New clause (Hansard, 14 July 1995)

§ Mr. Thurnham

I beg to move, That this House doth agree with the Lords in the said amendment.

This amendment is the single most important amendment made in the other place. It has already been referred to by the hon. Members for Norwood (Mr. Fraser) and the hon. Member for Brent, South (Mr. Boateng). It is not going too far to say that this amendment provided the momentum that has got the Bill so close to the statute book and which, I fervently hope, will take it all the way there.

The amendment, as was said in the other place, represents the essence of the compromise, and the basis of the agreement between differing interests in the property industry which has enabled the Bill to get this far. It was on the basis of a specific commitment to making amendments in the other place to give effect to that agreement that the Bill was allowed to pass that House. I am pleased to say that with this amendment, that commitment is fulfilled.

Throughout the passage of the Bill, it has been clearly stated that it could not reach the statute book without agreement. I firmly believe that the agreement represented by the amendment is realistic and balances the competing interests and objectives in a way that has already enabled it to be supported by both sides in both Houses and with the eloquently expressed blessing of the Opposition Front Bench in another place.

Hon. Members will appreciate from my explanation of previous amendments, that while this amendment is the backbone of the property industry agreement, the agreement goes far beyond simply trading landlord support for the Bill for greater control of over assignment. As a result of the agreement, tenants have the prospect of several additional measures of real benefit to those liable under existing leases.

Some explanation of the amendment's progress will help the House. The amendment appeared twice in another place. It was first moved in Committee when it was debated but withdrawn in response to a well-argued plea for time to consider it in more detail. After mature consideration, the amendment was moved again on Report, when it met with support from both sides. Full and compelling reasons for accepting it were given by Lord Irvine of Lairg.

I should make it clear that the arguments in favour of the amendment, while they are compelling in the case of commercial leases, do not apply to residential or 1261 agricultural leases. The amendment does not apply to those leases, although such leases will benefit from all the other provisions of the Bill.

It should also be made clear that, because the purpose of the amendment is to ensure that investment strength can be maintained notwithstanding the loss of privity of contract which buttresses it at present, it will apply only to new leases. It will affect only assignment, leaving the law relating to underletting and so on untouched.

The background has been explained in detail both in this House and in another place, but I believe that restatement is justified. An earlier attempt to implement the Law Commission's recommendations, as accepted by the Government, failed because it did not contain provision to the effect of this amendment, which is crucial to the success of the present attempt.

Landlords were not satisfied that current law governing their ability to control assignments could be relied upon to protect their interests under the new regime without privity of contract. Their fear, which I considered to be well founded, was that, whereas at present they have a sound head covenant, on the basis of which investment can be attracted, under the new regime they would be left with assignees of steadily declining covenant strength and no other recourse. Investment prospects and confidence would decline accordingly.

The reason for that is that, where a lease contains a qualified covenant against assignment—one which permits the tenant to assign only with the landlord's consent—section 19(1) of the Landlord and Tenant Act 1927 provides that the landlord be required not to withhold his consent unreasonably. Without the fallback of privity of contract, the landlord's safeguard in vetting prospective assignees of the lease becomes crucial to the maintenance of the investment value of the landlord's interest.

The historic approach of the courts, however, has led landlords to believe that any extra controls which it might in commercial terms be reasonable for them to impose in new leases to preserve investment strength would nevertheless be struck down by the courts as unreasonable in the context of section 19. Given the need for certainty in property investment, tenants have been able to see that such fears and uncertainties might drive landlords to wholesale adoption of absolute covenants against assignment, or banning assignment altogether in new leases so that tenants would have to underlet or submit to the landlord's absolute discretion as the only way out.

The amendment provides a middle way, making it less likely that landlords will ban assignments completely if they are allowed to define what they require of an assignee. Providing a middle way also makes it more likely that conditions will be properly tailored to the lease in question because, while it will be possible for landlords to insist on stringent conditions, they will need to think carefully before doing so in leases that are long enough to contain a rent review.

