Issue of unreasonable withholding of consent to assignment considered by the Commercial Court

In its recent decision in the case of Perfect Pies Limited (in receivership) and Pearse Farrell v Chupn Limited [2015] 11 JIC 0607, the Commercial Court has considered the difficult question of the unreasonable withholding of consent to the assignment of a commercial lease. This case involved interesting issues, in particular around a landlord potentially seeking to use the opportunity of an application for consent to assignment to pursue "ulterior motives" – in this case, to obtain possession of the premises.

Background
This case relates to the Café en Seine premises on Dawson Street, Dublin (the Premises) which have for some time been occupied by Perfect Pies Limited (the Plaintiff) on foot of three separate leases (the Leases).  Pearse Farrell (the Receiver) was appointed receiver over the Plaintiff's assets, to include the leases relating to the Premises, in December 2009.  Chupn Limited (the Defendant) is a company within the group of companies owned and controlled by Mr Louis Fitzgerald (the Fitzgerald Group) and acquired the freehold interest in the Premises in October 2010.

Facts
These proceedings initiate from a tender process whereby the Receiver intended to sell four properties of the Plaintiff, to include the Premises.  During that tender process, offers had been received from a number of prospective purchasers, to include one from Starpin Limited, a company connected to the Fitzgerald Group.  Ultimately, the Plaintiff acting by the Receiver agreed to assign its interest under the Leases to Sequana Management Limited (Sequana), a special purpose vehicle incorporated by Ardan Advisory Limited (Ardan). The agreement reached between the Receiver and Sequana was expressly subject to and conditional upon the landlord (ie the Defendant) providing its consent to the assignment of the Leases to Sequana. 

The Leases contained common and broadly similar provisions with regard to alienation, providing that the landlord would not unreasonably withhold or delay its consent to an assignment. The Leases went on to contain provisions with regard to the required financial standing of the assignee (to be of "good" or "satisfactory" financial standing) and with regard to possible sureties – the earliest of the three leases deemed it reasonable for the landlord to require that two directors provide guarantees for a period of not more than five years, while the later leases referred to both directors and / or shareholders, without reference to a time limit.

The Receiver applied to the Defendant's solicitors seeking consent on 15 September 2014. In this letter the solicitors for the Receiver set out information on Sequana and its incorporation and shareholding, similar information with regard to two proposed sureties (to include Ardan), financial information for these three parties and an offer of a guarantee from HSBC Bank.

In their first meaningful response to the request for consent, the Defendant's solicitors stated that the Defendant was not in a position to consider the issue of consent until such time as the Plaintiff detailed its proposals to address "significant breaches of the Leases" which it stated related to the following:

1. Breach of the repair clause – the Defendant had served three interim schedules of dilapidation on the Plaintiff which it contended had not been complied with; and
    
2. Breach of alienation provisions – a number of occupational licences of the Premises had been granted to third parties without, the Defendant argued, its permission.

A series of correspondence between the two parties ensued around these two issues, which were both contested by the Receiver, ultimately resulting in the Receiver issuing these proceedings on 18 November 2014. Immediately following the service of the plenary summons the Defendant's solicitors sent further correspondence raising, for the first time, issues with regard to the question of sureties and the quality of financial information and comfort furnished by the Plaintiff.

The Receiver submitted in evidence that the Defendant's real motive in withholding consent was its desire to obtain possession of the Premises (which it had failed to do via the Starpin tender bid) and that by raising issues with regard to breach of covenant in respect of repair and alienation the Defendant was not raising bona fide issues and was wrongfully refusing to consider the consent application.  In that context, the Receiver raised during the proceedings the fact that Avalondale Limited (Avalondale), a further company within the Fitzgerald Group, had petitioned the High Court on 14 January 2015 to wind up the Plaintiff (the Petition) on the basis of a debt originally owed to a third party but which had been acquired by Avalondale from that third party on 13 January 2015.  The Receiver argued that this attempt by a company controlled by the same ultimate shareholder as the Defendant to put the Plaintiff into liquidation was done with the intention of enabling 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".

Conclusions
In granting a declaration that the Defendant, in delaying and failing to consent to the Plaintiff's request for consent to assignment, acted unreasonably within the meaning of the leases and section 66 of the Landlord and Tenant (Amendment) Act 1980, Haughton J held that: 

• The Defendant unreasonably withheld consent to the assignment to Sequana on the basis of an ulterior motive, namely the desire to obtain possession of the Premises. In this regard Haughton J held that, in his opinion, the Petition was an abuse of process, which was further compounded by the fact that evidence given in court contradicted averments made on affidavit – it had been stated on affidavit that the consideration for the acquisition of the related debt had been paid prior to the Petition, however it transpired in court evidence that only a small proportion of the consideration had been paid up front with the balance deferred pending the outcome of the Petition. 
   
