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England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> NCR Ltd v Riverland Portfolio No1 Ltd  EWCA Civ 312 (21 March 2005)
Cite as:  EWCA Civ 312
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COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE (CHANCERY DIVISION)
(MR PETER LEAVER QC SITTING AS A DEPUTY HIGH COURT JUDGE)
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE CARNWATH
LORD SLYNN OF HADLEY
| NCR LIMITED
|- and -
|RIVERLAND PORTFOLIO No.1 LIMITED
Jonathan Seitler QC (instructed by Berwin Leighton Paisner) for the Defendant/Appellant
Hearing dates : 31st January 2005 and 2nd February 2005
Crown Copyright ©
Lord Justice Carnwath :
"at the best rent obtainable in the open market without the grantor taking any premium or other capital consideration or (if greater) the rent then payable hereunder…"
It is common ground that at the relevant time the open market rent was equivalent to £16 per square foot, which was less than the current rent, equivalent to £19.30 per square foot. Accordingly, to comply with the clause, the rent on the under-letting would have to be the higher amount. There was an issue as to whether the proposed under-letting complied with that clause, having regard to a proposed reverse premium (see below), but that was resolved in favour of NCR by a judgment of Peter Smith J on 2nd April 2004.
"(iv) the landlord's licence for such underlease has been given under seal (such licence subject to prior compliance with the foregoing provisions not to be unreasonably withheld)…"
" (3) Where there is served on the person who may consent to a proposed transaction a written application by the tenant for consent to the transaction, he owes a duty to the tenant within a reasonable time –
(a) to give consent, except in a case where it is reasonable not to give consent,(b) to serve on the tenant written notice of his decision whether or not to give consent specifying in addition –(i) if the consent is given subject to conditions, the conditions,(ii) if the consent is withheld, the reasons for withholding it.…
(6) It is for the person who owed any duty under subsection (3) above –
(a) if he gave consent and the question arises whether he gave it within a reasonable time, to show that he did…(c) if he did not give consent and the question arises whether it was reasonable for him not to do so, to show that it was reasonable. "
By section 4:
"A claim that a person who has broken a duty under this act may be made the subject of civil proceedings in like manner as any other claim in tort for breach of statutory duty."
The proposed under-letting
"In addition to the concerns already expressed, our clients are seriously concerned as to the covenant strength of the proposed undertenant, notwithstanding the offer of a guarantee from the parent company. They are concerned about the loss made by the proposed undertenant and the low value of the net worth of the proposed undertenant and the proposed guarantor."
They asked if further "information or comfort" could be provided to allay Riverland's concerns.
"Our clients… remain convinced that the covenant strength of the proposed undertenant is insufficient, despite the offer of a rent deposit and the proposed references. This, combined with the unsatisfactory position with regard to the financial terms of the proposed underletting, which has been the subject of correspondence, combine to lead them to withhold consent to the proposed underletting."
The judgment below
"(1) A landlord owes a duty to a tenant to give a decision on an application for consent within a reasonable time: section 1 (3) of the Act.
(2) What will amount to a reasonable time will depend upon all of the circumstances of a particular case: per Munby J. in Go West at page 1149C-F.
(3) The assessment of whether a reasonable time has elapsed in which the landlord has to give a decision will be made at the time at which it is claimed that a reasonable time has elapsed, and in the light of the facts at that time: per Sir Richard Scott V-C in Norwich Union at page 545F-G and Munby J. in Go West at page 1150A-B. Amongst the factors that will be borne in mind in assessing whether a reasonable time has elapsed is that the purpose of the Act is to "enable there to be fair and sensible dealing between landlords and tenants [and] a state of certainty to be achieved at the earliest sensible moment": per Sir Richard Scott V-C in Norwich Union at page 545H.
(4) If, within a reasonable time, a landlord gives notice refusing consent, reasons must be given for the refusal: see section 1 (3) (b) (ii) of the Act.
(5) The burden is on the landlord to show that it was reasonable, by reference to the reasons given in the notice, to refuse consent. "… [I]t is not now open to a landlord to put forward reasons justifying the withholding of consent if those are reasons which were not put forward in accordance with section 1 (3) (b), that is they were not reasons which were put forward in writing within a reasonable time".: per Neuberger J. in Footwear at page 560A.
(6) Once a notice has been given by a landlord, that landlord cannot subsequently justify a refusal of consent by referring to reasons which are not set out and relied upon in that notice: see per Pill LJ. in Go West at page 1158F.
(7) An unreasonable refusal of consent renders a landlord liable to pay damages to a tenant for breach of statutory duty. The measure of damages will be the tortious measure: see section 4 of the Act.
