Most applications for consent to assign or sub-let under a lease will proceed upon the basis that the landlord must not unreasonably withhold consent to the application. Withholding consent means either refusing consent or failing to provide a response to the application within a reasonable time. Many people miss the two-stage test that often exists in their leases.
TWO-STAGE TEST
More leases than you might expect contain a 2-stage test for applications for consent.
The first stage is usually a suitability requirement: The proposed assignee or sub-tenant must be of sound financial standing, or it must be respectable and responsible. This requirement often comes before the reasonableness test. When it does, the tenant must demonstrate that the proposed assignee or sub-tenant is responsible and respectable, and only if it does, do we move on to the second stage of the test – the reasonableness of the landlord's decision.
The first stage is a more technical test and less open to interpretation. For example, if the tenant is not of sound financial standing, it may not matter that a guarantee is being offered. However, when considering if it would be reasonable for the landlord to refuse consent, the availability of a guarantee may be highly relevant.
There have therefore understandably been several recent court actions about whether the two-stage test exists including Burgerking Ltd v Castlebrook Holdings Ltd and Homebase Limited v Grantchester Developments (Falkirk) Limited.
From these cases, we know the following.
Stage 1
Responsible means:
- relates to financial responsibility and can apply equally to a company as to an individual.
- does not relate to any group companies or related individuals.
- the proposed sub-tenant's or assignee's ability to meet its financial obligations under the lease e.g., its ability to pay rent, is relevant.
Note that when negotiating the lease, tenants may seek to remove any requirement for the sub-tenant to be of sound financial standing. However, if the lease says that the sub-tenant must be 'responsible and respectable' then the financial covenant of the proposed sub-tenant would still be relevant.
Respectable means:
- refers to the reputation of the proposed assignee or sub-tenant.
- the reputation of a company is not the same as the reputation of any related individuals.
Stage 2
The second stage of the test, which can only be considered if the first stage is met, is more open to debate and difficult to predict.
We previously discussed the requirements for a refusal to grant consent, in the context of a sub-let, to be held unreasonable here. There are 11 key points to consider.
Key Takeaway
Beware of the two-stage test in your lease, it could have a material impact on whether or not a landlord can refuse consent.
