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OUTER HOUSE, COURT OF SESSION
[2006] CSOH 13
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CA60/05
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OPINION OF
LORD DRUMMOND YOUNG
in the cause
BURGERKING LTD
Pursuer;
against
RACHEL CHARITABLE
TRUST
Defender:
________________
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Act: Mackenzie, Solicitor; Pinsent Masons
Alt: Ross; Maclay Murray & Spens
24 January 2006
The parties' lease
[1] The
defender is the owner of commercial premises situated at 3 and 5 High
Street, Paisley. The pursuer is the
tenant of those premises under a Lease dated 20 December 1984 and 7 January
1985. It carries on the business of a
fast food restaurant from part of those premises. The Lease was granted by a company known as
Caltrust Developments Limited, and the defender acquired the property in
December 2003. It was for a term of
nearly 25 years, expiring on 29 September 2009. The subjects leased in fact comprise three
distinct areas, namely the area on the ground floor occupied by the pursuer as
a fast food restaurant, adjacent shop premises, also on the ground floor, and
an area on the first floor referred to in the Lease as the "Club Premises". The ground floor shop and the Club Premises
were sublet by the pursuer to a firm of opticians. The present action is not concerned with
those parts of the premises.
[2] The
original rent payable under the lease was £88,500 per annum, in respect of the
whole of the premises. This was subject
to rent reviews on 29 September 1989 and every five years thereafter. At the first rent review in 1989 the rent for
the whole premises was increased to £150,000 per annum. Of that sum, £112,000 was attributable to the
subjects occupied by the pursuer.
Paisley High Street has, however, suffered a significant economic downturn
in recent years, and it was accepted by all of the witnesses that that rent was
well in excess of the current market rent of the premises. In the rent reviews in 1994 and 1999 the rent
was not increased. At proof Mr. Kevin
Frost, who was a UK property asset manager with the pursuer at the time of the
events that are in issue in this action, gave evidence that the market rent in
the autumn of 2004 would have been approximately £75,000 per annum. Mr. John Vincent, who at the material
time was a portfolio manager with Reit Asset Management, the defender's
investment managers, gave evidence that when the defender acquired the property
in December 2003 advice was received from DTZ that the market rent was £90,000
per annum. Subsequently, further advice
was received in about June or July 2004 that the market rent was then £75,000
per annum. By late 2004, therefore, it
appears that the market rent was in the region of £75,000 per annum.
[3] The
lease was in relatively standard terms, involving full insuring and repairing
obligations on the part of the tenant.
Assignation and subletting were dealt with by clause FIFTH,
which, so far as material, provided as follows:
"(One) ...
(a) ...
(b) The Tenants shall not in respect of any
part of the premises consisting of other than the following specified parts
there of namely (i) the Club Premises or (ii) the Ground Floor Shop or (iii)
the premises (under exception of the Club Premises and the Ground Floor Shop)
grant sub-tenancies.
(Two) The Tenants shall not in respect
of the whole of the premises either assign or grant fixed [securities over this
Lease nor in respect of the whole of the premises or any of three specified
parts thereof enumerated in paragraph (One)(b) of this Clause, grant
sub-tenancies except with the prior written consent of the Landlords such
consent not to be unreasonably withheld or delayed in the case of a substantial
and respectable assignee, security holder or sub-tenant as the case may be who
is of sound financial standing and is in the reasonable opinion of the
Landlords demonstrably capable of performing the Tenants' obligations under
this Lease or the tenants' obligations under the proposed sub-lease as the case
may be.
(Three) Every permitted sub-lease granted in pursuance of this Clause shall
be granted subject to the whole conditions contained in this Lease (other than
as to the amount of rent payable hereunder) and such other reasonable
conditions as the Landlords shall have previously approved in writing, in
consideration of a full market rent (calculated without taking any fine,
premium, grassum or other lump sum payment which the Tenants may have obtained
into account)...".
The pursuer's decision
to dispose of its restaurant
[4] In
2004 the pursuer decided that it should if possible dispose of the premises
occupied by it at 3 and 5 High Street, Paisley. This decision was explained at proof by Mr. Kevin
Frost, who at the time was, as I have mentioned above, a UK property asset
manager with the pursuer; he subsequently became the pursuer's head of UK
property. I found him to be an
impressive witness, who spoke clearly as to the pursuer's decision and the
reasons that underlay it. His evidence,
which I accept, was as follows. During
2003 the pursuer instructed Ernst & Young to carry out a review of poorly
performing restaurants according to certain set criteria. The Paisley restaurant found its way on to a
short list of 20 such restaurants. It
made consistent losses; during 2003 the loss forecast for the current year was
£80,000, and similar losses had existed for at least three years. It was located in a declining High Street,
and turnover had fallen consistently year on year. There were no operational or management deficiencies in the restaurant, which
consistently passed the inspections and audits imposed by the pursuer on its
restaurants. Against that background the
pursuer decided to attempt to cease trading in the premises and to dispose of
the lease, by a surrender, an assignation or a sublet. Ernst & Young had indicated that, on a
rough estimate based on surveying advice, the likely cost of leaving the
Paisley premises was £379,800. I should
add that the decision to cease trading was also influenced by a decision by the
pursuer's parent company to float its shares publicly in the near future. That made it important to reduce losses,
because the share price was likely to be influenced by the level of
profit. Consequently the parent company's
global board stipulated that any payments that were made in order to leave the
property were to be capital in nature.
[5] Thereafter
the pursuer contacted four property agencies and asked them to tender for the
work involved in disposing of the restaurants on the short list, which had
meantime been reduced from 20 restaurants to 12; the 12 included Paisley High
Street. The property agency whose tender
was successful was Eric Young & Co, acting with another firm in respect of
the English properties on the list. All
four property agencies gave advice that a significant premium would be required
to leave the Paisley premises; the average of the estimates was approximately
£410,000. Mr. Frost explained that
premiums are often payable when an occupying tenant wishes to escape from a
lease. In typical High Street locations
there is generally a lack of tenant demand, and it is common to find a reverse
premium. This involves a payment by the
occupying tenant, either to the landlord to surrender the lease or to an
assignee or subtenant to grant an assignation or sublease. Conversely, if there is high tenant demand
for a location, and the market rent is in excess of the passing contractual
rent, the tenant might expect to receive a premium. Twenty years ago that applied to High Street
premises, but the reverse premium is the norm today.
[6] Eric
Young & Co gave advice that the likely cost of disposing of the premises in
Paisley High Street was in the region of £550,000. That figure was an estimate that took into
account the rent due in respect of the remaining term of the lease (£532,000),
the service charge to the end of the term (£15,000) and a very approximate
estimate of the cost of stripping out the property (£100,000). Similar advice was given in respect of the
other 11 properties on the short list of poorly performing properties.
[7] Eric
Young & Co were then instructed to attempt to dispose of the lease. In the course of the proof evidence relating
to their involvement was given by Mr. Derek Gordon, one of their
directors, who was responsible for the attempts to dispose of the Scottish
properties on the short list. I found
Mr. Gordon to be an impressive witness.
