Landlord Unreasonably Withheld Lease Assignment Consent

The court declared that the landlord unreasonably refused consent to the assignment of a lease, finding that the assignees were competent and financially capable.

New South Wales Supreme Court

CITATION : [NAME] v [NAME] [2007] NSWSC 1453 This decision has been amended. Please see the end of the judgment for a list of the amendments.

HEARING DATE(S) : 11 and 12 December 2007

JUDGMENT DATE : 12 December 2007

JURISDICTION : Equity Division

JUDGMENT OF : Windeyer J at 1

DECISION : Declaration that withholding of consent unreasonable.

CATCHWORDS : LANDLORD AND TENANT - assignment of lease - refusal of landlord to consent to assignment - whether withholding of consent unreasonable

LEGISLATION CITED : Conveyancing Act 1919

[NAME] (First Plaintiff) PARTIES : [NAME] (Second Plaintiff) [NAME] and [NAME] as Executors of the Estate of the late [NAME] (Defendant)

FILE NUMBER(S) : SC 5772 of 2007

COUNSEL : [redacted] Mr J [NAME] QC (Defendant)

SOLICITORS : [redacted] [NAME] (Defendant)

- 7 - IN SUPREME THE COURT OF NEW SOUTH WALES EQUITY DIVISION

WINDEYER J

WEDNESDAY 12 DECEMBER 2007

5772/07 - [NAME] & [NAME] v [NAME] & [NAME] AS EXECUTORS OF THE ESTATE OF THE [NAME]

JUDGMENT

1 HIS HONOUR: The plaintiffs are tenants from the estate of [NAME] of the [COMPANY]. They have entered into a contract dated 27 September 2007 for the sale of the hotel premises to [NAME] and [NAME]. The contract is subject to the lessees obtaining the landlord's consent to the assignment of the lease. 2 The lease is for a term of eight years commencing on 1 July 2005 and ending on 30 June 2013. It is not necessary to go into the terms of the lease other than to say that clause 2.7, in somewhat strange terms, forbids transfer or parting with possession of the hotel without the prior written consent of the lessor having been obtained. This provision, of course, activates section 133B of the Conveyancing Act 1919 so that is it is subject to a proviso that consent is not to be unreasonably withheld. 3 The lessor died after the negotiations for consent were first entered into. The defendants have obtained a [NAME] of probate of the will of Mrs [NAME] in Victoria and have applied for reseal in New South Wales. An order has been made with their consent that they be joined to represent the estate of Mrs [NAME]. 4 The amended summons seeks declarations that the lessor has unreasonably refused consent to the assignment and that the plaintiffs are thus free to assign without consent without breach of covenant. The amended summons also seeks an order that the lessors stamp the lease with the plaintiffs paying the stamp duty but not any fine or interest and that the lessor register the lease. There is no argument about this now. The lease should have been stamped and registered long ago. No sensible reason has been given for that not having been done. I point out that if the plaintiffs are successful in the action, then it would be essential to register the lease prior to registration of any transmission application of the land into the names of the executors. 5 I turn to the question of whether consent has been unreasonably withheld. Here the onus is on the plaintiffs. [NAME] were both members of the Police Force. Mr [NAME] retired sick about two years ago and is in receipt of a pension, which apparently varies but will continue to be paid whether or not he gets back into the workforce. The pension is about $450 net per week. [NAME] resigned from the Police Force about the time the contract for purchase of the business was entered into, so that her only income at the present time is from casual work while learning the operations of the hotel. Both purchasers had good careers in the Police Force; both have lived at Forbes for some years and were stationed or worked there. There is no suggestion that they are not of good character. I am satisfied that although they have not had previous hotel experience, they are competent to manage the hotel, and it is not suggested otherwise. 6 The only question at issue in these proceedings, as it has been argued, is the financial capacity of the proposed assignees and whether the defendants are acting reasonably on the basis of fears that the assignees might default in their obligations under the lease. [NAME], the first defendant, has had the conduct of negotiations on behalf of her mother and later for the estate. It is fair to say that things did not get off to a good start with a letter from the plaintiffs' solicitors to the lessor and [NAME] suggesting that there was some doubt under clause 2.7 of the lease whether consent was required. While the letter was not helpful, I do not think there was any reason for [NAME] to take the attitude that she seemed to take, from her evidence in the witness box, namely, the landlord could only look forward to conflict about assignment. 7 The financial position of the proposed assignees is as follows:

ASSETS: Residence [ADDRESS] $ 380,000. Investment property [ADDRESS] $ 393,000. Motor vehicles $ 80,000. Superannuation $ 150,000. Total $1,003,000. LIABILITIES: Bank loan secured against real estate $ 360,000. 8 I have omitted from this list some minor assets and liabilities, and the valuations for the real estate are those set out on the bank loan application form whereas [NAME] apparently consider the properties could be worth more. The [NAME] have obtained approval for a bank loan up to $220,000 for the purchase of the business and stock and ATM machine in the hotel and for start up expenses. That would add an additional liability, but, of course, assuming that the business is worth $160,000 and stock is purchased at value, one would more or less offset the other. Nevertheless, there will be a substantial increase in interest payments as a result of the new loan, assuming a figure of about $200,000 is drawn down. At present the income from the investment flats is sufficient to pay the required monthly repayments with little in reserve. The lease terms would require [NAME] to live in the hotel so that would free up [ADDRESS] for sale or rental. Compared with these figures, the financial position of [NAME], the present tenants, is not very different. They appear to have a surplus of assets over liabilities of between $540,000 and $560,000, but they do have more money available in cash than the [NAME], rather than in real estate. 9 From the commencement of October 2007 information about the proposed assignees and their financial position was sent to [NAME] either by [NAME] directly or by the solicitors for the plaintiffs. On 4 [NAME] was asked to notify the solicitors of any additional requests. The estate solicitors were asked the same on 11 October but [NAME] then asked that all matters about the hotel be directed to her.

Accordingly, an email was sent to her on 16 October asking if anything further was required in relation to the proposed assignees. [NAME] replied stating that she was waiting for an inspection report of the premises which she was entitled to obtain. On 2 November 2007 [NAME] notified the plaintiffs' solicitors that consent was refused. No reasons were given. 10 Reasons were sought by letter of 2 November and in the same letter a further, perhaps more formal, application for consent was sent and some further details were given of the [NAME]' qualifications, assets and intentions. Again, the solicitors asked if anything more was required. This elicited a response from [NAME] dated 20 November 2007 of some considerable length which for the most part dealt with the lack of information that the [NAME] had about what was required for the hotel before they entered into the contract, lack of information about figures for the hotel, particularly the 2007 figures, the decline in poker machine takings with the sale of four machines in 2005, and some other matters of no importance here. The purpose of this was perhaps to point out the [NAME] were somewhat naïve in their approach. 11 A considerable amount of time was spent at the hearing looking at draft profit and loss figures for the years ending 30 June 2005, 2006 and 2007. It is fair to say that little faith could be placed in the figures, although the [NAME] would not have known this, and even on those figures the accountant for the proposed assignees did not think the business a good one. However, the point [NAME] wished to make, I think, was that even on those figures, the hotel income was such that it would not be sufficient to maintain the [NAME] family, so that there was a risk they would not be able to pay the rent under the lease. Their answer to that was that they had a plan which would bring about an increase in takings and, second, that they could lease their home, or perhaps sell it, thereby reducing borrowings. 12 It seems to me that attention to this was somewhat misplaced. The plaintiffs after all would be in much the same position as would new tenants, so far as viability of the business was concerned. [NAME], however, said, in oral evidence, which I accept, that Mr [NAME] had been a tenant to her mother for about 20 years and that she, meaning her mother, had had no problem with him and that no notice of default had ever been given. To some extent, that seemed to contradict some of the present complaints about lack of information and payment of arrears of rent, but perhaps that may be beside the point because in argument those matters were not relied upon for refusing consent. 13 [NAME] placed emphasis on the fact that under the terms of her mother's will the hotel properties which her mother had owned were to be sold and that she expected that the hotel at Forbes would be put up for sale in March 2008. She said she was concerned that if the lease were assigned, then, at the time of sale, there was a possibility of default by [NAME] which would have raised questions and considerable difficulties in any sale to a potential purchaser of the hotel property. 14 Like many business matters, it seems to me this is one which could have been handled better on both sides, but it is fair to remember that when the negotiations were taking place, [NAME] was under considerable stress due to her mother's illness and subsequent death. Nevertheless, the question for the court to decide is whether consent has been unreasonably withheld. I have come to the conclusion that it has been. It would seem to me that on a reasonable consideration of the financial position of [NAME], their good character, their obvious intention to work hard to build up the hotel business to a better state than it is in currently, there is no justifiable concern as to the ability of the proposed assignees to meet their obligations under the lease. This does not mean that there is no conceivable risk. On the present figures there must be some risk for Mr and Mr [NAME] as well, but people buy businesses intending to run them at a profit, not to use their capital resources to keep the business afloat. That is the position here, but if required capital reserves are available for a reasonable period to prevent default.

ORDERS.

1. Declare that the defendants, as representatives of the estate of [NAME] have unreasonably refused consent to the plaintiffs' application to assign the lease of the [COMPANY], Forbes to [NAME] and [NAME].

2. Declare that the plaintiffs are discharged from any obligation as lessees under that lease to obtain the lessor's consent to assignment to the said [NAME] and [NAME].

3. Make orders as sought in par 3 of the amended summons.

4. Order the defendants pay the plaintiffs' costs.

5. Exhibits to be retained for 28 days and then returned if no appeal is lodged.

6. Order that the operation of these orders be stayed up to and including Monday 17 December 2007. **********

13/12/2007 - Correcting file number of on coversheet - Paragraph(s) Coversheet

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