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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 [2005] EWCA Civ 312 (21 March 2005) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2005/312.html Cite as: [2005] EWCA Civ 312

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IN THE SUPREME COURT OF JUDICATURE
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)

		Royal Courts of Justice Strand, London, WC2A 2LL
		21st March 2005

Lord Justice Carnwath :

Background

1. The defendant ("Riverland"), which is a member of the Topland Group Limited, is the lessor of premises known as Solar House, 907-925 High Road, Finchley, London N12. The lessee is the claimant ("NCR"). The lease, which was dated 12th December 1984, was for a term of 25 years commencing on 25^th December 1984. It provides for 5-year upward only rent reviews. The current rent in the period relevant to this appeal was £710,000. The final rent review was due to take place in December 2004.
2. Clause 3(11) contains provisions relating to the grant of consent for under-letting. Paragraph (a) (i) is an absolute prohibition against under-letting of the premises unless the underlease is granted -

"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 2^nd April 2004.

3. Paragraph (a)(iv) of clause 3(11), which is relevant for present purposes required that prior to the grant of the under-letting:

"(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)…"

4. Section 1(3) of the Landlord and Tenant Act 1988 supplements the contractual requirements provisions. For present purposes, the following are relevant:

" (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

5. By the end of 2002 NCR had decided that the property was surplus to their needs and began looking for a way in which to dispose of or re-negotiate their interest. During the first half of 2003 there were discussions with Riverland and others on a range of possible solutions. It was clear that, because of the difference between the current rent under the lease and the market rent, a substantial reverse premium would be required on any under-letting. By June NCR had identified a potential under-lessee in the form of Telco Global Ltd ("Telco").
6. On 30^th June 2003 Herbert Smith on behalf of NCR wrote to Riverland requesting consent to sub-let to Telco, enclosing draft heads of terms and audited accounts of Telco's holding company. Further accounts and financial information relating to Telco itself were promised under separate cover. The draft heads of terms made clear that a reverse premium of £3m was to be paid by NCR to Telco.
7. Negotiations on the part of Riverland were conducted in the name of Berkley Estates London Ltd ("Berkley"), another member of the Topland Group, principally by Mr Kyte, the Group Management Surveyor. It is necessary to mention only a letter of 17^th July 2003, which was the first formal response to the application. In it Mr Kyte requested early provision of the promised accounts for both the proposed lessee and its holding company to enable its "stature" to be considered. He expressed concern about the financial terms of the underletting, in particular the reverse premium, which substantially reduced the effective rent payable by the undertenant, and would have "serious consequences for the valuation of our interest in the premises". He added that it would be necessary to notify Riverland's bankers, and obtain their consent to the proposed subletting; and that the payment of the premium would have an effect upon the rent review, due to take place in 2004. In the circumstances, he said that Riverland were "minded to refuse consent for this reason", but would defer a decision until the receipt of the outstanding information and any further comments.
8. On 28^th July 2003 Herbert Smith provided further financial information, together with an opinion of Mr Derek Wood QC dealing with the legal issue of compliance with paragraph (a)(i) of clause 3.11. On 7^th August 2003 Herbert Smith set a deadline for a decision of 4pm on 11^th August 2003. On 8^th August, Berwin Leighton Paisner ("BLP") informed Herbert Smith that they had been instructed on behalf of Riverland, and objected to the 11^th August deadline. On 11^th August they wrote further:

"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.

9. On 14^th August Herbert Smith wrote offering "a narrow window of opportunity" to conclude the underletting by 20^th August, but "without prejudice" to their contention that a reasonable time had already elapsed. (As emerged from NCR's oral evidence, Telco had by then indicated that it was willing to wait until 20^th August for a decision by Riverland.) On 20^th August BLP wrote formally confirming the refusal of consent on the following grounds:

"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."

10. The Judge rightly found the substance of Riverland's reasons for refusal in their solicitors' letters of 11^th and 20^th August. I would add, although the Judge had some doubts on this, that the reference in the former to "the concerns already expressed" can in my view fairly be taking as including a reference to the points in Mr Kyte's letter of 17^th July.