(8) A failure to give a decision within a reasonable time will be treated as equivalent to a refusal of consent without reasons. This conclusion necessarily follows from the fact that it is the landlord's obligation to make a decision within a reasonable time.
(9) It also follows that a failure to communicate a decision on a tenant's application within a reasonable time, will also make a landlord liable to pay damages to a tenant. That liability will not be avoided or mitigated even if a landlord is able subsequently to show that there were reasonable grounds for withholding consent: per Pill LJ. in Go West at page 1158F and 1158H-1159A.
(10) A landlord will discharge the burden of proving that a refusal of consent is reasonable if it can show that some landlords, acting reasonably, might have refused consent for the reasons given, even though some other reasonable landlords might have given consent."
"86. In deciding what was a reasonable time for Riverland to decide whether or not to give its consent to the proposed transaction, it must be remembered that NCR was asking for consent to underlet the property. There was to be no privity of contract between Riverland and Telco.
87. If consent had been granted, NCR would have remained liable to Riverland for the payment of rent; NCR would have remained liable for the payment of dilapidations at the end of the term of the Lease; and NCR would have remained liable for the other obligations under the Lease. Furthermore, if consent had been granted, the circumstances in which Riverland would have had to deal with Telco would have been limited. True it is that at the end of the term of the underlease, Telco would have had rights under the Landlord & Tenant Act 1954, but any new lease would have been on terms that the tenant paid rent at the then open market rate.
88. It follows, therefore, this is not a case in which the financial status of the proposed undertenant was of great or vital significance. Of course, Riverland would have wanted to have some evidence as to Telco's financial status so that, in the unlikely event of NCR becoming unable to pay the reserved rent prior to the termination of the Lease, it could be satisfied that Telco would be able to do so. However, there is no suggestion that NCR's covenant was not adequate, and if NCR had, for some unforeseen reason, become insolvent, Riverland would have had the cushion of the six months deposit, in addition to the guarantee from Telco's holding company. The party primarily concerned with Telco's overall financial strength was NCR, and NCR was satisfied, particularly as Telco was to provide the deposit which was to be held as landlord's monies."
"99. First, the contractual obligations of the landlord to its bank cannot, in my judgment, be a good reason for the landlord to withhold consent when, absent that obligation, he would grant consent. If it could be a good reason, then any tenant, who had taken a lease from a landlord who, at the time that the lease was granted, had no financial restraints, could, if that landlord sold his interest to a party which had financial restraints, or found itself, for some reason, under such restraints, might suddenly, without notice, find the lease becoming more onerous. That cannot, in my judgment, be correct.
100. Secondly, Riverland's bank could not withhold its consent unreasonably, and as Riverland was to continue to receive the contractual rent, it would have been unreasonable for the bank to withhold its consent unless the subletting had an impact on the reversion.
101. Thirdly, having heard the evidence of Mr Shapiro, I do not accept that there was any damage to the reversion such as to entitle Riverland to withhold its consent. In my judgment, the damage of which Mr Shapiro spoke was remote and speculative."
Issues in the appeal
i) Was the decision to refuse consent made within a reasonable time?
ii) Was consent unreasonably refused?
iii) Was the application for consent invalidated by a change in the details of the proposed transaction?
The first and third issues can in my view be disposed of relatively shortly.
"…the reasonable time requirement in s 1(3) is there to protect the tenant… But in another and equally important sense it is there to protect the landlord…
… the 'reasonable time' referred in s 1(3) is the time within which the landlord has to do something, not the time within the tenant has to do anything. In other words, and as s 1(3) makes clear, the 'reasonable time' is the time reasonably required by the landlord to do the things which the Act requires of him."
In my view, whatever earlier discussions there had been, Riverland was entitled to adequate time following receipt of the completed application to consider the serious financial and legal implications of a refusal with its advisers, and if necessary to report to the relevant Board. In the absence of special exceptional circumstances, a period of less than three weeks (particularly in the holiday period) cannot in my view be categorised as inherently unreasonable for that process.
Variation of terms
Reasonableness of refusal
" …. If the reasonableness of any condition imposed by the landlord or the reasonableness of the landlord's withholding of consent is questioned, the landlord must show that the condition or the withholding was reasonable.
 When a difference is to be resolved between landlord and tenant following the imposition of a condition (an event which need not be separately considered) or a withholding of consent, effect must be given to three overriding principles. The first, as expressed by Balcombe LJ in International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd  Ch 513, 520 is that
'a landlord is not entitled to refuse his consent to an assignment on grounds which have nothing whatever to do with the relationship of landlord and tenant in regard to the subject matter of the lease ...'
