Historically, landlords trying to protect their mix of tenants in a multi-let development were primarily concerned with preventing a concentration of similar uses that would compete against each other.
Modern retailing theory has completely reversed this position. The new conundrum for landlords is to find a way to ensure that similar retailing uses are located together without limiting assignability and affecting rent review. This is taken further in out-of-town shopping centres, where areas are designated not just for particular types of goods, but also for shops targeted at particular socio-economic groups.
While landlords need to find a way of achieving this clustering, tenants must keep an eye on the ease with which they may dispose of their leases. Tenants can find themselves in a dilemma. While they remain in the centre they are keen to ensure that the shops surrounding their unit are appropriate, but when they come to assign, they want to ensure that they are free to assign to a wide range of retailers.
This trend is illustrated by Moss Bros Group plc v CSC Properties Ltd (1999). It concerned a unit in the MetroCentre, Gateshead, that was let under a lease in 1997. The lease included conditions for assignment as permitted by the Landlord and Tenant (Covenants) Act 1995. The assignment provisions stated that the landlord was not to be regarded as unreasonably withholding its consent if the use to which the proposed assignee intended to put the premises was unsuitable for the premises or the MetroCentre, whether on estate management grounds or otherwise.
The lease permitted use for the sale of articles approved by the landlord. It stipulated that approval could not be unreasonably withheld 'if in the reasonable opinion of the landlord, the grant of such approval will be consistent with the principles of good estate management, having regard in principle to the distribution of retail trade within the MetroCentre'.
The tenant-mix policy had never been committed to writing, but the court was convinced that there was a consistent policy.
Even though the unit in question was relatively small and would not have had a significant impact on the balance of uses in the relevant part of the MetroCentre, the court backed the landlord's decision to refuse consent for the assignment and the tenant lost the opportunity to assign at a premium of £300,000.
The fact that the landlord admitted it would be happy to accept the proposed assignee, games and computer software retailer Game, as a tenant in another part of the centre, illustrates another hazard for tenants. They may find themselves losing prospective assignees, only to discover that they have been offered the leases of other units in the centre.
Tenant mix as grounds for refusing consent for change of use
Although the judge in the Moss Bros case did not say so expressly, it looks as though he would have reached the decision on the basis of the user clause alone, even if there had not been the more sophisticated provisions governing assignment. This would be consistent with an earlier decision, Chelsfield MH Investments v British Gas plc (1995), in which it was decided that refusal to a change of use on the ground that there was a similar user nearby was reasonable.
Assignment provisions preventing assignment to a tenant whose proposed use is inconsistent with tenant-mix policies look as though they are going to become increasingly common in the future. For tenants, this will have a direct impact on assignability.
The effect will be particularly bleak where there is a recession in the tenant's particular sector of the retail market. There may then be no tenant in that sector of the market interested in taking its lease.
Pre-emption and surrender-back provisions
Another market trend is for landlords to take the right to a surrender of the lease, if the tenant wishes to assign. This gives the landlord the freedom to 'buy in' leases and re-let units to traders that are on the landlord's target list for its centre.
A surrender can be an attractive option for the tenant – the tenant is released from liability and the surrender will usually take place swiftly. But it can have disadvantages. The tenant may find it difficult to attract prospective purchasers for its unit, if it is known in the market that the landlord can trump any offer made by a prospective assignee. If the tenant does find a prospective assignee, it risks losing the assignee during the hiatus while waiting for the landlord to decide whether or not to accept the surrender.
Lessons for tenants
The courts are responding to modern trends by allowing landlords greater freedom to control tenant mix. It is more important than ever for tenants and assignees to establish in advance the landlords' management policy for the property or the particular area of the centre is. In the Moss Bros case, Moss Bros seems to have been completely unaware of the (unwritten) management and letting policy.