It was clear that he had great experience of the commercial property
market in Scotland, acting for both landlords and tenants, and I accept his
evidence on the proposed disposal of the Paisley property and the commercial
rationale for the structure of the transaction.
Mr. Gordon gave evidence that in July 2004 Eric Young & Co
offered on behalf of the pursuer to surrender the lease to the defender in
return for a payment of £500,000. That
offer was not accepted, and thereafter, acting on the pursuer's instructions, Mr. Gordon
attempted to arrange either an assignation or a sublease of the premises. He was aware of the problems facing Paisley
High Street. He stated that it had
suffered from a surplus of supply and shortage of demand for approximately 10
to 15 years. This had been caused
first by the development of a new shopping centre, the Paisley Centre, at one
end of the High Street, and subsequently by the development of a very large
out-of-town shopping centre at Braehead.
The latter development had completely undermined the High Street as a
shopping centre. The result was that
numerous shops were available in the High Street; 13 such shops were
available when the marketing exercise was started. Mr. Gordon attempted to market the
premises occupied by the pursuer, using the standard methods used by commercial
property agents. Particulars of the
property were circulated to potentially interested parties and other agents,
and placed on a website. The only
interest that emerged, however, came from a company known as Quids In
(Scotland) Limited. The pursuer entered
into negotiations with Quids In, and reached agreement in principle on the
terms of a sublease and reverse premium.
The proposed
transaction
[8] The
terms of the proposed transaction were ultimately incorporated into missives,
although at the time when the defender's consent was requested they were merely
contained in heads of proposals. In
summary, the agreement was as follows.
The pursuer would grant a sublease of the premises occupied by it to
Quids In for a rent equal to the passing rent, namely £112,000 per annum. The sublease would subsist for the remaining
term of the pursuer's lease, that is to say, until 29 September 2009. The pursuer would pay Quids In a reverse
premium. Initially this was agreed at
£500,000, but when it became clear that immediate entry could not be given to
Quids In this amount was reduced in accordance with a formula that took account
of the remaining term of the lease. The
reverse premium was to be payable by instalments of £25,000 per quarter. The arrangement for payment was that Quids In
should pay the full quarterly rent to the pursuer on the appropriate term day,
and that immediately thereafter the pursuer would pay Quids In the reverse
premium of £25,000.
[9] On
23 September 2004 the pursuer's agents wrote to the defender's agents to
ask for the defender's approval of the proposed sublease in terms of clause
FIFTH of the Lease. With the relevant
letter there was submitted a Dun and Bradstreet company profile in respect of
Quids In and the audited accounts of that company for the three preceding
years. Certain matters were clarified in
subsequent correspondence.
The defender's response
[10] Ultimately, on 25 October 2004, the defender refused the
pursuer's application. The defender's refusal was contained in a letter from
its agents, Messrs. Maclay Murray & Spens, which is in the following
terms:
"Our clients
have instructed us to reject your clients' application for consent on the
following grounds:-
1. In terms of clause FIFTH
(Two) of the lease, our clients' consent is not to be unreasonably withheld or
delayed in the case of 'a substantial and respectable... sub-tenant... who is
of sound financial standing and is in the reasonable opinion of the Landlords
demonstrably capable of performing... the tenants' obligations under the
proposed sub-lease...'. Given that the
rent liability in terms of the proposed sub-lease for the five-year term is
£560,000 and that Quids-In would also be liable for other outgoings such as
rates, maintenance of the premises, insurance costs and service charge, our
clients are not of the view that Quids-In (Scotland) Limited fulfil this test
on the basis of the information exhibited.
2. Quids-In are receiving a
payment of £25,000 a quarter from BurgerKing and so while the rent under the
sub-lease is £112,000 per annum, the £100,000 yearly subsidy from BurgerKing
effectively means that Quids-In would be paying £12,000 per and them by way of
rent. A rent of £12,000 per annum is
well below full market rent and so the proposed sub-lease does not comply with
clause FIFTH (Three) of the lease".
[11] It is clear from its terms that the foregoing letter amounted
to a refusal of consent under clause FIFTH of the Lease, and that
proposition was expressly accepted by Mr. John Vincent, who acted for the
defender at the time of the transaction.
Considerable correspondence passed subsequently between the parties'
agents. I do not propose to go into this
in detail, because it is clear law that the grounds for refusal of consent to
an assignation or sublease must be those given at the time of refusal. To the extent that points made in
correspondence are relevant to the discussion of the legal issues that arise in
the present case, I deal with them subsequently.
[12] At this point, however, I should deal with the evidence of Mr. John
Vincent, who at the proof gave evidence on behalf of the defender. As I have mentioned, in 2004 he was a
portfolio manager with Reit Asset Management, the defender's investment
managers. It was submitted for the
pursuer that Mr. Vincent was not the appropriate person to give evidence
on the defender's behalf, since he had acted in an essentially advisory
position and not been responsible for making the decision to refuse the pursuer's
application. Moreover, it appeared from Mr. Vincent's
evidence that he had consulted other individuals, in particular the partner in
Reit who was responsible for the defender and the firm's accountant in relation
to the accounts produced on behalf of Quids-In.
In my opinion these criticisms are only justified to a very minor
extent. Mr. Vincent explained that
day-to-day management of the property had been carried out by a managing agent,
Lee Barron, but that Reit had been responsible for what he described as
transactional management of the defender's assets. In relation to applications to sublet or
assign, Reit had authority to refuse, although any decision to accept had to be
referred to the defender. It was also
clear that Mr. Vincent was the individual primarily responsible for
management of the property in Paisley.
In the circumstances I think that he was well qualified to express a
view as to why the application for consent was refused. That is so even though the ultimate
responsibility within Reit for the defender's affairs lay with a partner; it
seems clear that Mr. Vincent was the individual primarily concerned with
the assessment of the information relative to the proposed transaction. So far as his consultations with the firm's
accountant are concerned, I do not think that they played more than a minor
part in his deliberations.
[13] Mr. Vincent referred to the two reasons stated in Maclays'
letter of 25 October 2004. In
relation to the first, the stated that, in assessing whether a proposed tenant
was capable of meeting its financial obligations, a test used in the market was
to consider whether in three consecutive years the proposed tenant had net
profits amounting to three times the proposed rent. He described this as a test used in the
market, in particular to satisfy property owning institutions; if it was
satisfied, the proposed tenant was "demonstrably capable" of taking on
responsibility for the rent. In the
present case, the profits disclosed in Quids In's accounts were well short of
satisfying the test. In relation to the
second reason stated in Maclays' letter, Mr. Vincent stated that the
existence of the reverse premium would be influential evidence in relation to
the market value of the rent if the transaction proceeded. It was something that a valuer would have to
take into account, and it would adversely affect the investment value of the
defender's asset. The pursuer had argued
that the reverse premium was merely a premium, not a rent subsidy. Mr. Vincent disagreed with that
argument, however, on the basis that the premium was paid quarterly, and not as
a single lump sum. For that reason he
thought that a valuer would interpret it as nothing more than a rent subsidy,
and would treat the rent payable as being, in effect, £12,000 per annum.