The judgment below

11. The Judge referred to the summary of the relevant principles given by Lord Bingham in Ashworth Frazer Limited v. Gloucester City Council [2001] 1 WLR 2180 (to which I shall return below). He also quoted extensively from three recent authorities on the effect of the 1988 Act: Norwich Union Life Insurance Society v Shockmore [1999] 1WLR 531 (Sir Richard Scott, V-C), Footwear Corporation v Amplight Properties Ltd [1999] 1WLR 551 (Neuberger J), and Go West Ltd v Spigarolo [2003] QB 1140 (Court of Appeal, substantive judgments being given by Munby J and Pill LJ). From those authorities he derived the following summary, which was not materially in dispute before us:-

"(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."

12. The Judge heard oral evidence from both sides as to course of the negotiations, which he regarded as of "comparatively little assistance", because most of the communications were in writing (para 28). There was agreed expert evidence as to market rent of the property. In addition, Mr Shapiro, on behalf of Riverland, gave expert evidence as to the capital value of the property with and without the proposed underletting. The Judge concluded that Riverland were in breach of the Act, both in failing to make a decision within a reasonable time and in refusing consent on grounds which were not reasonable. He made declarations accordingly.
13. Although his judgment set out the authorities and the facts at considerable length, his reasoning was relatively short. At the heart of the Judge's reasoning on both issues was the importance he attached to the continuing covenant of NCR. This was explained in paragraphs 86 to 88:-

"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."

14. On the reasonableness of the time taken to give a decision, he considered that "a comparatively short period" was required, and that a period of two weeks from 28^th July was sufficient time for a decision (in effect, until 11^th August).
15. As to the reasonableness of the refusal, he summarised the two reasons advanced by Riverland in their solicitors' letters of 11^th and 20^th August 2003, as being (a) that the rent payable, because of the reverse premium, did not conform with the Lease and (b) that the covenant strength of Telco was insufficient. He dealt with them shortly: (a) had been disposed of by the decision of Peter Smith J; as to (b), given NCR's continuing liability to Riverland as head-lessee, the covenant strength of Telco was not of sufficient significance to entitle it to withhold consent (paras 95-6).
16. He also commented on two points made by Riverland in an earlier letter (dated 17th July 2003), while doubting whether they could properly be treated as reasons relied on in support of the refusal. They were that the proposed premium would have "serious consequences" for the valuation of Riverland's interests in the property, and that (as the Judge accepted) Riverland's bankers would have had to consent to the proposed subletting. He did not regard either as a good reason for withholding consent:

"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."

17. Accordingly, he held that the refusal of consent was unreasonable, and made a declaration accordingly.

Issues in the appeal

18. Three issues arise:

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.

Reasonable time

19. On the first issue, I do not share the judge's view of the significance of the delay between 11^th August and 20^th August. I would make four points. First, a clear distinction needs to be drawn between informal exchanges, both internally and between the parties, and the formal process of application and decision contemplated by the act. On the one hand, it is in all parties' interests that there should be such free exchanges, with a view to reaching an agreed solution, without prejudicing their respective positions under the Act. On the other hand, the serious legal consequences resulting from the statutory scheme require that the process of application and decision should be subject to a reasonable degree of formality. For this reason, although we were taken to exchanges of e-mails within the two groups, and between the parties, both before and after 28^th July, I gain very little assistance from either. The Judge was right, in my view, to treat Herbert Smith's letter of 28^th July as being the point at which NCR's application was in a form requiring due consideration by Riverland.
20. Secondly, the Judge was too ready, in my view, to categorise this as an uncomplicated transaction capable of summary treatment. Indeed, his view of the relative simplicity of the issue sits oddly with the overall effect of his judgment, which was that Riverland, even with the assistance of experienced legal advisers, arrived at the wrong answer and thereby incurred a lawsuit involving a claim of some £3m. The assessment of Telco's financial position no doubt was relatively simple, and it is clear that the internal financial advisers of Riverland were able to take an adverse view at a very early stage. The more difficult issue was whether a refusal based on such misgivings could be justified as reasonable under the Act, having regard to the serious consequences potentially involved. Furthermore, this was only one aspect of the transaction as a whole, which contained the unusual feature of a very substantial reverse premium, equating in financial terms to the bulk of the contractual rent over the remainder of the term. This was no doubt dictated by the market conditions, but it raised unusual legal and estate management issues which merited serious consideration.
21. Mr Wood criticised Riverland's failure to present the application to the senior officers of the company at an earlier stage. However, the completed application was not received until 28^th July. I respectfully adopt the words of Munby J in Go West (para [39]):-

"…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.

