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The Earl of Courtown moved Amendment No. 61:

After Clause 14, insert the following new clause:

Landlord's consent to assignments
Imposition of conditions regulating giving of landlord's consent to assignments

. After subsection (1) of section 19 of the Landlord and Tenant Act 1927 (provisions as to covenants not to assign etc. without licence or consent) there shall be inserted—
"(1A) Where the landlord and the tenant under a qualifying lease have entered into an agreement specifying for the purposes of this subsection—

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(a) any circumstances in which the landlord may withhold his licence or consent to an assignment of the demised premises or any part of them, or
(b) any conditions subject to which any such licence or consent may be granted,
then the landlord—
(i) shall not be regarded as unreasonably withholding his licence or consent to any such assignment if he withholds it on the ground (and it is the case) that any such circumstances exist, and
(ii) if he gives any such licence or consent subject to any such conditions, shall not be regarded as giving it subject to unreasonable conditions;
and section 1 of the Landlord and Tenant Act 1988 (qualified duty to consent to assignment etc.) shall have effect subject to the provisions of this subsection.
(1B) Subsection (1A) of this section applies to such an agreement as is mentioned in that subsection—
(a) whether it is contained in the lease or not, and
(b) whether it is made at the time when the lease is granted or at any other time falling before the application for the landlord's licence or consent is made.
(1C) Subsection (1A) shall not, however, apply to any such agreement to the extent that any circumstances or conditions specified in it are framed by reference to any matter falling to be determined by the landlord or by any other person for the purposes of the agreement, unless under the terms of the agreement—
(a) that person's power to determine that matter is required to be exercised reasonably, or
(b) the tenant is given an unrestricted right to have any such determination reviewed by a person independent of both landlord and tenant whose identity is ascertainable by reference to the agreement,
and in the latter case the agreement provides for the determination made by any such independent person on the review to be conclusive as to the matter in question.
(1D) In its application to a qualifying lease, subsection (1) (b) of this section shall not have effect in relation to any assignment of the lease.
(1E) In subsections (1A) and (1D) of this section—
(a) "qualifying lease" means any lease which is a new tenancy for the purposes of section 1 of the Landlord and Tenant (Covenants) Act 1995 other than a residential lease, namely a lease by which a building or part of a building is let wholly or mainly as a single private residence; and
(b) references to assignment include parting with possession on assignment."").

The noble Earl said: This amendment is the most important one which it falls to me to move. It represents the backbone of the compromise which has enabled this Bill to be supported on all sides. As I said at Second Reading, it is the essence of compromise that the results will not please everybody, but I believe that this compromise is proper and realistic and will ensure that the principal aim of privity reform is secured early in order to benefit those in need of relief while ensuring that landlords and investors know that they have the security they need.

The considerable challenge has been to do as much as necessary to give to landlords the security required to underpin investment and development while aiming not to stray any further from the spirit of Section 19 of the Landlord and Tenant Act 1927 than is needed to secure that objective.

This amendment introduces a new clause which amends Section 19 of the Landlord and Tenant Act 1927 to increase the possibility of the landlord's control over assignment compared to qualified covenants against

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assignment under the existing law, but short of allowing sole discretion to the landlord for which absolute covenants against assignment will still be possible for those landlords who require complete control and who are prepared to take the consequences in terms of lower rental values on rent review.

The changes are intended directly to balance the removal of privity of contract liability and they are to apply to new tenancies only. They are also specifically excluded from applying to residential tenancies and will also not apply to agricultural tenancies, which have always come under a different regime for assignment. They will also affect assignment only, leaving the law relating to covenants against underletting, for example, untouched.

Section 19(1) of the 1927 Act provides for any covenant against assignment, underletting or charging without the landlord's consent, to be deemed, notwithstanding any provisions in the lease to the contrary, to be a covenant which requires the landlord not to withhold his consent unreasonably. That lay at the heart of the opposition to the earlier Bill in another place, for reasons which I shall now summarise.

Many applications of leases in the commercial field, and much investment in tenanted property and funding of new development, presently depend on the security which privity of contract provides, because a strong original tenant covenant will ensure performance of the lease covenants and a return for the whole term of the lease no matter how many times it may change hands. In the absence of privity of contract, landlords and investors will seek to ensure that covenant strength is similarly maintained throughout new leases notwithstanding assignment. The natural way to do that is to ensure that assignment is only permitted where the assignee is of sufficient status to give the same level of assurance of performance of covenant and return as the original tenant.

