FREE BOOK CHAPTER: Typical Content and Effect Of Lease Restrictions (from ‘A Practical Guide to Applications for Landlord’s Consent and Variation of Leases’ by Mark Shelton)

CHAPTER ONE

TYPICAL CONTENT AND EFFECT
OF LEASE RESTRICTIONS

This chapter considers the usual content and effect of lease restrictions placed upon tenants in relation to alienation, alterations and change of use. It refers to relevant parts of the Code for Leasing Business Premises in England and Wales, and introduces the Alienation Protocol and the Alterations Protocol. It also outlines relevant considerations when more than one type of application for consent is made at the same time.


Types of prohibitions in leases

If a lease makes no provision in relation to a particular action which the tenant proposes to carry out upon the premises, then in general the tenant has a right to go ahead with that action, and does not require any consent from the landlord. It is only if that action is prohibited by the terms of the lease that landlord’s consent becomes a relevant requirement. Prohibitions fall into different classes. The classic analysis is that prohibitions imposed upon tenants in leases may be absolute, qualified or fully qualified.

  • An absolute prohibition does not contemplate any consent by the landlord, but simply bans the action outright. That is not to say that the landlord may not be persuaded to consent to the prohibited action regardless, however such a ‘consent’ would in reality amount to a variation of the lease terms. The landlord’s discretion as to whether to grant or refuse consent in such a case is absolute.

  • Under a qualified prohibition, the action may not be undertaken unless the landlord gives its prior consent.

  • Under a fully qualified prohibition, the action may not be undertaken unless the landlord gives its prior consent, not to be unreasonably withheld. The usual form of words is ‘not to be unreasonably withheld or delayed’, but where the words ‘or delayed’ are omitted, a sufficiently lengthy delay can of course amount to ‘withholding’. The effect at common law of a fully qualified prohibition is considered in the next chapter.

Absolute and fully qualified prohibitions are routinely encountered in leases, when dealing with the main areas of restriction: alienation, alterations and use. Qualified prohibitions are rare.


Typical restrictions

Alienation

Alienation’ simply means dealings with the leased property. One thinks immediately and naturally of assignment of the lease, and sub-letting, but restrictions are usually much broader in scope.

Clauses typically begin with a very broad prohibition of assignment, sub-letting, charging, holding on trust, and parting with or sharing possession or occupation. This prohibition usually applies both in relation to the whole of the premises, and in relation to part of them, and will be expressed as an absolute prohibition. However, it will be subject to exceptions as provided for in the remainder of the clause.

  • There will generally be an exception permitting assignment of the lease as a whole, with the landlord’s prior consent, not to be unreasonably withheld or delayed. There may be specific circumstances set out in the clause in which the landlord will be entitled to refuse consent (for example the proposed assignee does not meet some financial test), or conditions which the landlord will be entitled to impose upon any consent (for example provision by the proposed assignee of an acceptable guarantee). Assignment of part of a lease, while theoretically possible, gives rise to difficult technical and practical problems, and so is usually not within the scope of this exception; it is therefore absolutely prohibited.

  • Sub-letting is usually dealt with in some detail, and whether sub-letting of part is permitted will depend largely upon the nature of the property. A tenant whose lease comprises five floors of an office block may well be permitted to sub-let individual floors (sometimes half-floors, depending on the configuration of the building). A tenant of a light industrial unit, on the other hand, will probably not be permitted to sub-let in part, since the property may not be easily divided.

    Insofar as sub-letting is permitted, whether in whole or in part, there are usually pre-conditions: typically, a proposed sub-letting may only be allowed by way of exception to the general absolute prohibition if: (a) it is to be at the best market rent obtainable; (b) it is to be otherwise upon all the same terms as the lease; and (c) it is to be contracted out of the Landlord and Tenant Act 1954. Provided all those pre-conditions are met, sub-letting is permitted with the landlord’s prior consent, not to be unreasonably withheld or delayed.

  • There are sometimes arrangements for groups of companies, whereby sub-letting to companies within the same group as the tenant is permitted, without any requirement for a specific consent. Parting with or sharing occupation or possession is sometimes also permitted to group companies, again without any specific consent.