The present proceedings
[14] By July 2005 it was clear that the defender's position was
final. At that point the pursuer raised
the present action, in which it concludes for declarator that the defender has,
in terms of clause FIFTH of the Lease, unreasonably withheld consent to
a sublease as described in the missives with Quids In. The pursuer further concludes for declarator
that it is entitled in terms of that clause to sublet the subjects to Quids In
on the terms set out in the missives. At
the first preliminary hearing, held on 17 August 2005, the parties were
agreed that a proof before answer was appropriate, and a diet was fixed for 4,
5 and 6 January 2006. The proof
proceeded on those dates, and this is the resulting opinion.
[15] I intend to deal first with the legal principles that are
applicable to lease provisions, such as the present clause FIFTH, which
states that a landlord shall not unreasonably withhold consent to the proposed
transaction. Thereafter I will consider
two matters: first, the effect of the payments proposed to be made by the
pursuer to Quids In and the validity of the defender's second reason for
refusing consent, and, secondly, the standing of Quids In and the validity of
the defender's first reason for refusal of consent.
The applicable law
[16] The legal principles applicable to the present case are well
established, and there was no serious dispute between the parties about the
relevant law; those principles are clearly set out in a number of cases,
notably in the opinions of Balcombe LJ in International
Drilling Fluids Ltd. v Louisville
Investments (Uxbridge) Ltd., [1986] Ch 513, at 519-521, and Lord Hamilton
in Legal & General Assurance Society
Ltd. v Tesco Stores Ltd., 18 May
2001, unreported, at paragraphs [30]-[34].
In summary, the law relevant to the present case can be summarized as
follows. First, a landlord is not
entitled to refuse his consent to an assignation or sublease on grounds that
are collateral to the relationship of landlord and tenant under the particular
lease in question, in the sense that they have nothing to do with that
relationship of landlord and tenant. That
may, as Lord Hamilton points out in Legal
& General at paragraph [31], involve the interpretation of the
lease in order to determine whether a matter is truly collateral to the terms
of the lease in question and the intention of the parties when it was entered
into. A further analogous rule is that,
if the landlord's decision is based upon an erroneous interpretation of the
lease, that will vitiate the decision.
Secondly, the tenant bears the onus of establishing that consent has
been unreasonably withheld. Thirdly, the
landlord's decision should be upheld if his conclusions might have been reached
by a reasonable man in the circumstances of the case; it is not necessary that
the court should agree with the decision.
Fourthly, as a general rule the landlord need only consider his own
interests in deciding whether or not to give consent. Where, however, there is a significant
disproportion between the benefits the landlord and the detriment to the tenant
if consent is withheld it will be unreasonable for the landlord to refuse
consent. Fifthly, "the only reasons for
refusal which are relevant to the issue of the unreasonable withholding of
consent are those which influence the decision-maker at the time when he made
the relevant decision. Subsequent
considerations, however cogent, are irrelevant": Legal
& General at paragraph [31].
The same is true of the state of knowledge of the landlord, so far as it
is material to his decision; that must be determined at the time of refusal: Scottish Tourist Board v Deanpark Ltd., 1998 SLT 1121, at
1127C-D per Lord Penrose. Sixthly,
subject to the foregoing principles, the question of whether the landlord's
consent has been withheld unreasonably is one of fact.
[17] The foregoing principles describe the general approach that
must be taken to the issue of whether the withholding of consent is
unreasonable. A number of subsidiary
issues also arise. First, in cases where
more than one reason for refusal is given by the landlord, the landlord's
decision should normally be upheld if at least one of the stated reasons is
valid: Legal & General at
paragraphs [33]-[34]. That rule may
be subject to an exception in a case where the reasons are not independent of
one another, or where the basis of the landlord's decision is an accumulation of
reasons, where eliminating some of the reasons may undermine the fundamental
basis for the decision. That is not
relevant to the present case, however, where the two reasons advanced on behalf
of the landlord are clearly independent of each other. Secondly, in cases where the lease requires
that an assignee or subtenant should be "substantial and respectable" and "of
sound financial standing", the tests enshrined in those words are to be
approached in the following way:
"The question
whether a person is of sound financial standing appears to relate to the
totality of his financial position. If
that is correct, the test of 'substantial and respectable' in relation to a
subtenant must relate to the particular transaction, and to the capacity of the
person to carry on the business intended and meet the expense of doing so in a
regular way.... It appears that the
issue falls to be determined on an objective basis, without conventional
criteria, once and for all at the date consent is sought": Scottish Tourist Board v
Deanpark Ltd., at 1998 SLT 1126A-C.
Thus the circumstances of the
proposed assignee or subtenant must be assessed as a whole, and in the light
that assessment it must be determined whether the person concerned has the
necessary capacity to enter into the particular transaction that is
contemplated.
[18] The ultimate criterion against which the landlord's decision
must be measured is that of the reasonable landlord. The requirement of reasonableness was
considered by Lord Rodger of Earlsferry in Ashworth
Frazer Ltd. v Gloucester City Council,
[2001] 1 WLR 2180; [2002] 1 All ER 377, in a passage at paragraph [67]
with which the other members of the House of Lords agreed:
"The test of
reasonableness is to be found in many areas of a law and the concept has been
found useful precisely because it prevents the law becoming unduly rigid. In effect, it allows the law to respond
appropriately to different situations as they arise. This has to be remembered when a court is
considering whether a landlord has 'unreasonably withheld' consent to the
assignment of a lease. In this context I
would follow Viscount Dunedin's advice in Viscount
Tredegar v Harwood [1929] AC 72
at 78, that one 'should read reasonableness in the general sense'".
Lord Rodger cited with approval a passage from the opinion of
Lord Denning MR in Bickel v Duke of Westminster, [1977] QB 517 at
524:
"The words of
the contract are perfectly clear English words: 'such licence shall not be
unreasonably withheld'. When those words
come to be applied in any particular case, I do not think the court can, or
should, determined 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....
The utmost that the courts can do is to give guidance to those who have to
consider the problem.... But no one
decision will be a binding president as a strict rule of law.... It is rather like the cases where a statute
gives the court a discretion. It has
always been held that this discretion is not to be fettered by strict rules:
and that all that can be properly done is to indicate the chief considerations
which help to arrive at a just conclusion."
That emphasizes that the
reasonableness of any decision by a landlord must be considered in the
particular circumstances of the case.
Later in the same case, at paragraph [72], Lord Rodger pointed out
that the landlord's decision cannot be based on a misconstruction of the lease;
if the landlord's interpretation is wrong, it would plainly be unreasonable for
him to continue to withhold consent on that basis. The same must in my opinion apply to a
misconstruction of the tenant's proposals.
I should add one further point, which is perhaps obvious but
nevertheless important. The test of
reasonableness is an objective one, and the landlord's decision must be
measured against objective criteria.
