The recent High Court decision in Mulbury Homes (Hazel Grove) Ltd v Scoto Ltd & Stockport Council provides important guidance on the interaction between landlord's consent provisions in leases and the Standard Commercial Property Conditions (Third Edition) (SCPC), regularly incorporated into sale contracts.
The court granted summary judgment in favour of the seller, dismissing a purchaser's claim for specific performance and addressing two novel points of commercial property law. The case will be of interest to those seeking consent to assignment and to practitioners drafting sale contracts.
Background
The case arose after Mulbury Homes (Purchaser) exercised a contractual right of pre-emption to acquire land from the seller (Seller), which included leasehold property. The lease contained a qualified covenant against assignment, meaning that the landlord's consent was required before the lease could be assigned.
The parties' sale contract incorporated the SCPC. Under SCPC 11.3.1(a), the seller is required to apply for the landlord's consent where "a consent to let, assign or sub-let is required to complete the contract".
The landlord refused consent and a little over six months’ later the Seller exercised its right to rescind the contract pursuant to SCPC 11.3.6. The Purchaser responded by seeking specific performance, arguing that the refusal of consent was unreasonable and that the Seller therefore had no right to bring the contract to an end and sought damages.
The relevant SCPC provisions
The dispute focused on the operation of SCPC 11.3 which deals with the parties’ rights and obligations where consent to an assignment is required.
Under SCPC 11.3.5, if consent has not been obtained by the original completion date, completion is automatically postponed until either:
- The required consent is granted.
- A court declares that consent has been unreasonably withheld.
SCPC 11.3.6 then provides that once six months have elapsed from the original completion date, either party may rescind the contract if:
- Consent remains outstanding.
- Court declaration has been obtained confirming that consent was unreasonably withheld.
The key question was whether those provisions remained operative where it was said that the landlord's refusal was manifestly unreasonable or delayed. The judge made no finding of fact on whether consent was or was not unreasonably refused or delayed but assumed that it was for the purpose of the summary judgment application.
Two novel issues before the court
The court considered two issues that had not previously been the subject of authoritative judicial determination.
First, did SCPC 11.3 cease to apply if it became manifestly clear that the landlord had wrongfully refused or delayed consent? The Purchaser argued that once consent had been unreasonably withheld, the restriction on assignment effectively fell away and the contractual machinery in SCPC 11.3 no longer applied.
Secondly, the court had to determine whether a contracting purchaser of leasehold property has standing, before completion, to seek a declaration that the landlord's consent has been unreasonably withheld or delayed. Some practitioner commentary had suggested that only the tenant could bring such a claim.
The High Court's decision
The court rejected the Purchaser's primary argument and held that SCPC 11.3 continued to operate notwithstanding any alleged unreasonableness on the part of the landlord so that consent, or a declaration of unreasonableness, still needed to be obtained.
In reaching that conclusion, the court held that the wording of the SCPC does not distinguish between degrees of unreasonableness and does not provide that the contractual regime falls away merely because a refusal appears wrongful.The court considered that this interpretation promoted the certainty and predictability expected from a standard form commercial contract.
Accordingly, once SCPC 11.3.5 had been engaged, the completion date remained postponed until one of two specified events occurred: either consent was granted or a court made a declaration that consent had been unreasonably withheld. Neither event had occurred.The contractual preconditions for completion had therefore not been satisfied, and the Seller was entitled to exercise its rescission right under SCPC 11.3.6 six months after the initial completion date.
The court also rejected the argument that section 1(3) of the Landlord and Tenant Act 1988, which imposes obligations on landlords dealing with applications for consent, somehow removed the need for formal consent or a court declaration under SCPC 11.3. The statutory regime regulating landlords' conduct did not alter the contractual framework agreed between buyer and seller.
Standing of a contracting purchaser
The court held that a contracting purchaser does have standing to seek a declaration that consent has been unreasonably withheld before completion of the assignment, provided that the seller is joined as a party to the proceedings to ensure that they are bound by the decision. This aspect of the judgment is particularly noteworthy because it contradicts views previously expressed in certain practitioner texts and confirms that a prospective assignee is not entirely dependent on the tenant to challenge an unreasonable refusal.
Practical implications
The decision has significant consequences for commercial property transactions involving leasehold assets. Most importantly, the judgment confirms that purchasers cannot assume that an allegedly unreasonable refusal of consent automatically preserves their contractual rights. Unless consent is actually obtained or a court declaration is secured within the six months allowed under the SCPC, the rescission mechanism within SCPC 11.3 remains available to the seller or buyer.
The ruling also creates a practical urgency for purchasers. Where consent is withheld, a buyer or seller may need to commence proceedings promptly and obtain a declaration within the six-month period prescribed by SCPC 11.3.6. Failing that, the seller may acquire an unconditional right to rescind, even if there is a strong argument that the landlord acted unreasonably. Practitioners will be aware of the significant logistical challenges this creates.
For transactional lawyers, the case serves as a reminder that the standard form conditions may not always produce the commercial outcome desired by the parties and may need to be re-negotiated. Where there is a realistic risk of consent difficulties, bespoke contractual provisions may be required to extend the SCPC timetable before either party may rescind or restrict termination rights.
Conclusion
This is a significant decision on the operation of SCPC 11.3. The High Court confirmed that the contractual regime governing landlord's consent continues to apply even where consent may have been unreasonably withheld, and that a seller may rely upon the rescission provisions where neither consent nor a court declaration has been obtained. At the same time, the court clarified that a contracting purchaser has standing to seek a declaration of unreasonable refusal. Together, these findings provide valuable certainty for practitioners and are likely to influence the drafting of future leasehold sale contracts where landlord's consent is required.
Mills & Reeve LLP acted for the second defendant.
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