The same principle was earlier expressed by Sargant LJ in Houlder Bros & Co Ltd v Gibbs  Ch 575, 587:
'in a case of this kind the reason must be something affecting the subject matter of the contract which forms the relationship between the landlord and the tenant, and ... it must not be something wholly extraneous and completely dissociated from the subject matter of the contract.'
While difficult borderline questions are bound to arise, the principle to be applied is clear.
 Secondly, in any case where the requirements of the first principle are met, the question whether the landlord's conduct was reasonable or unreasonable will be one of fact to be decided by the tribunal of fact. There are many reported cases. In some the landlord's withholding of consent has been held to be reasonable (as, for example, in Pimms Ltd v Tallow Chandlers Company  2 QB 547 and Bickel v Duke of Westminster  QB 517), in others unreasonable (as, for example, in Bates v Donaldson  2 QB 241, Houlder Bros  Ch 575 and International Drilling  Ch 513). These cases are of illustrative value. But in each the decision rested on the facts of the particular case and care must be taken not to elevate a decision made on the facts of a particular case into a principle of law. The correct approach was very clearly laid down by Lord Denning MR in Bickel v Duke of Westminster  QB 517, 524.
 Thirdly, the landlord's obligation is to show that his conduct was reasonable, not that it was right or justifiable. As Danckwerts LJ held in Pimms Ltd v Tallow Chandlers Company  2 QB 547, 564: 'it is not necessary for the landlords to prove that the conclusions which led them to refuse consent were justified, if they were conclusions which might be reached by a reasonable man in the circumstances ...' Subject always to the first principle outlined above, I would respectfully endorse the observation of Viscount Dunedin in Viscount Tredegar v Harwood  AC 72, 78 that one 'should read reasonableness in the general sense'. There are few expressions more routinely used by British lawyers than 'reasonable', and the expression should be given a broad, common sense meaning in this context as in others."
"I can apply these decisions to the present case. The dangers to the defendants from the defendants having to forfeit the plaintiff's leases, owing to failure to perform its obligations by the plaintiff or his assigns, may be negligible. The situation in the event of bankruptcy of the plaintiff or an assign may present no real difficulty. But those who manage the defendant company think that notice under section 6 of the Law of Distress Amendment Act, 1908, might not produce sufficient rent to discharge the sums payable in respect of the rent under the plaintiff's lease. They are apprehensive also that, if they wished to realize their investment in the lease of No. 28, Berkeley Square, by sale or to raise money on it by mortgage, the reduced rent payable by Mr Romain might prove an embarrassment in their dealings. I cannot say that such a view is unfounded…." (p 314-5)
Thus, it is enough that the lessor has genuine, and not "unfounded" concerns, on matters relevant to the value of his interest in the property, even if the prospect of those concerns being realised is small.
"… the court is not concerned with whether or not the terms of the contract are reasonable as between the parties. The court is concerned only with the assignment and with whether or not it is reasonable for the landlord to withhold consent to that assignment…." (para ).
He had earlier (para ) cited with approval a passage to similar effect in the judgment of Lord Denning MR, in Bickel v Duke of Westminster  QB 517. Commenting on the contractual words "such licence shall not be unreasonably withheld", Lord Denning said:-
"When those words come to be applied in any particular case, I do not think the court can, or should, determine by strict rules the grounds on which a landlord may, or may not, reasonably refuse his consent. He is not limited by the contract to any particular grounds nor should the courts limit him. Not even under the guise of construing the words. The landlord has to exercise his judgment in all sorts of circumstances. It is impossible for him or for the courts, to envisage them all…" (at p 524)
"A proper reconciliation of those two streams of authority can be achieved by saying that while a landlord need usually only consider his own relevant interest, there may be cases where there is such a disproportion between the benefit to the landlord and detriment to the tenant if the landlord withholds his consent to an assignment that it is unreasonable for the landlord to refuse consent." ( 1Ch 513, 521C-D)
In that case the Court of Appeal upheld the finding of the judge that the refusal had been unreasonable. Balcombe LJ thought it right to take into account the fact that the decision resulted in the premises being left empty. He said:-
"Although (the judge) did not expressly mention the disproportionate harm to the tenants if the landlords were entitled to refuse consent to the assignment, compared with the minimum disadvantage which he clearly considered the landlords would suffer by a diminution in the paper value of the reversion – 'paper value' because he was satisfied there was no prospect of the landlords wishing to realise a reversion – he clearly recognised the curious results to which the landlord's arguments based solely upon a consideration of their own interests could lead." (p 521G-H).