Nevertheless, as indicated in the third of the principles stated in
paragraph [16] above, it is immaterial whether the court actually agrees
with the landlord's decision. This I
think is the meaning of the fourth of the principles set out by Balcombe LJ in International Drilling Fluids Ltd. v Louisville Investments (Uxbridge) Ltd.,
at [1986] Ch 520 C-D.
[19] A further matter that assumes considerable importance in the
present case is the construction of the reasons given by the landlord for
refusal of consent. The landlord is in
my opinion obliged to give reasons; otherwise it is impossible to know whether
the requirement that he must act as a reasonable landlord is satisfied. The need to give reasons is clearly stated in
the decision in the Sheriff Court of Sheriff Wheatley, as he then was, in Hutchison v Lodge St Michaels, 5 December 1980, reported in Paisley and
Cusine, Unreported Property Cases from the Sheriff Courts, page 103. It is also clear, as indicated above, that
the reasonableness of the landlord's decision must be determined against the
reasons that are given at the time of refusal.
I am nevertheless of opinion that the reasons given at the time of
refusal should not be construed over strictly.
The landlord cannot subsequently pray in aid of his refusal a reason
that is not touched upon in the refusal letter.
He can, however, rely upon anything that can fairly be said to form part
of the reasoning in that letter, or to be a reasonable development of that
reasoning.
The effect of the payments to be made to the proposed
subtenant: the defender's second reason for refusal of consent
The status of the
payments to be made by the pursuer: a genuine reverse premium
[20] The transaction proposed by the pursuer involves the making of
substantial payments, £25,000 per quarter, to Quids In. Those were described by the pursuer's
witnesses, Mr. Frost and Mr. Gordon, as a reverse premium, which they
both considered to be a normal commercial transaction. The defender's witness, Mr. Vincent,
expressed a different view; he thought that the payments would be regarded in
the market as a rent subsidy, largely because of their recurring nature, and
that in consequence they would have a significant effect on the rent that might
be obtained for the property after the present lease expires in 2009.
[21] Both Mr. Frost and Mr. Gordon gave evidence about the
use of reverse premiums. I have
summarized Mr. Frost's evidence at paragraph [5] above; he spoke to
the common use of such payments in cases where there was difficulty in finding
anyone willing to take on a lease of commercial property. He also referred to
the fact that, when the leases on the pursuer's short list were disposed of,
substantial reverse premiums were paid in every case. In two cases, Inverness and Burnley, reverse
premiums were paid to Lloyd's TSB and the Skipton Building Society
respectively. Those were both very
substantial financial institutions which would obviously be well able to take
on the leases in question. That
indicated that the use of reverse premiums was driven by market forces rather
than by any need to subsidize an unsuitable tenant who would be unable
otherwise to take on the lease. In the
present case the market rent, which both sides appeared to agree as
approximately £75,000 per annum, was on any view significantly less than the
passing rent of £112,000 per annum. Part
of the reverse premium, accordingly, represented no more than the difference
between the market rent and the passing rent.
[22] Mr. Gordon gave more detailed evidence on the matter. He defined a reverse premium as a payment
made to another person to relieve the payer of an obligation that it has, and
described the use of such premiums as commonplace. Often they were indicative of a decline in
rental values. He referred in some
detail to the properties on the pursuer's short list for disposal, and pointed
out that in every case but one the disposal involved payment of a reverse
premium. Of the 12 properties on
the short list, one had been withdrawn, and all the others apart from Paisley
had been disposed of; the reverse premiums were frequently substantial,
amounting to as much as £730,000 in East Kilbride, £1.77 million in
Princes Street, Edinburgh, and £585,000 in Inverness. Mr. Gordon explained that landlords were
fully aware that reverse premiums were common.
Generally they would prefer not to see them, because they tended to
indicate falling rental values. Mr. Gordon
was asked whether a reverse premium could be regarded as a subsidy for the
tenant, in the sense that it might be regarded as supporting a smaller or less
satisfactory tenant. He replied that
Paisley involved a common situation where a reverse premium was required to get
someone to take over commercial premises.
This has nothing to do with the particular tenant, but was rather
required to persuade someone to relieve the existing tenant of its obligations. Eric Young & Co had marketed the property
with a view to disposing of the lease on the best possible terms. In such a disposal, a surrender to the
landlord is generally the best result from the tenant's point of view, followed
by an assignation, which involves the tenant's being relieved of its
liabilities. A sublet is the least
desirable option, because the tenant remains liable for the obligations under
its lease. In the present case, the
result of the marketing exercise was that only one interested party came
forward, Quids In, who offered to take a sublease but only on payment of a
substantial reverse premium. The deal
with Quids In was the best that could be done in the circumstances of the
case. It did not follow from the
transaction with Quids In that the premises were only worth a rent of £12,000
per annum, the difference between the passing rent and the annual amount of the
reverse premium. The transaction rather
proceeded on the basis that the rent payable for the sublease was the passing
rent under the head lease of £112,000 per annum.
[23] Mr. Gordon further indicated that he was not surprised at
the existence of a substantial reverse premium; the amount agreed was in line
with the original estimate made by Eric Young & Co, (see paragraph [6]
above). In cross-examination he stated
that it was well known that Paisley High Street had a "dire shortage" of
occupiers. Consequently the market would
expect a substantial reverse premium, and should not be surprised by the
transaction agreed with Quids In. Mr. Gordon
was asked whether the transaction might affect the rent payable on the expiry
of the lease in 2009. He replied that
the rent for a particular property would be affected not by that property in
isolation but by a blend of transactions.
These would show a similar pattern.
The reverse premium in this particular case would be one factor in that
blend of transactions. Any valuation of
the property would be carried out by property professionals, who would look at
the real market value. Moreover, the
critical question was the market value at the end of the lease, when the rent
felt to be fixed. At that point the
passing rent would be an important factor in any valuation. It was suggested to Mr. Gordon that the
landlord might want to sell the property, which could of course occur prior to
2009. He replied that the defender had
in fact attempted to sell the freehold of the property in May 2005, during a
very buoyant commercial period, but had failed to find a buyer. Nevertheless, Mr. Gordon did accept that
the reverse premium was one factor that could affect the rent obtained for the
property.
[24] Mr. Vincent's primary position, as explained at
paragraph [13] above, was that the reverse premium should be regarded as a
rental subsidy. The periodic nature of
the payments made was significant as indicating that, in effect, the rent had
been reduced. Although the payments
might be called a premium, Mr. Vincent was concerned at the way the
transaction would be interpreted by a valuer. He stated that the reverse
premium would be influential evidence of the market value of the property, and
would have an adverse effect on the investment value of the defender's asset. In cross-examination Mr. Vincent accepted
that the property would be difficult to relet.
When asked if that meant that the pursuer had to offer a substantial
incentive to any tenant, he replied that it would be necessary either to wait
for some time or to offer an incentive.
