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26th February 2013

When does a tenant part with possession of the premises?

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Many leases restrict tenants from "parting with possession of the premises".

The meaning of this provision may be relevant, for example, if the tenant allows a management company or someone who supplies services to use the premises, has the tenant parted with possession?

A recent High Court case, Ansa Logistics Limited v Towerbeg Limited, provided some guidance on the interpretation of this provision. It demonstrated that it can be difficult for a landlord to prove that a tenant has unlawfully parted with possession. It also highlighted problems for a landlord who wants to refuse to give consent to a sub-lease in finding a good reason to do so.

Towerbeg was the landlord of a large area of land in Liverpool used for the storage of Ford motor vehicles and Ansa, who had acquired Ford’s logistics contract, was the tenant. The lease contained the common provision prohibiting the tenant from parting with possession without the landlord’s written consent, which was not to be unreasonably withheld. Ford wanted to take control of the operation and in 2007 entered an agreement with the tenant allowing Ford to occupy the site. In 2011 the tenant approached the landlord for consent to sub-let the premises to Ford. The landlord refused to grant consent on various grounds, including that the tenant had parted with possession of the premises in breach of its covenant in the lease. It also served a notice on the tenant forfeiting the lease, based again on the tenant’s breach of covenant in parting with possession to Ford. The tenant applied to Court for a declaration that the landlord’s refusal to grant consent had been unreasonable.

The Court decided that the tenant had not breached the lease as it had not parted with possession. The Judge said that the test for possession is whether the person in occupation has the right to exclude others, including the tenant, from the premises. At the date of the forfeiture notice the tenant continued to have responsibilities on site and had not "wholly ousted itself from possession".

As there had not been a breach of the lease, the Judge did not need to consider the issue of forfeiture and whether therefore to grant the tenant relief from forfeiture. However the Judge said that, had there been a breach, he would in any case have granted relief. This is a reminder to landlords of the Courts’ broad discretion as to whether to grant relief. Each case turns on its own facts.

The Judge also found that the landlord’s refusal to grant consent to sub-let had been unreasonable. Even if the landlord had good reason to believe that the tenant had parted with possession to Ford, the Judge felt that this would not have been a reasonable basis for refusing consent. The breach was not seriously prejudicial to the landlord and would actually have been remedied by the sub-letting. Another of the landlord’s reasons for refusing consent was based on Ford’s financial standing. Remarking that in 2011 only 11%of companies had a lower risk of failure than Ford, the Judge said that a landlord was not justified in refusing consent to a sub-lease “just because the sub-tenant is not bullet-proof”. The Judge considered the financial position of a potential sub-tenant was only marginally relevant to a landlord who would continue to look to its tenant for rent.

In this case, the decision has thwarted the landlord’s plans to redevelop part of the site, at least for the time being. This illustrates the risks in devoting resources to planning the development of land, which is currently let, before possession is obtained. This is the case even when the tenant may have breached the terms of the lease, whether by letting others use the premises or otherwise. The decision also highlights the value of including a restriction in a lease against parting with or sharing occupation (rather than possession). Occupation and possession are separate legal concepts and the tenant in this case might well have breached a restriction drafted along those lines.

For more information, please contact Ceri Riddell on 01223 461155 or click here to email Ceri.

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