As Ireland’s economy recovers we are seeing the return of high demand for commercial space, steep rents and key money within Dublin’s rental market. This contrasts with the situation as recently as two years ago when landlords not alone had to reduce rents but also had to offer significant rent free periods and other concessions in order to attract tenants into their buildings in the first place.

It is clear to all that commercial leases in good locations have become highly valuable assets again. Those landlords who took on board tenants with weak covenants during the recession are now looking for strategic means in which they can either take back their properties with a view to re-letting to a tenant with a better financial standing or to increase rent roll.

The Commercial Court was faced with one such strategy in the recent case of Perfect Pies Limited (in receivership) and Pearse Farrell v Chupn Limited [2015] 11 JIC 0607 This case concerned a landlord’s refusal to consent to an assignment of a lease and the facts are as follows:

The plaintiff in this case was the lessee of the popular Dublin venue, Café en Seine, under three separate leases each of which contained terms of 25 years or more. The defendant was the well known Dublin hotelier and publican Louis Fitzgerald who had acquired the freehold interest in the property in October 2010 and subsequently had become the plaintiff’s landlord. A receiver was appointed over the plaintiff’s assets including the three leases in December 2009. The Receiver initiated a tender process to sell the leases and received numerous offers from prospective purchasers including, Starpin Limited, a company which formed part of the well known Fitzgerald Group. Starpin Limited’s €5.35 million bid was unsuccessful in the tender process and they lost out to a bid from Ardan Advisory Limited. A conditional Tender Agreement was entered into between the parties which depended on the landlord’s consent to the assignment of the leases being obtained. A letter requesting landlord consent to the proposed assignment and setting out the financial background of the proposed assignee and its two proposed sureties was sent to the Defendant’s solicitors in September 2014. The Defendant (who had previously bid for the leases) refused to provide such consent on the basis that the Plaintiff was in significant breaches of the Leases in relation to the repair and alienation clauses.

In regards to the repair clauses the Defendant contended that he had served three interim  Schedules of Dilapidations on the Plaintiff (one of which had been served during the tender process) which had not been complied with. The Defendant also argued that a number of occupational licences of the property had been granted to third parties without the Defendant’s prior approval.

All three leases contained similar provisions prohibiting the tenant from assigning the leases without landlord consent and that “the Landlord shall not unreasonably withhold or delay its consent to an assignment” along with provisions with regard to the required financial standing of the assignee and its sureties. These provisions reflect the requirements of Section 66 of the Landlord and Tenant (Amendment) Act 1980 which provides that every commercial lease which contains a clause prohibiting or restricting alienation without the consent of the lessor shall be subject to a proviso that such consent shall not be unreasonably withheld, notwithstanding any express provision to the contrary contained in the lease.

The test is that of reasonableness and the parties to the action agreed that the UK’s Woodfall’s “Law of Landlord and Tenant” lays down the general principles to be applied in determining unreasonableness:

• The purpose such a covenant is to protect the landlord from having his premises used or occupied in an undesirable way or by an undesirable tenant.

• A landlord is entitled to refuse his consent on grounds which have nothing to do with the relationship of landlord and tenant in regard to the subject matter of the lease

• The onus of proving consent was unreasonably withheld is on the tenant

• The landlord need not prove that the reasons which led to the refusal of consent were justified if they were reasons which may be reached by a “reasonable man” in the circumstances

• A landlord may reasonably refuse consent on the ground of the purpose which the proposed assignee intends to use the premises, even if such purpose is not forbidden by the lease

• While a landlord need usually only consider his own interests there may be occasions where there is such a disproportion between the benefit to the landlord and the detriment to the tenant that it is unreasonable for the landlord to withhold his consent

• In every case it is a question of fact, depending on individual circumstances, whether the landlord’s consent to an assignment is being unreasonably withheld.

It was also noted in Rice v Dublin Corporation that a landlord may state the grounds for refusal to the Court even if no reasons had previously been given. A landlord can also subsequently amend an invalid reason for refusing by giving a valid reason as was confirmed in Boland v Dublin Corporation [1946].

Essentially the onus is on the tenant to show that no reasonable landlord would have refused consent in the circumstances as the landlord apprehended them to be. A landlord does not need to justify the conclusions that led it to refuse consent. Moreover, a landlord is entitled to rely on advice of appropriate qualified professional / experts provided that the advice given is reasonable.

Following a course of protracted and unsuccessful correspondence between the parties proceedings were issued by the Receiver contesting the two alleged breaches of the leases in relation to repair and alienation. On receipt of the summons the Defendant’s solicitors raised for the very first time issues in relation to the question of sureties and the quality of the financial information and comfort in respect of the proposed assignee which had been provided by the Plaintiff.

The Receiver gave evidence that the Defendant had an ulterior motive in withholding consent – its desire to obtain possession of the premises (which it had previously failed to do via the tender process). He further submitted that the Defendant’s claim to breach of covenant in respect of repair and alienation did not amount to the raising of bona fide issues and that the Defendant  had wrongfully refused to consider the consent application.  The Receiver also drew the Court’s attention to the fact that Avalondale Limited, a company also within the Fitzgerald Group, had petitioned the High Court on in January 2015 to wind up the Plaintiff in respect of an outstanding debt owed to a third party. The debt had been sold to Avalondale from that third party the day before. The Receiver argued that this attempt by another company within the Fitzgerald Group to liquidate the Plaintiff was undertaken with the intention of facilitating a forfeiture of the Leases, which each provided for a right of re-entry where the tenant “being a company shall go into liquidation either compulsory or voluntary”.

The High Court in Dunnes Stores (Ilac Centre) v Irish Life Assurance PLC [2008] had confirmed a well established principle that landlords are not entitled to use the opportunity of applications for consent to pursue any “ulterior motives”; rather consent can reasonably be refused only for purposes reasonably contemplated by the lease itself.

It is therefore not surprising in this case that the Court ruled in favour of the plaintiff.  The Court declared that the landlord had acted unreasonably within the meaning of Section 66 of the Landlord and Tenant (Amendment) Act 1980 in refusing to consent to the Plaintiff’s application for consent to assignment of the leases on the basis of an ulterior motive, namely its desire to obtain possession of the property.

The Court did however refuse to grant an order dispensing with the requirement for the Defendant’s consent to the assignment on the basis that if the Defendant had given full and proper consideration to the application for consent it would have been reasonable to refuse consent on a number of grounds relating to shortcomings in the financial offerings made by the Plaintiff prior to the proceedings.

To conclude landlords must ensure that their motives in refusing consent cannot be said to be improper and that tenants should be advised of such refusal in a timely manner.  The judgment provides a very useful aide memoire for landlords and advisors reviewing consent applications.  One for the drawer and bound to be cited in arbitrations and other landlord and tenant cases for years to come.