Not in occupation, but clinging onto possession
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First appeared in Informer: Real Estate Newsletter - Spring 2013
Alienation covenants in leases are amongst the most wordy and can seem unduly repetitive – the recent case of Ansa Logistics Ltd v Towerbeg Ltd & Ors illustrates why detailed wording is important.
The central issue before the Court was whether the landlord, Towerbeg, had unreasonably withheld consent to a proposed underletting by its tenant, Ansa, to the Ford Motor Company (Ford). Towerbeg refused consent on four grounds, but the principal one of interest was that Ansa was allegedly in breach of the alienation covenant in the lease by ‘parting with possession’ of the demised premises without the landlord's consent. As well as refusing consent to the underletting, Towerbeg used the alleged breach of covenant to seek to forfeit the lease and recover possession of the property.
Historically, Ansa had used the property to provide storage and transport services for Ford vehicles which were manufactured locally. In 2007, Ford ended their contract with Ansa and the intention was that Ford would provide this service themselves from the property. Under heads of terms, Ansa allowed Ford to occupy the property and Ford were given the right to call for underleases, subject to landlord's consent being granted. Whilst Ford managed all the operations on the property, Ansa continued to be actively involved in the property, e.g. visiting it from time to time.
Towerbeg acknowledged that this agreement caused no immediate parting with possession, but argued that over the years Ansa allowed Ford an ever greater degree of control which eventually resulted in a parting with possession. The judge disagreed and found for the tenant, Ansa. The judge drew a distinction between Ford's control of the business at the property and control of the property itself. Ansa and its employees continued to have responsibilities for the property and to have access to the property. Ford were in occupation of the property, but Ansa had not wholly ousted themselves from legal possession and Ford recognised this.
The alienation covenant in the lease (in this case) only prohibited parting with possession without consent – it did not prohibit (unlike many other clauses) allowing another into occupation of whole or part, or sharing occupation. There had therefore been no breach of the alienation covenant.
Importantly, the case is a reminder that the legal test for whether someone is in possession of a property as opposed to mere occupation, is whether the person in occupation has the right to exclude others, including the tenant, from the property.
Lessons
This distinction shows the importance to landlords and their advisors in making sure that alienation covenants are comprehensive. As this case demonstrates, they should ideally prohibit allowing anyone into occupation as well as prohibiting parting with possession.
For tenants it shows that it is worth reading alienation covenants in a lease carefully, particularly on business sales where typically a seller may well allow the buyer of the business to occupy demised premises, pending a formal assignment or underletting. If the seller keeps some control over the property, it may be possible to achieve the practical end desired, without breaching the lease covenants.
Jayne Elkins, Partner, Real Estate Investment Group at Field Fisher Waterhouse LLP