A landlord who insists on driving a hard bargain may well find that others with comparable property have been more relaxed and have to accept a lower rent on review. Without the middle way, it would be more likely that all landlords would see little alternative but to ban assignments, so there would be no differentiation on review.

1262 Considerable effort has been expended to meet the challenge of doing as much as necessary to give landlords the security required to underpin investment and development while not straying any further from the spirit of section 19 of the Landlord and Tenant Act 1927 than is needed to secure that objective. The amendment introduces a new clause which amends section 19 of that Act to increase the possibility of landlords' control over assignment compared to qualified covenants against assignment under the existing law, but short of allowing sole discretion to the landlord a landlord. A landlord who still requires complete control and is prepared to take the consequences in terms of lower rental values on rent review will of course still be able to seek an absolute covenant against assignment.

The solution finally agreed and accepted, and supported in this place and—after mature consideration—in another place, is that it should be possible for the parties to a lease containing a qualified or fully qualified covenant against assignment to agree between them the criteria that should govern the question whether the landlord would consent to any assignment and that those criteria should not be susceptible to being overturned by a court on the grounds that they, or the landlord's refusal based on the tenant's failure to fulfil them, are unreasonable.

As I said, immense effort has been expended to ensure that the change does only what is necessary to enable the parties to preset the criteria for assignment without fear of their being void for unreasonableness while otherwise retaining, as far as possible, the effect of section 19 and the effect of the Landlord and Tenant Act 1988 which builds on it. The parties will not simply be able to sidestep section 19 altogether so as to place the decision whether to consent to assignment in the landlord's undefined discretion as that is no more than an absolute covenant against assignment in disguise.

The amendment inserts five new subsections after subsection (1) of section 19 of the 1927 Act. The main provision is the new subsection (1A) which specifically enables the landlord and tenant to enter into an agreement to govern assignment. The landlord and tenant are to be able in such an agreement to specify the terms or conditions on which the landlord will grant or withhold consent.

Where conditions are pre-agreed in that way, the landlord is not to be taken to be refusing consent unreasonably if he does so on the ground that the conditions have not been met. If it is in dispute whether the conditions have been met, it will be for the landlord to show that they have not, just as at present he has to show that he is not withholding consent unreasonably. Furthermore, for the purposes of the Landlord and Tenant Act 1988, if he gives consent subject to a condition that was pre-agreed in that way, he is not to be taken as giving consent subject to an unreasonable condition.

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Section 19 of the 1927 Act and the provisions of the Landlord and Tenant Act 1988 which build on it, will not thereby be rendered completely ineffective, and they will continue to have effect—as they do at present—to the extent that pre-agreed conditions are not exhaustive. Therefore, if the tenant fulfils all the specified conditions, but the landlord is still dissatisfied with the assignee and wishes to withhold consent, the landlord will have to show that, in so withholding consent, he is not being unreasonable.

1263 The landlord will still have to fulfil duties under the 1988 Act to consent, or to give reasons for withholding consent, within a reasonable time. Landlords will thus have the security of knowing that they can set out specific requirements as to matters such as the assignee's business and financial status to ensure that the assignee is a sufficiently secure prospect for the landlord's investment to be safeguarded without having to go so far as an absolute covenant against assignment.

New subsection (1B) allows the agreement to be in the lease or in any other instrument, for example a side letter representing parallel negotiations to those for the lease, and allows it to be at the time of the lease or at any other time. It will, of course, most often be the case that the agreement forms part of the lease or, as I have said, a parallel matter which is part of the same package. There will also, however, be cases where the parties will wish to enter into an agreement at another time to reflect changing conditions. I should add that the agreement must have been entered into before the tenant actually applies to the landlord for consent to assign.

New subsection (1C) makes provision for a different condition from those that I have been discussing so far. I have dealt with conditions that require definite objectively verifiable facts to exist when numerous conditions must cumulatively be satisfied, but, when taken together, indicate clearly what type of assignee will be acceptable. Such a condition might be that a prospective assignee should have net profits before tax in the most recent accounts of three times the rent, or perhaps that the rest of the building in question has been and remains let.