"In my judgment the gross unfairness to the tenants of the example postulated by the judge strengthens the arguments in favour, in an appropriate case of which the instant case is one, of it being unreasonable for the landlord not to consider the detriment to the tenant if consent is refused, where the detriment is extreme and disproportionate to the landlord."
That passage needs to be seen against the background of the judge's conclusions in that case, which included findings that there was "no possibility" that the proposed use would have a depreciatory effect on the letting value at the end of the lease; that there was no significant danger that the rent would not be paid throughout the term; that the rent obtainable on future rent reviews would not be prejudiced; and that the was "no prospect" of the property being placed on the market or mortgaged to the fullest extent possible. (p 518 F-G)
"As to the test as to what is reasonable in this context, there are more authorities that deal with assigning a lease than with sub-letting. I believe, however, that the basic principles are common to both situations." (p 310)
I respectfully agree that the general legal principles are the same. Mr Wood did not suggest otherwise. At the same time, of course, it must be recognised that the two forms of transaction have different legal and practical implications, which may affect the application of the general principles in any particular case. However, it is important to stress that neither form of transaction would relieve the original lessee of his own continuing liability under the covenants in the lease. (I disregard for these purposes the changes made in relation to assignments by the Landlord and Tenant (Covenants) Act 1995, which because of the date of the lease has no relevance to this case).
The reasonableness of the refusal.
"…what a reasonable landlord would be looking for – a comfortable margin within which to meet rental liabilities."
Mr Shapiro's evidence
i) The two valuations attributed no difference in value to the expected yield in the remaining 6.35 years of the NCR lease. Both valuations assumed that the current rent (£710,000) would continue for the remainder of the lease, and that the appropriate yield was 7%, having regard to NCR's covenant strength. The differences rested entirely on the assumptions made as to what would happen after the end of the current NCR lease in 2009.
ii) The first valuation (without Telco) assumed that in 2009 NCR would not renew its lease and that the property would then be re-let in parts. On this basis the assumed rent was £651,473 (£17.50 psf) and the assumed yield 8.5%.
iii) The second valuation (with Telco) took account of the fact that at the end of the lease Telco would have rights to a new lease under the Landlord & Tenant Act 1954. On this basis, the assumed rent was ££595,632 (£16 psf) and the assumed yield 8%.
iv) The difference in assumed rents was based on current rental values, which Mr Shapiro put at £16 psf on the basis of a letting of the whole; and £17.50 psf "on the basis of lettings as permitted by the lease" (report para 7.1-2)
v) The assumed increases of the yields from 7% to 8% and 8.5% respectively were explained as follows:a) The increase to 8% reflected the assumption that the property would be let in parts:"This is a realistic assumption as it is more difficult to let a 15 year old building of this size to a single tenant rather than to a number of tenants." (para 8.1.2)b) The increase to 85.5 % reflected the view that:"… the covenant strength of Telco is not only significantly less than that of NCR, but also the risk to the landlord of having a single tenant in the entire building of less than A1 covenant strength is to increase the risk of voids." (para 8.2.4).
NCR called no expert evidence of their own on this point, but Mr Shapiro was subject to cross-examination by Mr Wood. The Judge made no adverse finding on Mr Shapiro's expertise, or credibility as a witness. Having summarised the effect of his evidence, he commented:"83. Mr Shapiro accepted that the proposed underletting to Telco would cause no risk to Riverland's income stream, or to the value of Riverland's reversion, during the remainder of the term of the Lease. He accepted that it would be more convenient for NCR to have a single undertenant of the whole property, but expressed the view that NCR would have received more by underletting the property in parts. He also accepted that a reverse premium would have had to be paid even if the property had been underlet in parts at £17.50 per square foot.84. Mr Shapiro accepted also that it was somewhat speculative to attempt to place a value on the reversion 6 1/2 years ahead of the expiry of the Lease. There were many unknown factors, such as the state of the property market at that time, and the identity of any proposed tenant."
"… having heard the evidence of Mr Shapiro, I do not accept that there was any damage to the reversion such as to entitle Riverland to withhold its consent. In my judgment, the damage of which Mr Shapiro spoke was remote and speculative." (para 101)
"True it is that at the end of the term of the underlease, Telco would have had rights under the Landlord & Tenant Act 1954, but any new lease would have been on terms that the tenant paid rent at the then open market rate. " (para 87)
That, however, was only a partial answer to Mr Shapiro's evidence. His expert view was that there was material difference in the value attributable to the prospect of a single new letting to Telco, albeit at the market value for such a letting, and the possibility of smaller leases of a vacant building. There was no contrary expert evidence on that issue, and the Judge gave no indication that Mr Shapiro's competence as a valuer was in doubt.
Lord Slynn of Hadley
Lord Justice Ward