He agreed, however, that it was standard practice to offer an incentive
in the form of a reverse premium in such a case. Mr. Vincent was asked about the exercise
carried out by Eric Young & Co; it was suggested that this demonstrated the
need for a very substantial payment to dispose of the lease. He seemed to accept the proposition, albeit reluctantly,
but pointed out that this depended on the time taken to dispose of the
property. Overall, his position appeared
to be that a reverse premium might be significantly reduced if one were
prepared to wait long enough to find an assignee or subtenant. Mr. Vincent went on to accept that
reverse premiums were often paid if a party is disposing of a property that has
become a liability, and that, in the circumstances of the present case, the
market would demand a reverse premium.
He added, however, that the problem was the way in which the reverse
premium was structured, which made it look like a rent subsidy. On that basis, the sublet could be regarded as
being at a rent of £12,000 per annum, the difference between the passing rent
of £112,000 and the annual payment by the pursuer to Quids In of £100,000.
[25] I accept the evidence of Mr. Frost and Mr. Gordon
that the proposed transaction with Quids In involves a genuine reverse premium,
driven by market forces. As I have
indicated, I found both Mr. Frost and Mr. Gordon to be impressive
witnesses. Both had extensive experience
in the commercial property field, and Mr. Gordon had acted for both
landlords and tenants; I thought that he gave his evidence in a noticeably
careful manner. Four considerations
support the conclusion that the reverse premium is genuine and is driven by
market forces. First, Eric Young &
Co carried out a substantial marketing exercise, and were only able to find one
taker for the property. The prospective
subtenant was only willing to accept a sublease on condition that the
particular reverse premium was paid.
That in itself suggests that the reverse premium was the result of
market forces. Secondly, Mr. Gordon's
evidence established that demand for shops in Paisley High Street was extremely
poor; 13 shops were available for occupation.
That makes it inherently probable that a substantial reverse premium
would be demanded. It further suggests
that the marketing exercise carried out by Eric Young & Co could not be
criticized as inept. Thirdly, Eric Young
& Company and the other valuers who were asked to tender for disposal of
the properties on the pursuer's short list all thought that a substantial
reverse premium would have to be paid to dispose of the Paisley property. Eric Young & Co thought that disposal
would cost £550,000, and the average of the four valuers was £410,000. That suggests that the payment of
approximately £500,000 that was to be made to Quids In was broadly in line with
surveyors' expectations. Similar support
is found in the fact that all but one of the other properties that were
disposed of by the pursuer required the payment of a reverse premium, in some
cases of a very substantial amount.
Fourthly, there are obvious reasons for supposing that a reverse premium
will be demanded in a case where the passing rent is well above the market
rent. Elementary economic considerations
suggest that, if a new tenant is to take on the property, it will require some
compensation for payment of a rent that is above the market level.
The commercial impact
of the transaction: scale of the reverse premium
[26] Even if the transaction involves a genuine reverse premium,
however, the question remains of the impact that the transaction as a whole
might have on the value of the defender's asset. It is obvious that a market transaction
involving a particular property is likely to be relevant to determining the
market value of that property; Mr. Gordon accepted that the transaction
with Quids In, including the reverse premium, was one of the factors that would
affect the rent obtained in future for the property. The impact of any particular transaction on
the market value of the property concerned must obviously decrease with time. Nevertheless, the transaction at issue in the
present case was negotiated in 2004, some five years before the expiry of the
lease, and it is not suggested that by 2009 it would be of historical
importance only.
[27] The transaction agreed between the pursuer and Quids In
involves a very substantial reverse premium.
The evidence disclosed that in cases where the market rent has fallen
significantly below the passing rent a reverse premium will be required to
compensate for the difference. In the
present case, however, it is clear that the reverse premium is greatly in
excess of that required to compensate for the difference between market rent
and passing rent. The passing rent was
£112,000; the witnesses were agreed that the market rent in mid to late 2004
was of the order of £75,000. That
suggests that the reverse premium required to compensate for the difference
between the two would have an annual equivalent in the region of £37,000. The calculation of a reverse premium is
obviously market driven, and will not be the subject of a precise calculation
of this nature. Especially in a very
difficult market, I accept that the reverse premium that is negotiated is
likely to be significantly greater than the precise amount required to
compensate for the difference between market rent and passing rent. Nevertheless, provided that the premium can
be seen as bearing some relationship to prevailing market rents, its effect on
any future assessment of market rent is unlikely to be very great. In such a case, I am of opinion that the
reasonable landlord would normally have no objective justification for
objecting to the reverse premium, because the premium effectively recognizes
the state of prevailing market rents.
Where, however, the reverse premium goes greatly beyond anything that
might reasonably be taken as compensation for the difference between market
rent and passing rent, I am of opinion that a reasonable landlord might be
justified in refusing consent. In such a
case, the transaction points to a situation that is markedly worse than that
indicated by prevailing market rents, and that seems inherently likely to have
an effect on future transactions in the market.
[28] Whether a refusal of consent is justified in any particular
case must depend upon the precise circumstances of that case; that is clear
from the authorities on the meaning of the test of reasonable as discussed in
paragraph [18] above. In the
present case, the reverse premium is worth £100,000 per annum. That must be contrasted with a passing rent
of £112,000 per annum. It is accordingly
clear that the net amount that is being paid for the property by Quids In is
relatively small, £12,000 per annum plus service charges and certain other
outgoings. For this purpose it is
immaterial that the payments are regarded as a genuine reverse premium, and not
as a rent subsidy; the net payments are still relatively small. They are
clearly well beyond the amount that is required to compensate for the
difference between the passing rent and the market rent. In my opinion the reverse premium that is
proposed is so large that it is probable that the proposed transaction will
have an impact on the rent that is obtained in future. That in turn would affect the capital value
of the defender's asset. In the light of
that conclusion, I do not think that it is possible to hold that a reasonable
landlord would not be justified in refusing consent; the probable impact of the
transaction on the value of the landlord's asset appears to me to provide a
sufficient justification. In this
connection, it must be borne in mind that the onus of establishing that consent
has been unreasonably withheld lies on the tenant. It is also significant that, as a general
rule, the landlord does not need to have regard to the tenant's interests. The only exception to this is in cases where
there is a significant disproportion between the benefit to the landlord and
the detriment to the tenant. I do not
think that any such disproportion exists in the present case, and indeed no
such suggestion was made on behalf of the tenant. Finally, while I accept that the reverse
premium was negotiated in the open market, I do not think that this alters the
position. The sheer size of the premium
seems likely to have an adverse effect on the rental value of the property, and
that conclusion must be viewed in the light of the relevant test; that test is
what a reasonable landlord might do, considering his own interests.
[29] The next question is whether the level of reverse premium is an
objection that is covered by the second reason contained in the defender's
agents' refusal letter of 25 October 2004.
The statement of that reason concludes with two propositions: a rent of
£12,000 per annum is well below a full market rent, and accordingly the
proposed sublease does not comply with clause FIFTH (Three) of the
Lease. Clause FIFTH (Three) deals
with the rent that is payable under a sublease.