The historic approach of the courts in deciding when a refusal of consent is unreasonable means that there is no confidence at all that such control over assignment would be possible for new leases, even given that the courts might be expected to adjust their approach to take account of the fact that landlords' investments in new leases will no longer be backed by the privity of contract of the original tenant. Authorised guarantee agreements are a help, but do not address the problem sufficiently because, on the next assignment, the original tenant will drop out of the picture and the covenant strength underpinning the investment may become seriously diluted.

Without change to Section 19 of the 1927 Act, therefore, in the attempt to preserve covenant strength, landlords will seek, where they are able, to impose absolute covenants against assignment and thereby keep complete control over assignment. Where they cannot do that, investment will be harder to attract and the property market will therefore suffer a blow to confidence of the sort which was in the Government's contemplation when they concluded that the Law Commission's recommendations could not be implemented for existing leases.

The solution finally agreed and accepted was 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 which should govern

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the question of whether or not the landlord would consent to any assignment, and that those criteria should not be susceptible of being overturned by a court on the ground that they, or the landlord's refusal based on the tenant's failure to fulfil them, were unreasonable.

Much 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 the effect of Section 19(1) of the 1988 Act as far as possible. It is not intended that the parties should simply be able to oust Section 19(1) altogether so as to place the decision whether or not to consent to assignment in the landlord's undefined discretion which is to all intents and purposes a disguised absolute covenant against assignment, but one which might be easier to impose than a naked absolute covenant.

The amendment works by inserting five new subsections after subsection (1) of Section 19 of the 1927 Act. New Subsection (1A) is the main operative provision. It specifically empowers the landlord and tenant to enter into an agreement to cover assignment. In such an agreement, the landlord and tenant are to be able to specify the terms or conditions on which the landlord will grant or withhold consent. Where they do so, 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—which he will have to show to be the case if the matter is disputed, as he has to show at present that he is not withholding consent unreasonably. Furthermore, if he gives consent subject to any such pre-agreed condition, he is not to be taken as giving consent subject to an unreasonable condition.

To the extent that the conditions are not exhaustive, however, Section 19 and the provisions under the Landlord and Tenant Act 1988 which build on it will continue to have effect as they do at present. Thus, if the tenant meets all the specified conditions but the landlord is still minded to withhold consent, he will have to show that his final refusal notwithstanding the fulfilment of all the pre-agreed conditions is not unreasonable. He will also have to fulfil the duty under the 1988 Act, for example, to consent or to give reasons for withholding consent within a reasonable time. This will enable the landlord to set out the specific requirements in respect of matters such as the assignee's business and financial status which will ensure that the assignee is a sufficiently secure prospect for the landlord's investment to be safeguarded.

The new subsection (1B) provides that the agreement may be in the lease or in any other instrument and could be at the time of the lease or at any other time. It will most often be the case that the agreement is part and parcel of the lease but there will be cases where it is appropriate for such an agreement to be entered into at another time to reflect changing conditions, provided that it is before the tenant actually applies to the landlord for consent to assign.

The new subsection (1C) is aimed at those cases in which the landlord will wish to reserve some final discretion or judgment as to the suitability of the assignee notwithstanding that a series of specific conditions are fulfilled. Simply to allow the landlord to agree with the

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tenant a condition reserving the final determination to the landlord, or indeed to another person who might be the landlord's associate, would produce the effect of an absolute covenant against assignment in a disguised form.

The new subsection (1C) permits 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. It does so, however, only if the terms of the agreement require the power to determine the matter to be exercised reasonably or provide for the determination to be referred to an independent person if the tenant is not satisfied with the initial determination by the landlord or other person. This will, for example, allow for matters which of their nature require an opinion or judgment to be formed to be 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.

The new subsection (1D) concerns the assignment of new building leases. The present position under Section 19(1) (b) of the 1927 Act is that any covenant against the assignment of a building lease without the landlord's consent cannot stop the tenant from assigning without consent more than seven years before the end of the term. With the removal of privity of contract liability for new leases, this complete lack of control over assignment cannot be justified for building leases, and so the new subsection ensures that, as regards assignment, new building leases are to be no different from new commercial leases generally.

The new subsection (1E) makes it clear that the changes do not apply to residential leases. It also covers the fact that a covenant against parting with possession may be broken in a number of ways, of which assignment is one; and it ensures that, in the case of such a covenant, assignment, but not the other ways of parting with possession, is covered by the new provisions.

I am conscious that I have spoken at great length, but I believe this to be justified by the importance of this amendment. I beg to move.

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