    As to occupation and possession, to a layman they may be interchangeable expressions, but in law they are different. The distinction between possession and occupation in the context of alienation restrictions was considered at length in Akici v L R Butlin [2006] 2 All ER 872.

The Code for Leasing Business Premises in England and Wales 2007 recommends that where landlord’s consent to an assignment or sub-letting is required, it should be provided that consent is not to be unreasonably withheld or delayed. In other words, the prohibition in the lease should be in the fully qualified form. While the Code is not binding, s.19(1), Landlord and Tenant Act 1927 applies to transform any qualified prohibition on assignment or sub-letting into a fully qualified one (this provision will be considered more fully in the next chapter). The combined effect is to make it rare to see an alienation restriction in the qualified form. It will be either absolute or fully qualified.

In certain circumstances, it may be very important to landlords to have complete control over dealings with the property. In some retail leases, for example, rent is calculated by reference to the tenant’s turnover. A proposed assignee’s business model may be very different from that of the incumbent tenant, and the amount of rent that the landlord would receive could be reduced if the lease were to be assigned. Rather than have its decision submitted to a reasonableness test in the courts, the landlord will wish to have absolute discretion.

One answer to that is to make the prohibition absolute, though this may be commercially unacceptable to the tenant, and would have an adverse impact upon valuation in any rent review. The alternative is to include an ‘offer-back’ provision: a requirement that prior to making an application for consent to assign or sub-let, the tenant must first offer to surrender the lease to the landlord. The landlord then has the option to bring the lease to an end by accepting the offer, rather than submit to the reasonableness requirement.

Such provisions may also be used where high rental growth is anticipated, so that instead of the tenant assigning the lease for a premium, the landlord can re-let at a higher rent.

Doubt was thrown on the effectiveness of such provisions by the decision in Allnatt London Properties Ltd v Newton (1983) 45 P. & C.R. 94, in which the agreement to surrender was held to be unenforceable under s.38(1), Landlord and Tenant Act 1954. While in theory that consequence could be avoided by following the procedure under s.38A of the 1954 Act for contracting-out the surrender agreement, in practice there was no way of compelling the tenant to do so. It is now thought, following the reforms to the 1954 Act which came into effect on 1 June 2004, that an effective offer-back procedure is possible (though this has never been tested in the courts) and some leases provide for this.

Alterations

When looking at an alterations covenant in a lease, it may be relevant to bear in mind the broader commercial context. In Bickmore v Dimmer [1903] 1 Ch 158, the tenant fixed a large clock on the outside of the premises, by means of bolts which went six inches into the wall, to advertise its business of selling watches. This was held not to fall foul of the prohibition on alterations, since the parties must have contemplated that a tenant would carry out acts which would be usual in the conduct of its business. That is an old case, and it would be usual now to see express provision dealing with external facia and advertisements, but it is a reminder that it is always necessary to consider the meaning and extent of the restriction.

The wording of the alterations covenant will depend upon the type of building and the extent of the demise. A lease of whole will typically permit the tenant to carry out a broader range of alterations than a lease of part. In a lease of part, structural and external works are often not permitted at all, and this is sometimes the case with a lease of whole. A tenant of a stand-alone industrial unit will expect to have more flexibility than a tenant of a unit in a shopping centre. Different landlords have different policies as well.

These different outcomes are achieved by distinguishing between different categories of alteration.

  • Certain types of work may not be prohibited at all, being specifically permitted by a blanket permission in the lease. A lease of office premises, for example, might permit the installation and removal of demountable partitioning, while a warehouse lease might permit the installation and removal of full-height racking. Sometimes the permission is expressed more broadly, to allow any internal non-structural work. So long as the tenant’s proposed work falls within this category, specific consent is not required, although there is normally a covenant to notify the landlord after the works have been carried out.

  • At the other end of the spectrum, there is generally a category of work which is absolutely prohibited. This is likely to include structural work, and may perhaps extend to matters affecting the external appearance of the property. That may be important where the building is listed, or is in a conservation area, or simply for maintaining the visual unity of a development. Since the prohibition is absolute, the law relating to landlord’s consents is irrelevant, though as mentioned above it may be that the landlord will be persuaded to consent to work of this nature, the ‘consent’ taking the form of a variation to the lease.