If the reverse premium is regarded as genuine, however, it is distinct
from the rent payable under the sublease; the rent remains at the agreed level
of £112,000. On that basis there is no
breach of clause FIFTH (Three).
The underlying basis for the second reason, however, is found in its
first sentence, where it is pointed out that Quids In is receiving quarterly
payments of £25,000, with the result that "the £100,000 yearly subsidy from
BurgerKing effectively means that Quids-In would be paying £12,000 per annum by
way of rent". The wording used is based
on the notion that Quids In is receiving a rent subsidy. Nevertheless, as I have indicated above at
paragraph [19], I do not think that statements of reasons in refusal
letters should be construed over strictly.
The substance of this statement is that Quids In is being paid £100,000
to take on the sublease. That is
factually correct. Moreover, it is clear
that the defender's objection is to the scale of the payment. That is essentially the complaint that Mr. Vincent
made in the course of his evidence: the scale of payment involved in this case
is liable to have an adverse effect on future rental values. For this purpose I do not think that it
matters whether it is categorized as a reverse premium or a rent subsidy; what
matters is the fact of the payment, and its size. I am accordingly of opinion that this ground
of objection to the transaction with Quids In is sufficiently covered by the
letter of 25 October 2004.
[30] For the pursuer it was submitted that Mr. Vincent was not
properly qualified to give an opinion as to the effect of a reverse premium on
the determination of the rents. He was
not a surveyor who acted on the ground in valuation exercises, and he had no
real experience of the market in Paisley.
His expertise lay rather in portfolio management than valuation on a
day-two-day he basis. It is quite
correct that Mr. Vincent's experience and expertise lay in the area of
portfolio management. Nevertheless, this
clearly included decisions as to the acquisition and sale of property and rent
reviews, and in order to perform those functions properly Mr. Vincent
would require to have a good knowledge of the factors that affect market
value. The present issue does not
involve a precise valuation exercise; it merely involves the question of
whether a very large reverse premium would be likely to have an effect on the
future determination of rent. In my
opinion that is a matter on which Mr. Vincent was qualified to express an
opinion. I note, too, that Mr. Gordon
agreed that a sublease to Quids In would be a relevant factor in a future
determination of rent. He pointed out
that it would merely be one factor, along with other market transactions in the
area. I entirely accept that point. Nevertheless, the critical question is
whether a reasonable landlord might refuse consent on account of the size of
the reverse premium. The onus of
establishing the contrary rests on the pursuer.
The reverse premium is nearly 90% of the passing rent, and the property
will require to be relet in 2009. In
these circumstances I consider that the transaction is likely to have an effect
on the rent determined at that time, and that that is sufficient to render the
defender's decision one that a reasonable landlord might make.
[31] Mr. Vincent also criticized the reverse premium
transaction because of the manner in which it was structured, with quarterly
payments of ££25,000, made immediately after rent payments. The reason for this structure was explained
by Mr. Frost in cross-examination.
He stated that the reverse premium had been negotiated as a lump sum,
but it proved possible to agree that payment would be made by instalments. That was obviously beneficial to the pursuer
because payment was deferred. Mr. Frost
did not accept the suggestion that the real reason for payment by instalments
was that the pursuer was not confident that Quids In would continue to pay its
rent under the sublease.
[32] In my opinion the fact that the amount payable by the pursuer
to Quids In was made payable by instalments does not affect the nature of the
payment as a genuine reverse premium.
The timing of payments is usually a matter of considerable commercial
significance, and if payment can be deferred there is an obvious advantage to
the party making payment. In many cases
it is possible to structure a transaction either by means of a lump sum payment
or by means of a series of instalments, according to the parties' cash flow
requirements, and in my opinion that is what happened in the present case. In the present case, Mr. Frost stated
that the reverse premium was originally negotiated as a lump sum. For these reasons I do not think that there
is anything commercially improbable in the fact that the pursuer and Quids In
agreed that payment should be made by instalments. I should note, too, that in the
cross-examination of Mr. Frost and Mr. Gordon, which was based
largely on the correspondence that passed between the parties' agents, the
proposition that making the reverse premium payable by instalments was of
decisive importance in altering its nature was not advanced clearly.
[33] In the
course of submissions I was referred to the case of NCR Ltd. v Riverland
Portfolio Ltd. No. 1, [2004] EWCR 921 (Ch); [2005] 1 P & CR 3; affirmed
[2005] EWCA Civ 312; [2005] 22 EG 134, in which the earlier case of Allied Dunbar Assurance PLC v Homebase Ltd., [2002] EWHC Civ 666;
[2003] 1 P & CR 6 was distinguished.
In NCR the tenant of
commercial premises wished to grant a sublease to a subtenant. The passing rent for the property was
substantially in excess of the current market rent, and the proposed subtenant
insisted on payment of a reverse premium of £3 million. Of that sum, £2,290,000 was to be placed in
an escrow account and released to the subtenant in five equal instalments of
£458,000. Consent to the proposed
sublease was refused, one of the grounds being that the reverse premium took
the rent under the sublease below market value, in contravention of the
provision in the lease that governed subletting. Peter Smith J. held that the reverse premium
was a genuine premium, and should not be considered as a component in the
rent. His decision on this part of the
case was upheld in the Court of Appeal, where Carnwath LJ held (at paragraph
[39]) that the judge had been entitled to hold that the existence of the
reverse premium was not a reasonable ground for refusal of consent. The earlier decision in Allied Dunbar Assurance was distinguished by Peter Smith J.; in the
latter case the court had construed the lease as being such that the true rent
passing was the net figure after deduction of the premium. That was a finding in fact made on the basis
of a number of factors, including an earlier version of the agreement that
stated the rent to be at the level net of the premium. For that reason it was held that the use of
the premium was essentially fictional.
In both cases, the finding in fact as to the nature of the reverse
premium was critical. In the present
case, on the basis of the evidence led, I have come to a conclusion similar to
that reached by Peter Smith J. as to the genuineness of the reverse
premium. Ultimately, however, I have
reached a different result because I consider that the scale of the reverse
premium in the present case is sufficiently large to determine the rent that is
likely to be obtained in future. No such
finding was made in NCR,. Two further points should be noted about that
case. First, the net sum payable net of
the reverse premium was approximately 40% of the current market rent. In the present case the net sum payable is
approximately 16% of the current market rent.
I consider that difference to be material. Secondly, in England and Wales the onus rests
on the landlord of proving that his decision was reasonable. In Scotland the onus is on the tenant to prove
that the decision was unreasonable. The
present case is, I think, fairly close to the margin, and is one where the onus
is of some significance.
