Scottish court: company can only be judged "respectable and responsible" on its own merits

Out-Law News | 28 Feb 2014 | 9:44 am | 2 min. read

It was not unreasonable for a landlord to refuse to allow its property to be sub-let to a newly-formed company where the tenant did  not supply evidence that the proposed sub-tenant was "respectable and responsible" under the terms of the lease, the Court of Session in Scotland has ruled.

The tenant, Burgerking  Ltd, had instead provided information about the owner and other companies within the same corporate group as the proposed sub-tenant, Caspian Food. The lease contained a clause that the premises could not be sub-let "without the prior written consent of the landlord", Castlebrook Holdings; and that the landlord's consent would not be "unreasonably withheld" if the proposed sub-tenant was "respectable and responsible".

Litigation expert Craig Connal of Pinsent Masons, the law firm behind Out-Law.com, said that the decision provided "rare guidance for landlords and tenants on their rights and obligations in relation to an application for consent to sub-let".

"The issue here was whether Burgerking had provided Castlebrook with evidence as to the respectability and responsibility of Caspian," he said. "They had not. It was not sufficient for them simply to sit back and say there was nothing to suggest that they were not respectable and responsible."

"The judge also discussed the financial realities: it was entirely possible that a group company could become insolvent while others traded on; one company associated with an individual could collapse even while others flourished. It mattered not that this was a sub-let rather than an assignment, as the landlord still had an interest in the operational success of the occupier," he said.

The proposed sub-tenant was a relatively new company which had only been trading for a few months, but was part of an established group of companies and controlled by an individual who was said to have a considerable track record in owning and operating restaurants through other companies. To satisfy the clause, Burgerking  supplied some information about those other group companies and the owner.

In its letter refusing consent to the sub-lease, Castlebrook said that the term did not only imply that the proposed sub-tenant was respectable and responsible but also that "the proposed sub-tenant can perform the obligations under the lease". "All you are saying that there is nothing to say that they are not respectable and responsible, which is quite a different thing," the letter said.

The expression "respectable and responsible" in relation to a proposed sub-tenant or assignee is frequently used in commercial leases in Scotland. The courts have interpreted 'respectability' to refer to the manner in which the company in question conducts its business, for example, its reputation, and 'responsibility' to refer to the company's financial capacity.

"In my opinion, [Castlebrook] is well founded in its submission that these characteristics must be borne by the particular entity proposed as a sub-tenant," the judge, Lord Tyre, said.

"I consider this to be more obviously the case with regard to responsibility. By using the word 'responsible' ... the parties agreed, in my opinion, that the landlord would be entitled to be satisfied as to the financial solidity of any proposed sub-tenant ... In my opinion a landlord who stipulates that a proposed sub-tenant must be responsible is reserving to himself the right to be satisfied as to the financial soundness of the sub-tenant itself and not as to the soundness of individuals or entities who might or might not provide assistance in the event of financial difficulty," he said.

Although it would probably be easier to satisfy the landlord about the proposed sub-tenant's respectability, Lord Tyre said that the same principle in respect of evidence applied. A company's respectability was not "the same as an assessment of the respectability of the company's owners or of other companies in common ownership", he said.

Litigation expert Craig Connal said that the case was also a warning to "those always inclined to a hard line in negotiations".

"The landlord offered to think again if either the group head company was proposed as sub-tenant or a guarantee by that company or the group's owner was proposed," he said. "Rejecting that offer has led to expensive and unsuccessful litigation in this instance."