Property law reports

Landlord and tenant: Licence to sublet

Underlease - consent - tenant's freedom to sublet qualified by provisos as to contents of proposed underlease - tenant subletting on required terms but furnishing proposed underlessee with collateral deed modifying certain obligations recited in proposed sublease - judge upholding landlord's refusal of consent to underlease - whether proposed sublease and deed interdependent - whether provisos complied with - appeal dismissed provisos complied with - appeal dismissed

Allied Dunbar Assurance plc v Homebase Ltd and another:CA (Lords Justice Simon Brown, Chadwick and Hale):17 May 2002

The appellant tenant held a 25-year, full-repairing lease of a retail warehouse unit in Wolverhampton.

The rent was subject to five-yearly, upwards-only reviews.

By clause 3(32)(C) of the lease, the tenant covenanted not to underlet any part of the unit without the prior consent of the respondent landlord, such consent not to be unreasonably withheld.

That covenant was subject to certain provisos, notably that any underlease would:

l Not reserve a rent less than the full market rent reasonably obtainable without taking a premium;

l Contain covenants by the underlessee in the same form as those given by the tenant; and,

l Effectively provide that the rent payable by the underlessee would be reviewed on an upwards-only basis on the same dates as those applicable to the rent payable by the tenant.

The tenant subsequently sought to sublet the unit, but, because of its inconvenient size and location, found it difficult to find a suitable subtenant.

The eventual subtenant, L Ltd, was not prepared to pay a rent as high, or accept repairing obligations as onerous, as those under the lease.

The agreed heads of terms reflected that, providing, among other things, for a fixed rent after 2005.

An underlease was drafted in accordance with the terms of the lease.

In an accompanying collateral deed, expressed to be personal to the tenant and L Ltd, the tenant undertook to indemnify L Ltd in respect of part of the rent, namely the difference between the rent set out in the heads of terms and that under the lease, and the cost of complying with certain repairing obligations.

The landlord withheld its consent to the underlease on the ground that it did not comply with the provisos, and sought an order to prevent the subletting from going ahead.

The tenant counterclaimed under the Landlord and Tenant Act 1988 for damages for unreasonable refusal of consent.

The judge held that the collateral deed was to be read as one with the draft underlease.

He found that the first and second provisos were met, since the rent stated in the heads of terms was not less than the full market rent reasonably obtainable in the circumstances; and the indemnity provisions in the collateral deed did not detract from the repairing obligations in the underlease.

However, he found that the proviso as to rent reviews was not met, because it would be unrealistic to ignore the rebate under the collateral deed.

He, accordingly, allowed the landlord's claim and dismissed the counterclaim.

The tenant appealed.

John McDonnell QC and Gerard van Tonder (instructed by Russell Jones & Walker) for the appellant; Michael Barnes QC and Tiffany Scott (instructed by Nabarro Nathanson) for the respondent.

Held: The appeal was dismissed.

The collateral deed and the underlease were interdependent and had to be read together: AG Securities v Vaughan [1988] 1 EGLR 36 applied.

Accordingly, the rent was effectively that set out in the heads of terms.

It followed that the third proviso was not met.

The fixed rent, under the heads of terms, did not meet the proviso that the rent was to be varied on a review 'to the intent that' a market rent would be obtained, in the absence of evidence that the market rent obtainable in June 2005 could not exceed that figure.

Moreover, the judge had erred in concluding that the second proviso, as to repairs, was met.

The overall effect of the underletting agreement was that L Ltd was to effect repairs partly at its own expense and partly at the tenant's expense.

That was not a covenant 'in the same form' as the covenant obliging the tenant to carry out repairs entirely at its own expense.

Since the proposed underletting did not comply with the provisos, no issue arose as to the landlord's unreasonableness.

It made no difference that the collateral deed was expressed to be personal to the tenant and L Ltd, and to have effect only between them.

The original parties were to be taken to have intended that the landlord should be able to control the terms of a permitted underlease, since he had a commercial interest in the terms of such a lease.

For instance, the rent under the underlease was an obvious comparator on any rent review under the headlease, and the landlord's interest in the state of repair of the premises was best served by ensuring that any underlease contained similar repairing covenants to those in the headlease, so that the covenants were observed by the person in actual occupation of the premises.

Moreover, it was possible that a underlessee might acquire a new underlease pursuant to the provisions of part II of the Landlord and Tenant Act 1954.

There was a risk that the terms of that tenancy, including any lesser obligations as to rent and repairs, could subsequently become the terms of a tenancy arising directly between the landlord and the underlessee on termination of the headlease.

By that means, terms that were originally personal between the tenant and underlessee might be imposed on the landlord.