The standing
of Quids In: the defender's first reason for refusal of consent
[34] The
defender's first reason for refusing consent to a sublease to Quids In related
to the requirements of clause FIFTH (Two) of the Lease. These stipulated that consent should not be
unreasonably withheld in the case of "a substantial and respectable...
sub-tenant... who is of sound financial standing and is in the reasonable
opinion of the Landlords capable of performing... the tenants' obligations
under the proposed sub-lease...". The
reason given for refusal in the defender's agents' letter of 25 October
2004 was that, because the rent liability under the proposed sublease was
£560,000 over five years, with rates and other outgoings in addition, Quids In
would not fulfil the test in clause FIFTH (Two). That reasoning clearly relates to the
financial capacity of Quids In to meet the outgoings under the sublease. I emphasize this because at times there were
hints in the evidence that Quids In operated a "pound shop" type of operation,
which placed them at the lower end of the retail market. That was not, however, a reason that was put
forward for refusal. In view of the
authorities discussed above at paragraph [16] it is clear that the only
reasons for refusal letter relevant to the unreasonable withholding of consent
of those which influence the decision maker at the time when he made his
decision.
[35] The
application for consent to the sublease was accompanied by a financial profile
of Quids In prepared by Dun & Bradstreet, which included relevant
accounting information. The accounting
information provided with the application letter was not produced, but audited
accounts of Quids In were available for the period from 20 February 2001
to 31 March 2002, the period from 1 April 2002 to 28 February
2003, and the year ended 29 February 2004.
Those accounts must in my view give a precise indication of the
financial information that was available.
The first set of accounts disclosed turnover of £851,427 and a net
profit before taxation of £43,711. The
second set of accounts disclosed turnover of £2,934,900 and a net profit before
taxation of £133,498. The third set of
accounts disclosed turnover of £6,840,864 and a net profit before taxation of
£237,043. It is quite obvious that those
figures indicate a successful business.
[36] In his
evidence Mr. Frost expressed the view that Quids In made for an "exciting
covenant". They had 32 shops, a
profitable business, and increasing turnover and increasing profit. They had plans to expand further. He expressed the view that a retailer such as
that was worth taking as a tenant. He
further pointed out that, because a sublease was proposed, the financial standing
of the subtenant was at least as important to the pursuer as it was to the
defender; the pursuer remained liable to the defender for the whole of its
obligations under the lease. He had
thought that a landlord would react positively to the application. Mr. Gordon also gave evidence about
Quids In, although he prefaced this part of his evidence by stating that Eric
Young & Co are not financial experts.
Nevertheless, in putting forward a proposal for a sublease they had to
present something that was credible, in that it met the landlord's
requirements. He referred to the test in
the lease, and pointed out that Quids In's turnover for its last financial year
had been £6 million. In Mr. Gordon's
view that was "substantial". The same
was true of the profit of approximately £250,000. Likewise, on the basis of those figures,
Quids In seemed capable of fulfilling the financial obligations that it
undertook in terms of the transaction involving the sublease. In cross examination Mr. Gordon referred
to the fact that Quids In had a growing business which appeared increasingly
strong. He would regard the business as
substantial in the context of a subtenant.
[37] The
pursuer also produced a report from Price Waterhouse Coopers dated 3 March
2005, in which that firm expressed the view that, on the basis of the
accounting information provided, they were of opinion that Quids In was capable
of meeting an annual payment of £135,000 taking into account a reverse premium
of £25,000 per quarter. In that context,
Price Waterhouse Coopers expressed the opinion that Quids In could be
considered substantial and of sound financial standing, and demonstrably
capable of meeting the payments involved.
That opinion was obviously not available to the defender or its advisers
at the time of the refusal of consent.
Nevertheless, it is an opinion about the standing, and in particular the
financial status, of the proposed subtenant.
As such, it is in my opinion an adminicle of evidence that may be taken
into account in assessing whether Quids In meets the tests set out in clause FIFTH
(Two) of the Lease.
[38] Mr. Vincent
was asked about the thinking that underlay the first of the reasons for refusal
in the letter of 25 October 2004.
He stated that he had used what he described as a "market test" based on
the proposed tenant's net profit as a multiple of the rent payable. The normal version of that test involves
considering three consecutive financial years of the proposed tenant and
determining whether the net profits in each of those years amount to three
times the rent that is payable. Mr. Vincent
described this as an institutional test, to satisfy investment institutions
about a proposed tenant. If the test was
satisfied, the tenant would be demonstrably capable of taking on responsibility
for the rent. Quids In clearly failed the test if the rent was taken as
£112,000 per annum, and even failed it if the rent were treated as £12,000 per
annum plus a service charge, because of the profits for the period ended 31 March
2002. In cross-examination Mr. Vincent
accepted that the test that he had applied did not appear in the correspondence
that passed between the parties' agents.
He described the test as being in common application as one measure of a
tenant's ability to meet a rent liability.
He admitted that a fast-growing company could readily fail the test
because it was based on three consecutive years' profits.
[39] Mr. Frost
was asked in cross-examination whether any rule of thumb was used in relation
to ability to pay rent. Mr. Frost
referred to the test involving three years' profits that were three times the
proposed rent. He accepted that the test
had been commonly used for at least 20 years, but stated that many surveyors
look beyond it because it had failed in the past. Mr. Frost thought that it was
appropriate to go beyond the test and consider other matters. Mr. Gordon was also asked about the
test. He was clearly acquainted with it,
and said that the formula was often used but was not essential. Generally the formula was used for a tenant,
not a subtenant. In re-examination Mr. Gordon
stated that the test was a rule of thumb, not an absolute rule. Often it was not satisfied, and for a
youthful business it was difficult to satisfy it; it was only appropriate when
a business had been in existence for a number of years. In practice it was used as a starting point,
but very rarely was it a mandatory requirement that had to be satisfied.
[40] On the
basis of the evidence summarized in the two preceding paragraphs, I have
reached the conclusion that it is not unreasonable to make use of the test of
whether net profits are at least three times the rent, but that it is not
reasonable to make use of that test to the exclusion of all other
considerations. On this matter I accept
the evidence of Mr. Gordon that the test should normally be used along
with other considerations, as a starting point rather than a mandatory
requirement. I further accept his
evidence that the test is normally used in relation to a tenant rather than a
subtenant. The reason for this is very
obvious: in the case of a subtenant the primary responsibility for meeting the
rent is that of the tenant, which inevitably reduces the landlord's concern
with the solvency of a subtenant. No
doubt the landlord would be directly concerned with the subtenant's financial
situation in the event of the insolvency of the tenant, but that would only be
a serious consideration if the insolvency of the tenant were a significant
possibility. In the present case there
was no suggestion that the pursuer is anything other than a very substantial
company. In addition, the question of
whether a tenant or subtenant is capable of meeting its obligations under a
lease or sublease is a matter of judgment, and in making that judgment a
landlord should not in my opinion fetter its discretion by adopting a rule of
thumb as an absolute principle.
[41] It was
clear in my opinion that the test used by Mr. Vincent was central to his
thinking on the question of whether Quids In satisfied the requirements of
clause FIFTH (Two) of the Lease. In this
part of his evidence Mr. Vincent explained the basis on which the defender
came to the views expressed in the first ground of rejection in the letter of
25 October 2004; consequently the test can be described as the dominant
reason for that part of the defender's decision. In his evidence Mr. Vincent mentioned
two other matters that might be regarded as reasons supporting this part of the
decision. The first was a suggestion that the existence of a sublease, and
possession of the property by a subtenant, created difficulties in enforcing
the tenant's contractual obligations. If
the tenant was not in possession it did not have a strong incentive to ensure
that the property was well run and kept in good repair. This meant that the landlord was likely to
require to take action against the tenant to ensure that the tenant enforced
observance of the subtenant's obligations.
