If you own a leased property or you are a tenant, take a moment to consider if you are unreasonable! Do you prioritise the right things? This case might make you think…
The courts were asked to make a declaration relating to a landlord withholding consent for a tenant to assign (or pass on) their lease to their son and his wife.
To set the scene, E is the owner of a rural property in Northland. It is leased to R for 999 years on quite favourable terms for the tenant. Whilst this lease can be assigned, it still requires the consent of E, the landlord. That consent should not be unreasonably withheld. This means that the landlord should accept the assignment within a reasonable period unless they have a good reason not to.
Breaking it down into two constituent parts,
- the landlord must reply within a reasonable period
- they must have good reason to refuse.
The landlord, E, refused in the first instance as he wanted to sell the property in full to the tenants. The tenants refused the offer and asked for consent to assign the lease again. However, the landlord refused again on the basis that he was unhappy with the state the properties were in.
The tenants then made a claim to the High Court for a declaration that the landlord had unreasonably withheld consent. Also for damages based on “formal proof” from the Property Law Act 2007.
Due to the case being brought by formal proof, the court looked through all communications between the landlord and tenant. We always suggest you keep a record of all communications, this case is further proof that this is good practice.
The tenants were able to provide proof of dates that communications were sent and what was said in the communications. Whereas the landlord had stated the property was not well kept but he was unable to provide any proof.
- The bank offered a loan to the parties that were looking to take over the lease. This loan is relevant as it included a favourable interest rate which was fixed. This offer expired before the landlord gave consent to assign the lease.
- The tenants had asked for consent to assign the lease for a second time and the landlord refused due to the state the properties were kept in.
- The bank then offered a new loan at a higher interest rate so the Tenants made an urgent application to the Court to gain consent and secure the new interest rate.
- During these proceedings, the Landlord told the Court and the tenants that he was unwell and would consent to the assignment via text the following day. The text was not sent.
- The tenants relied on this phone call, accepted the loan, and settled the assignment anyway.
- They then turned to the court once more wanting compensation for having to pay a higher interest rate on their loan to the landlord unreasonably withholding consent.
The Court’s decision
The Court relied on principles from s227 of the Property Law Act 2007 for when consent is unreasonably withheld:
- If the lessor requires payment or consideration
- If they impose an unreasonable condition on the lessee
- If consent is withheld due to the lessee being bankrupt or in receivership and that;
- If consent is refused, the lessor should provide prompt written notice of the reasons.
The court further added a principle from the case of Louis Vuitton v Princes Wharf:
It is unreasonable to withhold consent if the grounds of refusal do not reasonably relate to the matter at hand.
The court split its judgment into two parts; the declaration; and the damages.
A declaration was made that the landlord unreasonably withheld consent. The landlord had no evidence for his reasoning in refusing to consent to the assignment. He had also confirmed he would consent to the assignment but failed to do so.
Damages of $5,920.00 were also awarded. Had the landlord not unreasonably withheld his consent; the son and his wife would have accepted a loan at a more favourable interest rate.
What we learned
The first aspect of this case to consider is that the obligations of landlords are real. A landlord should be reasonable and respond within a reasonable time. This landlord used the assignment request as an opportunity to leverage the tenants into purchasing the property. Ultimately, he picked the wrong time to do this and paid the price.
It is also important to note that this is not just relevant to lease assignments. It could also be relevant for other requests, for example subletting or changing the use of premises on the leasehold. In all day-to-day contact, a landlord should consider whether they are legally obligated to be reasonable in considering the tenant’s application. If so, they must ensure that obligation is met, for example by responding in a reasonable time.
It is not always easy to discern what is reasonable, even with commercial transactions our emotions can obscure the best course of action. Always consult a trusted property lawyer if you are in any doubt.