  • It is the third, residual category which is of interest in the context of the issues addressed in this book: alterations subject to a fully qualified prohibition. Work in this category can only be carried out with the landlord’s prior consent, not to be unreasonably withheld or delayed.

It would be unusual to encounter a proposed alteration which was not provided for in one of the different categories. In that rare situation, though, a landlord may have a fall-back protection, in the law of waste. The law relating to waste is archaic, and is rarely of practical significance. ‘Voluntary waste’ means damaging the premises by some deliberate or negligent act, and may provide a remedy in the case of alterations which are not controlled by the lease. Liability for voluntary waste arises in tort independently of what the lease may say, but it is often addressed in the tenant’s lease covenants as well.

The Code for Leasing Business Premises in England and Wales recommends that:

  • A landlord’s control over alterations should be no more restrictive than necessary to protect the value of the landlord’s property

  • Internal non-structural alterations should be permitted without any requirement for landlord’s consent, unless there will be an impact on services and systems in the wider building

Use

The use clause (or ‘user clause’) in a lease sets out the permitted use of the property. Older leases very often also contained a lengthy list of objectionable uses which were specifically prohibited, and these lists tended to have a long and not very distinguished history, with further prohibited uses being added into lease precedents on an ad hoc basis over the years, while nobody thought (or perhaps dared) to remove out-of-date items. A clause might prohibit use of the premises for various archaic business types, such as those of a blood-boiler or tallow-chandler, for example, while a more contemporary addition might be use for the purposes of a social security office or unemployment exchange.

Modern leases rarely contain that sort of list, and instead generally confine themselves to identifying the permitted use, and prohibiting all other uses. There is generally also a restriction on any use which may cause nuisance or annoyance to neighbouring occupiers, which presumably deals with those pariahs the blood-boilers and tallow-chandlers, and some leases specifically prohibit use for illegal or immoral purposes.

The prohibition on all but the permitted use is generally an absolute one, so that questions of landlord’s consent rarely arise. Retail leases, though, may contain a fully qualified, or sometimes just a qualified, prohibition. A lease might provide for a specific use such as the sale of ladies’ fashion clothing, while permitting any other retail use with landlord’s consent, not to be unreasonably withheld or delayed. In such a case, a change to anything other than another retail use would fall within the absolute prohibition.

It is unusual for a dispute over change of use to turn upon a reasonableness provision in the user clause, however. More commonly, where a retail tenant proposes to assign or sub-let, and the incoming third party requires a change of use, the relevant clause of the lease is the alienation clause, since the caselaw establishes that the intended use of the premises by an assignee or sub-tenant may justify refusal of consent to the assignment or sub-letting.

Planning controls

There will normally be a separate covenant governing whether the tenant is permitted to make planning applications, which may be needed before tenants can make alterations or change the use of premises. The landlord will be concerned that a breach of planning law by the tenant could lead to enforcement action against the landlord, and potentially have an adverse impact on the investment value of the property.

Usually the lease will provide that the tenant will not apply for, or implement, a planning consent without the landlord’s consent, not to be unreasonably withheld or delayed where the landlord has consented to the activity underlying the tenant’s application for planning consent (i.e. alterations or change of use). There may also be a provision that if the tenant implements a planning consent, it will comply with any conditions, and implement the consent in full, before the end of the term. The landlord’s concern is that if the tenant leaves a consent only partly implemented, the local authority could require the landlord to complete the implementation after the lease has ended.

As regards use, the permitted use of the property will fall within one of the Use Classes set out in the Town and Country Planning (Use Classes) Order 1987, and indeed the user clause may well define the permitted use by reference to one or more such Use Class. Change from one Use Class to another generally requires planning permission, though some shifts between Use Classes are permitted by the Town and Country Planning (General Permitted Development) (England) Order 2015.

It is important to bear in mind that the two restrictions, contractual and statutory, are parallel and unconnected. If a change of use from one Use Class to another is permitted by the planning legislation, it may still be prohibited by the use clause in the lease, and the planning position will not necessarily determine whether a landlord’s refusal to permit change of use is reasonable or not.