That would involve greater administrative costs. In my opinion there is
no real force in this point. It applies
to any sublease, but subleases are expressly permitted by clause FIFTH,
subject to certain conditions. In any
event, the inconvenience and greater administrative costs are likely to be
fairly minor. That is especially so in
the case of a tenant such as the pursuer; I was satisfied on the evidence of Mr. Frost
that their policy is to act at all times as a responsible tenant. The second
supporting reason referred to in Mr. Vincent's evidence was a concern at
the nature of the subtenant proposed by the pursuer. He thought that Quids In would be conscious
of cash flow, and would keep overheads as low as possible. Their attitude would be different from a
tenant with a larger financial commitment.
In my view this point is not significant. If there is a sublease to Quids In, the
primary obligation for ensuring compliance with the tenant's obligations under
the Lease remains with the pursuer. In
any event, this argument was not one of the reasons for refusal put forward in
the defender's agents' letter of 25 October 2004. On that basis it is not relevant.
[42] I
accordingly conclude that the institutional test referred to by Mr. Vincent
was the only effective reason for the first ground for rejecting the pursuer's
proposal. For the reasons stated in
paragraph [34] I am of opinion that using that test entirely on its own is
not the act of a reasonable landlord considering an application for a
sublease. It follows that the first
ground is defective, in that it gives dominant weight to a test that should
only be applied as one of a range of considerations. In that respect the first reason for
rejection of the pursuer's proposal was based on a consideration extraneous to
the Lease, because it was based on a test that was not warranted by the terms
of the Lease. In this connection, I am
of opinion that the approach stated by Lord Denning MR in Bickel v Duke of Westminster,
quoted above a paragraph [18], is highly pertinent. The decision of a landlord under tests such
as those contained in clause FIFTH (Two) cannot be the subject of strict
rules, but must be considered in the whole circumstances of the case.
[43] In any
event, I am satisfied on the facts that Quids In satisfies the tests in clause FIFTH
(Two) of the Lease. In reaching this
conclusion I have had regard to the principles discussed in paragraph [17]
above. Clause FIFTH (Two) requires that a prospective subtenant should
be of sound financial standing. Whether
that test is satisfied in relation to Quids In must be based on that company's
financial position assessed as a whole.
Clause FIFTH (Two) also requires that a proposed subtenant should
be substantial and respectable, and demonstrably capable of performing the
obligations under the proposed sublease.
Whether those criteria are satisfied must depend upon the particular
transaction that is contemplated; that is clear from the opinion of Lord
Penrose in Scottish Tourist Board v Deanpark Ltd., at 1998 SLT
1126A-C. In view of that transaction, it
is necessary to assess the capacity of Quids In to carry on business in the
premises and to meet the expense of doing so in a regular way. In the present case the particular
transaction that is contemplated involves a sublease and also the payment of a
reverse premium; it is quite clear that the reverse premium arrangement is
integral to its structure. Consequently
it is the whole of that transaction that must be taken into account in
determining whether the tests in clause FIFTH (Two) are satisfied. I have also had regard to the fact that the
proposal is that Quids In should be a subtenant, not the tenant of the
defender. That is important because the
pursuer remains fully liable to the defender for the whole of the rent and other
obligations during the remaining term of the Lease. The standards that apply to a subtenant need
not, therefore, be as strict as those that apply to an assignee, who comes into
a direct contractual relationship with the landlord.
[44] The
first requirement of clause FIFTH (Two) is that the proposed subtenant
should be "substantial and respectable".
The second is that it should be "of sound financial standing". The third is that it should be "demonstrably
capable of performing... the tenants' obligations under the proposed sub-lease". These are independent requirements, but the
same considerations may be relevant to each of them; in particular, the
existence of a sound financial position points to an ability to perform the
pecuniary obligations under the proposed sublease, and the substantiality and
respectability of the tenant may also point to the likelihood that it will
perform its obligations. In Scottish Tourist Board v Deanpark Ltd., Lord Penrose took the
test of "substantial and respectable" to refer to the capacity of the proposed
subtenant to carry on the intended business and meet the expense of doing so in
a regular way.
[45] In my
opinion Quids In can be considered substantial and respectable. It is the true that it operates at what might
be described as the lower end of the retail market (although that is not one of
the reasons advanced for rejecting the proposed sublease), but that does not of
itself mean that the company is not substantial and respectable, and Quids In
has a successful and expanding business.
Its turnover during the last financial year prior to the application for
consent was well over £6 million, with a net profit approaching £240,000. No doubt, as counsel for the defender pointed
out, the profit is relatively low in relation to turnover; that obviously reflects
the "pound shop" nature of Quids In's operation. Nevertheless, the rapid expansion in turnover
and profits suggests a competently run business. In my view it can clearly be said that Quids
In would be able to carry on its intended business in the defender's premises
and meet the expense of doing so in a regular way. As Lord Penrose points out in the passage
mentioned above, the substantial and respectable nature of the proposed
subtenant must be measured in relation to the particular transaction that is
proposed. What is involved is a sublease
in which the pursuer will continue to have the primary liability to the
defender. It is, moreover, a transaction
in which substantial reverse premium is payable to Quids In. The information available, from the accounts
and from the evidence of Mr. Frost and Mr. Gordon, suggests in my
opinion that Quids In are well able to meet their obligations as subtenant.
[46] I am
further of opinion that Quids In is of sound financial standing. Once again the figures in the accounts are
significant. Some support is provided in
the opinion of Price Waterhouse Coopers.
The accounts disclose a successful business, with both turnover and
profits expanding rapidly. Overall, I
think that the evidence indicates a business that is sound financially. The same is true of the third requirement,
that the proposed subtenant should be demonstrably capable of performing its
obligations under the proposed sublease.
Once again, the financial position disclosed by the accounts is important. In this case the precise transaction that is
proposed is clearly of critical importance.
As explained above, I am of opinion that the totality of the
transaction, both the sublease and the reverse premium, must be taken into
account. Against that background I
consider that the contractual test is plainly satisfied.
Conclusion
[47] For the
foregoing reasons I am of opinion that the pursuer has established that the
first reason for refusal of consent given in the letter of 25 October 2004
was not one that a reasonable landlord could reach, but has failed to do so in
respect of the second reason. The two
reasons are independent of each other.
Consequently the validity of one of the reasons is sufficient for the
decision to be upheld. I will accordingly
sustain the plea in law for the defender, repel the plea in law for the pursuer
and refuse decree of declarator in terms of the conclusion of the summons. Finally, I should thank the representatives of
both parties for the very clear and expeditious manner in which the proof was
conducted; I found their submissions to be of great assistance in reaching my
decision.
