature of any reverse premium or rent subsidy may offer reasonable grounds for refusing consent. As a consequence, refusal to provide information about any such arrangement may also provide reasonable grounds for refusing consent, at least until the information is supplied.