22. Of course, a critical factor may be the attitude of the proposed underlessee. However, we know that Telco, when pressed, was prepared to wait until 20^th August. It is not surprising, therefore, that, in spite of some legal posturing, the actions of the two sets of experienced legal advisers do not suggest that either regarded that timescale as unreasonable.
23. Thirdly, it is in neither side's interests, at least where a refusal is being contemplated, for the decision to be rushed. The lessor is properly concerned to protect himself against the possible consequences of a finding of unreasonableness, while the lessee's primary objective is to achieve an underletting, rather than an uncertain cause of action under the Act.
24. Finally, it is not clear what harm was caused by the delay between 11^th and 20^th August. If Riverland's decision on 20^th August had been to grant consent for the under-tenancy, then it seems clear on the evidence that the transaction would have gone ahead, and it is difficult to see what in practice would have been left to litigate.
25. Accordingly, I would respectfully disagree with the Judge's conclusion on the delay point.

Variation of terms

26. The third point was rightly described in argument as a "technical point". It arose from the fact that there had been a change of one detail in the heads of terms agreed with Telco, between 8^th July (when NCR told Riverland that they were "final") and 20^th August, when consent was refused. The change affected the structure of the instalments in which the reverse premium was to be paid to Telco, so that a larger part was to be paid earlier. It was argued that this made it a different application from that submitted. The Judge observed that this point had been only "faintly" argued, and he held that the change was not material to the application (para 43).
27. In my view, the point is in any event misconceived. The failure to inform Riverland of this change may have been discourteous. But it does not mean that the application was invalidated. The original application had not been withdrawn and Riverland remained under a duty to consider it on its own terms. Of course, if, before or after consent to an underletting has been obtained, the terms of the underletting are changed materially, then a revised consent may be needed. However, the lessor's duty at any time can only be related to the proposal which is actually before him.
28. In my view, the key issue in the case is the reasonableness of the refusal, to which issue I now turn.

Reasonableness of refusal

29. In considering this issue, the Judge rightly sought guidance in the most recent House of Lords authority on this subject: Ashworth Frazer Limited v. Gloucester City Council [2001] 1 WLR 2180, 2182E-2183D. The relevant clause in that case provided that consent to assignment was not to be unreasonably withheld "in the case of a respectable and responsible assignee". Speaking of the "combined effect" of that clause and section 1 of the 1988 Act, Lord Bingham summarised the position thus:

"[2] …. 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.

[3] 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 [1986] 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 [1925] 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.

[4] 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 [1964] 2 QB 547 and Bickel v Duke of Westminster [1977] QB 517), in others unreasonable (as, for example, in Bates v Donaldson [1896] 2 QB 241, Houlder Bros [1925] Ch 575 and International Drilling [1986] 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 [1977] QB 517, 524.

[5] 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 [1964] 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 [1929] 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."

30. In the context of this case, the first two principles provide little positive guidance. The first does not arise. There can be no suggestion that the reasons for refusal were "wholly extraneous" to the lease. Riverland's concerns, right or wrong, were directly related to the effect of the proposed underletting on the security and value of their asset. The second principle cautions against giving undue weight to previous decisions on different facts, but supports their use to illustrate the principles. The third principle is critical. However, two points require some elaboration in the context of this case. The first is the apparent paradox that a decision may be shown to have been "reasonable", even if it was not "justifiable". The second is the extent to which the lessor must have regard to interests other than his own, including adverse effects on the lessee.
31. The apparent paradox is no more than semantic. It is of course the essence of a reasonable decision that there were reasons for it, which can be justified at some level, even if only by showing that they were genuine and not wholly fanciful. So much is implicit in the statutory requirement that reasonableness has to be proved. What is not required, however, is for those reasons to be justified by reference to some objective standard of correctness.
32. Lord Bingham quoted the statement to the same effect of Danckwerts LJ in Pimms Ltd v Tallow Chandlers Company [1964] 2 QB 547, 564. He in turn referred to an earlier decision of his own, which well illustrates the point: Re Town Investments Ltd Underlease [1954] Ch 301. In that case, the proposed underletting was to be at a rent well below the current market rent, and in consideration of a substantial premium. It was held that the lessor had reasonably withheld consent, on the grounds that its ability to collect rent, and the value of the property, might be adversely affected in the future. One concern was related to the lessor's rights under the Law of Distress Amendment Act 1908, which, when the head lessee's rent is in arrear, enables the lessor to require the underlessee to make future payments of rent direct to him. If the rent payable by the underlessee were less than the corresponding rent payable by the head lessee the lessor's remedy under this section might not be wholly effective. Other concerns were the position which might arise on forfeiture of the headlease or on bankruptcy.
33. Having referred to the authorities, Danckwerts J accepted the submission that it was sufficient if a reasonable man in the lessor's position might have regarded the proposed transaction as damaging to his property interests, even though some persons might take a different view. He continued:

"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.

34. On the second question, there is no doubt that the lessor is normally entitled to be guided by reference to his own interests alone. As Lord Rodger accepted in Ashworth Fraser:

"… 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 [69]).

He had earlier (para [67]) cited with approval a passage to similar effect in the judgment of Lord Denning MR, in Bickel v Duke of Westminster [1977] 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)

35. However, there may be exceptions. In the International Drilling case, where the authorities were considered by Balcombe LJ. He found "two streams of authority" which he reconciled in the following passage:-

"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." ([1986] 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).

36. The judge had referred to the unfairness of an approach which had the effect that, the more the substantial the lessee, the more easily the landlord would be able to justify a refusal of consent since unless the proposed assignee's covenant was as strong, a reasonable man might form the view that the market would regard the reversion as less attractive. Balcombe LJ commented:-

"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)

37. Finally, before returning to the Judge's decision in this case, I should mention one point, which arose in argument, that is whether there is any difference in the principles applicable respectively to proposals to underlet and proposals to assign. Mr Seitler said there was no material difference, citing Mount Eden Land Ltd v Straudley Investments Ltd [1996] 74 P&CR 306. That concerned a proposed underletting. Phillips LJ said:-

"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.

38. As I have said, the reasons given for refusing consent in this case came under two headings: (a) the unusual terms of the lease and (b) the inadequate covenant of the proposed underlessee.
39. The judge was entitled in my view to hold that the first was not on the evidence a reasonable ground of refusal. Although it was not surprising that Riverland was initially concerned by the unusual characteristics of the arrangement, it was unable to show at the trial that there was any foundation for their concerns. The burden was on Riverland to do so. In particular, it was not shown that there was any reason to think that the arrangement would adversely affect the forthcoming rent review, given that the market rent was likely to remain well below the current lease rent. Similarly, although the judge accepted that the bankers' consent would have needed to be obtained, Riverland failed to adduce any evidence – contemporary or retrospective – to show that it would have been a practical obstacle.
40. The other concern was the covenant strength of Telco. Mr Seitler was at pains to emphasise the weakness of the financial position disclosed by the accounts of Telco and its parent company. As to Telco itself, he pointed out that in the year to 30 June 2002 it had made a loss of £330,000 before taxation; that its net assets were only £142,000 "substantially less even than the rent as subsidised by NCR"; and that in the year to 30 June 2003, it was projected to made a loss of £2.3m. It was, as he put it, "sinking", and its own covenant was "next to useless". As to the guarantee of its parent company, Telco Holdings, he pointed out, among other concerns, that it had only been formed in June 2001; the audited accounts supplied were for its first period of trading, and there was no possibility of examining trading over a longer period. Looked at overall, its accounts failed to show –

"…what a reasonable landlord would be looking for – a comfortable margin within which to meet rental liabilities."

41. It is unnecessary to dwell on the detail of these submissions, because they were not central to the arguments before us. The Judge made no specific findings on them, because he regarded the strength of Telco's covenant as irrelevant. Nor did Mr Wood take issue on the detailed assessment. As he no doubt would accept, if the security of Riverland's investment had to depend simply on the strength of Telco's own covenant (even with the support of its parent), the refusal would have been unassailable.
42. The question for us is whether the judge was entitled to regard the strength of Telco's covenant as wholly irrelevant, because of the continuing liability of NCR as head-lessee.

