Practice tips: Tenant’s obligation to grant an option to purchase and application to assign a commercial lease

• In TCG Pubs Ltd and another v The Art or Mystery of the Girdlers of London [2017] EWHC 772 (Ch), the High Court considered whether a letter given to the landlord constituted the grant of an option to purchase, as required by the lease and whether a subsequent request to assign had been properly made.
• In 1987, a lease of the Hop Poles pub in Hammersmith was granted by The Art or Mystery of the Girdlers of London (Landlord) to Watney Combe Reid and Truman Ltd for a term of 40 years. The lease was assigned to TCG Pubs Limited (Tenant).
• The lease provisions included for the Tenant to assign or sublet the property, it must first grant an option to the Landlord, to buy back the residue of the lease term, at the then current open market rent. If the Landlord declined to purchase the lease, then the Tenant could assign the lease with the consent of the Landlord, such consent not to be unreasonably withheld or delayed.
• In September 2015, the Tenant went into administration. Stonegate Pub Company Ltd purchased the Tenant company, pursuant to a business purchase agreement which apportioned consideration to the Hop Poles pub.
• The following events subsequently occurred:
  • The Tenant’s lawyers contacted the Landlord, offering it the opportunity to buy the lease, purportedly in accordance with the terms of the lease.
  • Stonegate’s lawyers sought permission from the Landlord, to assign the lease to Stonegate. The request, therefore came from the proposed assignee and not the Tenant.
  • The Landlord rejected the offer to buy back the lease on the basis it could not afford to do so.
  • The Landlord’s solicitor contacted Stonegate’s solicitor, confirming that the Landlord would be amenable to granting consent to an assignment, if (amongst other requirements), the request for the assignment came from the Tenant’s administrators.
  • Stonegate responded confirming it was authorised by the Tenant to approach the Landlord for consent.

The High Court held that a letter giving the Landlord notice of an offer to sell the property to the Landlord was not sufficient to comply with the terms of the lease, which envisaged that a formal option agreement would be granted. Further, an option agreement fell within the definition of a contract pursuant to section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 (LP(MP)A 1989), which provides a contract for a sale/disposition of an interest in land must be in writing; incorporate all the terms agreed in one document (or where contracts are exchanged, in each documents); and, be signed by or on or behalf of each party. The court decided the option clause in the lease had not been validly triggered. The High Court, nonetheless, commented that it was acceptable for an assignee to make a request for consent to assign a lease from the Landlord; however, it needed to be made absolutely clear that the assignee was acting with the authority of and on behalf of the Tenant.

Although most of the comments in this case were obiter, the case raises the following legal considerations:

1. If the wording of the lease sets out a mechanism for a buy back, such as a formal option agreement, this should be followed, especially where it is apparent from reviewing the lease, that a notice was not what the original parties to the lease intended.
2. Where an assignment of a lease is proposed, the application to the landlord for consent should be either made by the Tenant, or if made by a prospective assignee, it must be made clear to the landlord that, in seeking consent to assign, the assignee is acting with the authority of and on behalf of the tenant.

For further information regarding this topic or any other property and construction matter, please contact Joanne McIvor – Partner, Hayley Cloherty – Associate, or any member of the Edwin Coe Property or Construction teams.

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