A borrower’s statutory power of leasing is restricted to granting tenancies at the best rent that can reasonably be obtained
At common law, borrowers have the capacity to grant leases, but cannot create tenancies that bind their lenders. So, if a borrower grants a lease, a lender with a prior claim will be entitled to evict the tenant. Section 99 of the Law of Property Act 1925 addresses this by conferring a statutory power of leasing on borrowers, which can be extended, or excluded, by agreement between the parties. Predictably, most legal charges deprive borrowers of the power to grant leases without the lender’s consent.
Habib Bank AG Zurich v Utocroft 2 Ltd [2015] EWHC 3481 (Ch); [2015] PLSCS 358 concerned the grant of a seven-year lease of premises at an annual rent of £24,000. The borrower’s mortgage prohibited it from letting the property without the bank’s consent. However, the borrower claimed that the bank had consented to the grant of the tenancy by endorsing the word “OK” on its letter of application for permission to grant a lease to a company that had yet to be incorporated, in a form “to be vetted” by the borrower’s solicitor.
The bank denied that it had agreed to the grant of the lease and, even if it had, argued that it had consented only to the exercise of its borrower’s statutory power of leasing. The bank relied on the fact that its legal charge did not include any provisions extending the powers conferred by the 1925 Act and pointed to section 99(6), which provides that leases authorised by the section must reserve the best rent that can reasonably be obtained in the circumstances.
At common law, borrowers have the capacity to grant leases, but cannot create tenancies that bind their lenders. So, if a borrower grants a lease, a lender with a prior claim will be entitled to evict the tenant. Section 99 of the Law of Property Act 1925 addresses this by conferring a statutory power of leasing on borrowers, which can be extended, or excluded, by agreement between the parties. Predictably, most legal charges deprive borrowers of the power to grant leases without the lender’s consent.
Habib Bank AG Zurich v Utocroft 2 Ltd [2015] EWHC 3481 (Ch); [2015] PLSCS 358 concerned the grant of a seven-year lease of premises at an annual rent of £24,000. The borrower’s mortgage prohibited it from letting the property without the bank’s consent. However, the borrower claimed that the bank had consented to the grant of the tenancy by endorsing the word “OK” on its letter of application for permission to grant a lease to a company that had yet to be incorporated, in a form “to be vetted” by the borrower’s solicitor.
The bank denied that it had agreed to the grant of the lease and, even if it had, argued that it had consented only to the exercise of its borrower’s statutory power of leasing. The bank relied on the fact that its legal charge did not include any provisions extending the powers conferred by the 1925 Act and pointed to section 99(6), which provides that leases authorised by the section must reserve the best rent that can reasonably be obtained in the circumstances.
The evidence indicated that the rent reserved by the lease was below normal commercial rates for similar properties at the date of the grant of the lease. The bank argued that it followed that the lease was not one that the borrower had had the power to grant, with the consequence that it was not binding.
The judge noted that the borrower’s letter requesting the bank’s consent contained an assurance that the lease, when granted, would not contain any clauses that were detrimental to the bank. Consequently, it could not be construed as a request for consent to a letting at less than the market rent. Therefore, even if the word “OK”, which was endorsed on the borrower’s letter, were to be interpreted as signifying consent to the grant of a lease, the judge considered that the borrower would have been entitled only to grant a tenancy on the terms permitted by section 99 – ie at the best rent that could reasonably be obtained. It had not done this – and the lease did not bind the bank.
Furthermore, the judge did not believe that the endorsement on the borrower’s letter was intended to be construed, or was actually interpreted, as consent to the grant of the lease. The bank had not agreed to the demise and was entitled to an order for possession of the property as against the tenant.
The decision reminds us that, where property is charged to a lender, prospective tenants will need to consider whether the landlord has the power to grant a lease on the terms agreed between the parties. If not, or in the event of any doubt about the position, tenants would be well-advised to obtain the lender’s unequivocal consent to the grant of a tenancy on the terms of the proposed draft lease.
Allyson Colby is a property law consultant