Mr Shapiro's evidence

43. An important element of Riverland's case on this issue was the evidence of Mr Shapiro on the relative capital values of the property, with and without the Telco underlease. He assessed the value as £7,860,000 without the underlease, and £7,332,000 with it; a difference of over £500,000. The following points can be deduced from Mr Shapiro's report:

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."

44. His only other comment on this aspect was in the concluding passage, which I have already quoted, where he said –

"… 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)

45. Mr Seitler makes a strong attack on the Judge's treatment of this evidence. He reads the comment on it as "remote and speculative", as an echo of the earlier reference to Mr Shapiro's "acceptance" that it was "somewhat speculative" to attempt to value the reversion in 6½ years time. He says that this was a "serious mischaracterization" of the evidence, which was a current valuation, taking account of how a current investor would take account of the value of Riverland's reversion.
46. He has shown us the relevant part of Mr Shapiro's evidence (Transcript 15.6.04 p 34-38). Mr Shapiro accepted that the difference of 0.5% in the assumed yield depended on a "judgement made upon what might happen in the future", but rejected the suggestion that he had exaggerated the risk (p 34). Later, in relation to the assumption that the rent for a letting of the whole building would be less than letting in smaller areas, he accepted that the amount of the difference was "a matter of estimate or some might say speculation" (p 38). There is no record of him accepting in terms that it was "somewhat speculative" to the value reversion 6 1/2 years ahead of the expiry of the Lease. Nor is there any record of it being put to him, by Mr Wood or by the Judge, that the whole exercise was so "remote and speculative" as to be of no value.

Discussion

47. I see considerable force in Mr Seitler's criticism of the Judge's treatment of this issue. He was of course entitled to give great weight to the security provided by NCR's covenant during the remainder of the current lease, as indeed did Mr Shapiro. However, a reasonable lessor could be expected also to take account of the position at the end of the lease. There was no doubt that Telco, if still in occupation, would have a right to seek a new tenancy under the 1954 Act.
48. The Judge acknowledged that right. He said:

"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.

49. It was wrong, in my view, to dismiss that evidence as no more than speculation about the distant future. Any such estimate must of course be uncertain. But the purpose of the evidence was to show how a current investor might be expected to evaluate that uncertainty, by reflecting it in a current valuation. The Judge had no reason to reject that as an inappropriate valuation technique, or one which Mr Shapiro as a qualified valuer was not entitled to perform in the exercise of his professional judgement.
50. Furthermore, the question for the judge was, not whether he himself regarded the evidence as "speculative and remote", but whether it helped to show that Riverland's concerns about the weakness of Telco's covenant had been "reasonable" (even if not "correct or justifiable"). It was not suggested that Riverland's concerns were not genuine, and on the evidence, in my view, it could not be said that they were unfounded.
51. One further point should be mentioned for completeness. Following the approach of Balcombe LJ in International Drilling, it might have been argued that Mr Shapiro's estimate was no more than of a difference in "paper value", and that it was outweighed by the loss to NCR of its liability for an empty building. I did not understand Mr Wood to put his case in this way, and in my view he was right not to do so. As I have explained the approach taken in that case was exceptional, and dependent on the strong findings made by the judge. By contrast, in the present case, the estimated difference in present value was related to a future possibility which was real, albeit uncertain. On the other side, there was no examination of the consequences for NCR, or the alternatives that might have been available. (Mr Seitler pointed, for example, to the apparent interest in parts of the building shown as late as May and June 2003 by the Inland Revenue and Co-operative Insurance Services Limited.)
52. I accept that the issue of reasonableness is an issue of fact, on which the Judge's conclusion should normally be respected. However, I conclude that in this case he set the standard too high, having regard to the authorities, and in particular gave inadequate weight to the expert evidence.

Conclusions

53. For these reasons, I would hold that Riverland has established the reasonableness both of the time taken for the decision and of the decision itself. I would accordingly allow the appeal and set aside the declarations made by the Judge.

Lord Slynn of Hadley

54. I agree that the appeal should be allowed for the reasons given by Carnwath LJ.

Lord Justice Ward

55. I also agree.