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Waiving not an option in offer-back case

Offer-back clauses in leases are sometimes used to give the landlord greater control over the identity of the tenant at a property. However, the mechanism of operating an offer-back clause can be problematic as demonstrated by a very recent case: (1) TCG Pubs Limited (in Administration) (“TCG”) and (2) the Administrators of TCG Pubs Limited v The Master and Wardens of the Art or Mystery of the Girdlers of London (“Girdlers”).

The Girdlers were the freehold proprietor of a pub in Hammersmith. TCG held a 40 year lease of the pub, the term of which commenced in June 1987.  TCG, having entered administration, sought to assign its lease to a third party.  Before doing so, TCG were required to “first grant an option” to the Girdlers to buy back the residue of the term at the then current open market value.

The case rested on three points:

• Had TCG granted a valid option by writing to the Girdlers indicating that they were prepared to offer them the ability to purchase the property at a proposed price?

• Had the Girdlers waived the right to rely on the requirement for TCG to grant an option by dealing with the application for consent to assign?

• If the answer to either of the above was “yes”, had the Girdlers unreasonably withheld their consent to the assignment?

Grant of an option
The court decided that words used in the clause such as “grant”, “option” and “exercise” were more consistent with a formal transaction than a simple process of giving a notice. TCG had not done enough, even though the Law of Property (Miscellaneous Provisions) Act 1989 (which provides that an option cannot be granted by a unilateral act of the tenant) was not introduced until after the date of the lease.  Instead, TCG would have had to proffer a formal option with an invitation to the Girdlers to execute it.

The Girdlers’ solicitor had responded to the proposed assignee, dealing with the application for consent to assign.  TCG argued that this waived their option rights but the court found that the letter did not contain a sufficiently unequivocal statement to amount to a waiver of the rights under the option clause. Nor was it addressed to the person affected by the waiver (TCG) but, the court said, that “particular hole would have been filled” once it was clear that the proposed assignee was making the application on behalf of TCG.

Application for consent to assign
The application for consent had initially been sent by the proposed assignee, not the tenant. As such, the court found that the application was not a valid request for consent until the tenant had confirmed that the application was made on its behalf.

The court found that the requirement for a surety in the lease operated as a valid gateway to the right to assign, which the landlord was entitled to insist upon and which was not tested by reasonableness.

Hogan Lovells acted for the Girdlers in the case. A full copy of the judgment can be found here.