Assignment and underletting

Covenants that restrict the tenant's ability to assign or underlet are construed against the landlord. Key principles to emerge from case law are:

• a covenant against assignment does not prohibit underletting

• a covenant against assignment of part does not prohibit underletting part

• a covenant not to part with possession prohibits both assignment and underletting

• a covenant not to part with possession is not broken by a tenant who in law retains possession, even though he allows another to use and occupy the premises

• a covenant not to part with possession does not prohibit sharing with licensees

• a covenant against assignment or underletting of 'any part' of the premises prohibits assignment or underletting of the whole as well as part only

• a covenant 'not to underlet the premises' does not prohibit an underletting of part

• a covenant against parting with possession does not prevent the tenant from surrendering the lease

Obtaining consent

Landlord and Tenant Act 1988, s 1(3) makes it clear that where landlord's consent is required for an assignment or underletting, the landlord must give that consent except where it is reasonable to withhold it. This applies even where the covenant does not expressly provide that a landlord is not unreasonably to withhold consent. Landlord and Tenant Act 1927, s 19(1)(a) imports that requirement into any covenant that requires landlord’s consent for alienation, and applies ‘notwithstanding any express provision to the contrary’.

Consent must be given within a reasonable time after receipt of the tenant's application. If there is no good reason for withholding consent then there is case law to suggest that it should be given within a week after the tenant's request - a far tighter timescale than the 28 days sometimes suggested by inference from Dong Bang Minerva v Davina [1996] 2 EGLR 31.

Although the landlord must make a decision within a reasonable time, it is entitled to request reasonable information in order to make that decision. It is usually sufficient for the landlord to be informed of the details of the heads of terms. Ultimately, the level of information that the landlord may reasonably request will depend on the terms of the lease.

Withholding consent

Generally, it is unreasonable for a landlord to refuse consent where it will gain a disproportionate benefit or 'collateral advantage'. A request for a rent deposit has been held to be unreasonable, since the landlord would gain additional security beyond its rights under the lease. The right for a landlord to refuse consent to avoid a potential breach of covenant was underlined in Ashworth Frazer v Gloucester City Council [2002] 1 All ER 377, where consent was refused to an assignment because it would breach the user clause. The fact that the landlord could enforce the user covenant against the assignee was irrelevant. The court held that it was perfectly legitimate for a landlord to 'seek to avoid an undesirable outcome… which he reasonably fears may well occur, not least where that involves the prospect of unwelcome litigation'.

A landlord may seek to withhold consent on the grounds that the proposed assignees' or undertenant's accounts are not strong enough. This objection may not be sustainable, particularly where the proposed transaction is an underletting and the tenant will remain liable. Although case law and practice suggest that a tenant should have net profits of three times the rent, this is merely a rule of thumb. The court has also dismissed a landlord's argument that if the lease were forfeited or disclaimed, it would be obliged to accept the subtenant as its direct tenant. Even if the scenario did occur, it would be up to the court to decide, at the relevant time, the appropriateness of granting relief from forfeiture or a vesting order, at which time the landlord would be able to put his case

Underlettings and side letters

In Allied Dunbar v Homebase [2002] 2 EGLR 23 the lease stated that an underletting could proceed only if it satisfied specific conditions, including a requirement that the covenants in the sublease should reflect those in the headlease and that any underlease to include provisions for the rent to be reviewed to not less than the full market rent. The onus was on Homebase to show that its transaction satisfied these conditions. A landlord’s duties under the Landlord and Tenant Act 1988 concerning consent transactions do not apply until any conditions precedent imposed by the lease are satisfied.