Combined applications

As suggested above, a proposal to assign a lease, or to sub-let, may well be accompanied by a proposal to change the use of the property. Even more likely is that the incoming occupier will wish to make some physical changes to the property, so that there may be a need to obtain the landlord’s consent to alterations as well. If the alterations or change of use require planning consent, that restriction is engaged too, so that four separate consents may be required for one transaction.

This may have implications as regards the degree of control which the landlord can exercise. As we shall see, the landlord may be in difficulties in refusing consent to an assignment or sub-letting, but may be on much firmer ground in refusing consent to alterations. If the alterations are an integral part of the transaction, then that is a back-door route to a much greater degree of control over the assignment or sub-letting. This factor can also have consequences for the tenant’s ability to recover damages for an unreasonable refusal by the landlord. We shall return to these considerations later.

Protocols

Although this chapter is not concerned with matters of procedure, it is convenient to make early mention of two protocols which give useful guidance on applications for landlord’s consent. The website www.propertyprotocols.co.uk has been established as a joint enterprise between the law firm Hogan Lovells LLP and Falcon Chambers, one of the leading sets of barristers’ chambers practising in landlord and tenant matters. It has published a small (so far) number of protocols which aim to assist in avoiding property disputes, or if unavoidable, resolving them.

The first one published was the Protocol for Applications for Consent to Assign and Sub-let, abbreviated to the Alienation Protocol. The second was the Protocol for Applications for Consent to Carry Out Alterations, or the Alterations Protocol. They can be downloaded free from the website, together with accompanying explanatory materials.

Neither is in any way binding, nor is there yet any suggestion of them having been quoted in court as being persuasive. However, their provenance is excellent, and the content is soundly based upon the existing law and best practice. While these documents are not, accordingly, controversial, they do include some practical suggestions whose widespread adoption would be welcome. At the very least they can be regarded as a form of useful checklist for dealing with such applications, whether acting for landlord or for tenant.

They are mentioned here because the procedures outlined in them follow from the legal analysis of different types of prohibition, and from the nature of the statutory interventions in this field, and because they contain commentary on factors likely to be of relevance in assessing reasonableness. All these matters are the subject of the next few chapters, and it will be useful to refer to relevant parts of the Protocols as we proceed.

Summary

There are three types of prohibitions in leases governing tenant’s activities upon the premises: absolute, qualified and fully qualified. It is unusual to see a qualified prohibition; they are usually either absolute or fully qualified.

As regards alienation, leases usually contain an absolute prohibition on any dealings with the property, in the widest terms, but subject to detailed exceptions. The exceptions will usually include a fully qualified prohibition on assignment of the lease as a whole, so that the lease may be assigned with the landlord’s consent, not to be unreasonably withheld. A further exception will often be a fully qualified prohibition on sub-letting. Each is typically subject to further detailed control in the terms of the lease. There is sometimes also a provision permitting intra-group assignments or sharing arrangements, again usually subject to restrictions. ‘Offer-back’ clauses may be included where control is particularly important to the landlord, so that the landlord may elect to accept a surrender of the lease rather than permit the tenant to make an application for consent to assignment or subletting.

Alterations covenants usually separate types of work into different categories:

  • Those permitted generally, without any need for specific consent.

  • Those prohibited absolutely, such as structural works.

  • Those subject to a fully qualified prohibition, which may therefore be carried out with landlord’s consent, not to be unreasonably withheld.

It is only the third category which raises any issues of landlord’s consent.

Change of use is generally subject to an absolute prohibition, though retail leases may have an exception by means of a fully qualified prohibition, permitting change to another retail use with landlord’s consent, not to be unreasonably withheld.

Landlord’s consent may also be required in relation to making planning applications, and this is usually on a fully qualified basis, so that landlord’s consent may not be unreasonably withheld.

It is often the case that more than one type of application is made together, and this may have tactical implications as to the degree of control which the landlord can in practice exercise.

Two protocols, the Alienation Protocol and the Alterations Protocol, contain useful procedural and substantive guidance in this area of law and practice.

 

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