• The Defendant relied on spurious reasons, namely non-repair and lack of consent to licensees, to decline to consider the Plaintiff's application for consent to assignment.
   
• Insofar as the Defendant might now be adjudged to have good reason to withhold or refuse consent based on the adequacy or otherwise of the tenant and sureties offered, the Defendant cannot now retrospectively rely on such issues to suggest that it acted reasonably in withholding consent. 
  
  The Court specifically distinguished this case from previous decisions in Rice v Dublin Corporation [1947] IR 425 and Irish Glass Bottle Co. Ltd. V Dublin Port Co. [2005] IEHC 89 where it had been held that a landlord may state grounds for refusal to the Court even if no reasons had previously been given – Haughton J states that to allow the Defendant give new reasons to the Court when, during the relevant period between the application for consent and the issuing of proceedings, it had withheld consent for an ulterior motive would allow landlords to refuse or decline consent for improper motives "with impunity" and later seek to rely on some good reason.  In this regard it was relevant that Mr Fitzgerald had in evidence claimed that his real objection to giving consent was the inadequacy of the financial covenant, yet this had never been raised with the Plaintiff prior to proceedings being issued.  Haughton J stated in this regard that "a landlord surely cannot be permitted to deliberately keep secret from the tenant what it claims to be the real reason for declining consent and later produce it like a rabbit out of the hat and rely on it in court".

The Court, however, refused to grant the second relief sought by the Plaintiff, which was an order dispensing with the requirement for the Defendant's consent to the assignment.  The Court made this refusal for the reason that, had the Defendant given due and proper consideration to the application for consent to assignment, it would have been reasonable to refuse consent on a number of grounds related to shortcomings in the sureties offered and the financial references provided prior to commencement of the proceedings.

Financial Covenant
In giving his judgment, Haughton J made a number of obiter comments setting out his views with regard to the issue of the financial covenant on offer.  These comments were set out in the context of this particular case, given the likelihood that there will be a renewed application for consent.  However, the principles stated are of general interest in the context of consent applications and can be summarised as follows:

1. The proposal of a special purpose vehicle without a financial track record as an assignee is not of itself a reasonable ground for rejecting the proposed tenant, but is a good reason for requiring one or more guarantors with sound financial credentials.
    
2. In this particular case, it was not unreasonable for the landlord to seek one or more additional sureties, particularly having regard to the amount of the rent and the commitment of the incoming tenant to address repairs. If one or more sureties with reasonably vouched and satisfactory financial status were offered, it would not be reasonable for the landlord to insist that these sureties be directors, or even shareholders, in Sequana – the essence of the surety is that it should be a person or body to whom the landlord will be able to have practicable recourse to ensure the rent and other sums due under the lease are paid.  It is not reasonable for a landlord to insist on a requirement contained in the lease that directors provide personal guarantees where corporate or banking sureties that are reasonably financially sound are offered.
    
3. It must be considered reasonable for a landlord to insist on seeing audited accounts for a least the last accounting year for a proposed surety before accepting it as guarantor.
    
4. Where a surety is offered which is registered and has its centre of business or administration within an EU member state or the United States of America and agrees to subject to the jurisdiction of the Irish courts, that its guarantee will be governed by Irish law and nominates Irish solicitors to accept service of proceedings, there must be a view that the potential for difficulty in enforcing the security would no longer be a valid objection to the granting of consent.
    
5. The fact that a tenant has the potential to offer a number of different surety options but does not offer all of these up initially is not a relevant consideration for the landlord – it is to be expected that in many instances concerning commercial premises there will be some negotiation of the terms of the landlord's consent and the tenant would not in normal circumstances have an obligation to put all their cards on the table at the outset.
    
6. In considering what is offered by way of surety, a landlord is not entitled to a gold-plated guarantee, but only to "the same benefit in terms of financial reward and care of the premises" as enjoyed with the current tenant.
    
7. It was unreasonable of the landlord to require that in lieu of an Irish bank guarantee it should receive a security deposit equivalent to 18 months' rent and rates – this was never envisaged under the Leases and would amount to the landlord securing an advantage from the granting of consent to which the landlord was not entitled.

For further information please contact Aoife Smyth at asmyth@algoodbody.com.

Date published:1 December 2015