Subsection (1C), on the other hand, is aimed at those cases in which the landlord wishes to reserve some final discretion or judgment as to the suitability of the assignee, notwithstanding that a series of specific conditions is fulfilled. It would not do simply to allow the landlord to agree with the tenant a condition reserving the final determination to the landlord, or indeed to another person who might be the landlord's associate, as that would reproduce the effect of an absolute covenant against assignment in a disguised form.

Conditions which inherently or expressly depend on the landlord's or any other person's determination, and therefore his discretion, judgment or opinion rather than being objectively proved, will survive only if one of two conditions is met. Those conditions are that the terms of the agreement provide either that the determination, if disputed, may be referred to an independent person or that the element of judgment rests with the landlord and that the landlord has committed himself to exercise it reasonably. For example, that would allow for matters which of their nature require an opinion or judgment to be formed capable of conclusive resolution by an independent expert, thus balancing the need in some cases for an element of judgment or discretion against the need for certainty.

New subsection (1D) deals with new building leases. Under section 19(1)(b) of the 1927 Act, unless the landlord imposes an absolute covenant against assignment in such a lease, he cannot stop the tenant assigning without consent more than seven years before the end of the term, no matter what the terms of the lease may otherwise say. With the removal of the privity of contract liability for new leases, that complete lack of control over assignment cannot be justified for building leases, so the 1264 new subsection ensures that new building leases are to be no different from new commercial leases generally in respect of assignment.

New subsection (1E) makes it clear that, as I have said, the changes do not apply to residential leases. They will not apply to agricultural leases in any event, as section 19 does not apply to such leases, which have always been subject to a different regime for assignment. The new subsection also covers the fact that a covenant against parting with possession may be broken in a number of ways, of which assignment is one. It ensures that, in the case of such a covenant, assignment is covered by the new provisions but the other ways of parting with possession are not.

I realise that I have spoken for some time on a single amendment, but I hope that the House will accept that its vital importance justified that.

Mr. John M. Taylor

I am grateful to my hon. Friend the Member for Bolton, North-East for his comprehensive explanation of this crucial amendment. I appreciate that this element of the agreed package of changes will result in a certain shift in the balance of power, but I am firmly convinced that it represents a necessary and sensible compromise which, when taken in the round, can be seen to do the greatest amount of good for the greatest number and to enable it to be done in the shortest possible time.

Some reservations have been expressed about the effect of this element of the property industry agreement. The Law Commission had reservations, and expressed them eloquently, but accepted that the reform could make its way to the statute book only by agreement, and that this element opened the way to that necessary agreement. The commission's commitment to implementing that reform, notwithstanding its reservations, cannot be doubted, and I believe that its attitude is right.

As I said in a previous debate on the Bill, there were initial reservations in the Government on the basis that the smaller commercial tenants, in particular, could not clearly be said to have had their say. It was for that reason that it was thought appropriate to consult on the package. The response indicated that all sides of the property industry supported the compromise, and a notable feature was the number of respondents who praised the compromise as a realistic way forward and urged prompt action to put it into effect.

I have before me a letter, dated 7 July, from the chief executive of the Forum of Private Business, Mr. Mendham. With commendable worldliness and wisdom, he writes: This Bill represents a compromise, but one which represents a significant advance on the present position. Not only does the Bill abolish privity for future leases, but also significantly improves the equity of existing leases. The Bill has the strong support of business tenants. When questioned by FPB over 72 per cent. of tenants supported the Bill with less than 15 per cent. opposed. That is very encouraging. My hon. Friend and I, and, indeed, the Government, are grateful to the Forum of Private Business for its research and information.

The amendment received support from all quarters in another place—not simply because it was presented as a property industry agreement, but on the basis of mature consideration of its operation in practice, and the prospects for tenants and landlords if the reform reached the statute book in its present form. I believe that the 1265 assessment of the amendment in the other place hit the nail on the head, and I commend it to the House.