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 WITHHOLDING CONSENT TO ASSIGN : OLD ENGLISH INNS PLC .V. BRIGHTSIDE. Landlords have traditionally relied on a review of audited company accounts when considering the covenant strength of proposed assignees or undertenants which are limited companies. This is normally satisfactory, but the recent case of Old English Inns v Brightside indicates that landlords may need to look beyond the accounts in ascertaining the financial soundness of small private companies. THE FACTS: The tenants of a pub/restaurant sought a declaration from the Court that their landlord had unreasonably withheld consent to the assignment of their lease. The proposed assignee was a company owned and operated by a well-known chef. The main issue was whether or not the assignee was financially sound. The assignee had made a small operating loss for the previous two years, but losses were decreasing and turnover increasing. The explanation for the loss was that directors had taken large drawings from the company; otherwise an operating profit would have been made. The Court decided that in the case of a very small private company, it was artificial to look solely at the accounts. These were a useful guide, but not the sole determinants. The remuneration policy of directors could be quickly altered and financial soundness therefore could not sensibly be determined on the face of the current policy or accounts. THE OUTCOME: The court decided that it was entitled to look wider than the accounts, and that it is legitimate to take other factors into account also. For example, the court could take account of the fact that the assignee's debts were guaranteed by guarantors who were willing and able to ensure that the company had sufficient working capital. The assignee company therefore had enough funding to meet its financial requirements for the foreseeable future. CONCLUSION The accounts of a small one-man or two-person private company are useful for assessing covenant strength, but should not be the determining factor. Landlords should also take into account the wider circumstances of the company. If they do not do so, they will be at risk of damages claims for unreasonable withholding of consent. May 2005 Further information This Newsflash is issued by the Leisure and Property Management Group. Should you have any queries please contact Carmela Inguanta, email: carmelai@sghlaw.com or your usual contact at S.G.H on 0207 544 5555. This newsflash summarises complex litigation and should not be relied on as a definitive statement of law.
Disclaimer This news flash is copyright Sprecher Grier Halberstam LLP.2005 and should not be construed as legal advice or opinion in any specific facts or circumstances. The contents are intended for general information purposes only. You are urged to contact a suitably qualified lawyer for specific advice. |
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