If you can't be a shining example, at least be a horrible warning: lease assignments and offer-back clauses

Posted by Daniel Kidd on
A recent judgment shows how things can go badly wrong if you don't follow the lease to the letter when sending an offer-back notice and applying for consent.  

TCG Pubs Ltd & Another v The Art Or Mystery of the Girdlers of London

Quick read

A tenant failed to comply with the offer-back process in a lease, meaning it could not seek consent to assign. It had sent an offer letter rather than a formal option, as the lease required. It had also failed to make a consent application correctly, by allowing the buyer to apply to the landlord.

Tenants can avoid these problems by following the lease carefully in each case.

What happened

A pub company, TCG Pubs, went into administration. The administrators decided to sell the company's portfolio of pubs in a pre-pack sale. A dispute developed when they tried to get consent to assign one of the leasehold pubs, the Hop Poles in London.

The lease contained an offer-back provision in favour of the landlord. That is, if the tenant wanted to assign or sublet they had to offer the landlord the opportunity to buy back the lease. In this particular lease, the tenant was required "to grant an option to [the landlord] to buy back" the property.  Often, leases require the landlord to match the offer that the tenant has received, but here the offer back was to be at the open market value.

When the sale got under way, the administrators' lawyers wrote to the landlord. They wrote that the administrators "offer you the ability to purchase the property at a proposed price of £1.7m". They said that they had received an offer for that amount, which they considered to be the open market value.

With that, the first issue in the case was looming.

Next, the solicitors for the pub's buyers also wrote to the landlord. They applied for consent to assign the lease to their client.

The last key event was the landlord's response: pointing out that the tenant (not the buyers) ought to have applied for consent, but saying that subject to certain points (including a rent deposit) it would have no objection.

A dispute developed, on three points:

1. The landlord challenged the validity of the offer-back letter. They said it did not 'grant an option' to the landlord (as required by the lease).  They also claimed the offer letter wrongly offered to sell at £1.7m rather than the open market value. They pointed out that the pre-pack sale involved an overall price for the sale of the whole portfolio of pubs, and the buyer had simply apportioned part of that to the Hop Poles. It wasn't an indication of market value for that particular lease.

2. The landlord said the tenant had not made a valid application for consent, since the request came from the buyer.

3. The tenant said the offer back and application were valid, and accused the landlord of unreasonably withholding its consent by asking for the rent deposit.

The decision

1. The judge decided the letter was not enough. The lease called for the tenant to 'grant an option', not simply to make an offer.  The tenant should have sent a formal option to the landlord, that it could sign.

The dispute about the £1.7m price tag was therefore irrelevant, since the offer was invalid. But the judge said he would have found that the price was not fatal to the notice. On the whole, it had been clear that the tenant would sell at the open market price. It wasn't 'take it or leave it' at £1.7m. He also decided the landlord had not 'waived' the invalidity of the offer-back notice.

2. The application for consent was not valid. It had been made by the buyer, not the tenant. It is well established that only the tenant can make an application for consent. It was later validated by the tenant, but the 'reasonable time' for the landlord's response did not start running until then.

3. The question of the landlord having unreasonably withheld consent was irrelevant, because the offer back was not valid, so the tenant had no right to assign. But the landlord's request for a rent deposit would have been unreasonable. The lease entitled them to ask for a guarantor, but not a deposit, and the landlord had conceded that a deposit was not necessary.

What to take away

The case is a warning to tenants: make sure you follow the lease clauses to the letter. And an application for consent must come from the tenant (or someone acting on its behalf).  It can't be left to the buyer alone.

The case is being appealed. The appeal court will have the opportunity to change the decision and update the law, but we are not likely to have a result for several months at least.

For further information about this case or any other property litigation issue please contact Daniel Kidd. 

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Daniel is the national head of our property litigation group: A team of over 20 specialist lawyers working from our offices in London, Oxford, Southampton and Cardiff.

Daniel Kidd
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