March 23, 2020

Unreasonably withholding consent - reasonable odds favour the Landlords refusal of consent – just!

Facts

The case concerned a long lease of 51 Brewer Street in Soho, granted in 1986 for a premium of £200,000 at a peppercorn rent (the “Property”). The current tenant (Hautford Ltd (“Hautford”)) was an assignee of the original term. The current landlord (Sequent Nominees Ltd (“Sequent”) formerly Rotrust Nominees Ltd (“Rotrust”)) was the original landlord by another name. The Property was part of Sequent’s Soho estate which included a number of the other adjacent buildings along that part of Brewer Street (odd numbers 39-61).

At all material times the planning use of the Property had been: for the ground floor and basement - retail; for the first and second floors - office/ancillary; for the top two floors - residential.

The Lease contained the following tenant covenants:

Clause 3(11) “Not to use the Demised Premises otherwise than for one or more of the following purposes (a) retail shop (b) offices (c) residential purposes (d) storage (e) studio PROVIDED however that nothing herein contained shall imply or be deemed to be a warranty that the Demised Premises may in accordance with all Town Planning Laws and Regulations now or from time to time in force be used for the purpose above mentioned”.

Clause 3(19) “To perform and observe all the provisions and requirements of all statutes and regulations relating to Town and Country Planning and not to apply for any planning permission without the prior written consent of the Landlord such consent not to be unreasonably withheld” (emphasis added).

When the Lease was granted in 1986 the freeholder faced no immediate risk of enfranchisement because the Leasehold Reform Act 1967 (the “1967 Act”) imposed a residence qualification on a tenant which would not be satisfied by a company. This qualification was removed by the Commonhold and Leasehold Reform Act 2002.

On 17 April 2015 Hautford applied under Clause 3(19) for consent to apply for planning permission to change the use of the first and second floors of the Property to residential use.

The building was spread over 6 floors. At the time of Hautford’s application approximately 25% of the Property was in residential use. If Hautford’s application was successful approximately 52% of the building would have been in residential use.

Rotrust replied refusing consent on 30 April 2015 on the grounds that granting permission would lead to an increased risk of a successful claim to enfranchise under the 1967 Act. They stated that enfranchisement would significantly decrease the value of their reversion and would deprive them of control of the whole block (in which they owned numerous properties) for the purposes of estate management.

First instance

The County Court found that withholding consent in these circumstances was unreasonable. Judge Collender commented “the lessor’s refusal of consent under Clause 3(19) is unreasonable because thereby they are seeking to achieve a collateral purpose, i.e. the imposition of a restriction on use, that was not negotiated and is not included within Clause 3(11)”.

Further that Sequent’s concern about disruptions to estate management could have been addressed through the use of restrictive covenants under s10(4) LRA 1967.

Court of Appeal

Sir Terrence Etherton MR gave the leading judgment in the Court of Appeal and generally agreed with Judge Collender’s reasoning.

It was noted that there was no existing case law on the unreasonable refusal of consent to making a planning application. Therefore, the same principles that had been applied in cases relating to unreasonable refusal of consent to assignment were to be applied.

The Court of Appeal agreed with the view that using Clause 3(19) to alter the meaning of Clause 3(11) was equivalent to rewriting the Lease.

Sir Terrence Etherton MR also stated that Clause 3 (19) should not be construed to permit the Landlord to reasonably refuse consent to make an application for planning permission for a use authorised by Clause 3(11) because any third party could apply for the same planning permission. The Landlord would not be able to oppose a third-party application which would give rise to the same increased risk of enfranchisement.

Supreme Court

The Supreme Court overturned that Court of Appeal and disagreed with the First Instance decision. Lord Briggs gave the leading judgment with which Lord Carnwath and Lord Hodge agreed. Lord Briggs referred to the three significant established principles:

  1. The grounds for withholding consent must be relevant to the landlord and tenant relationship
  2. A question of reasonableness is a question of fact
  3. A landlord is only obliged to show their conduct was reasonable, not right or justifiable

In his judgment Lord Briggs referred specifically to the comments of Lord Rodger Earls Ferry in Ashworth v Frazer (2001), “The test of reasonableness is to be found in many areas of the law and the concept has been found useful precisely because it prevents the law from becoming unduly rigid. In effect, it allows the law to respond to different situations as they arise.”

The Ashworth v Frazer case related to refusal of consent for assignment, however Lord Briggs found it contained principles which are equally applicable to a refusal of consent in relation to a planning application. Lord Briggs stated that “it will in every case be a question of fact and degree measured as at the date upon which the relevant consent is sought by the tenant”.

Lord Briggs summarised the three arguments in favour of the view that the refusal was unreasonable in these circumstances:

  1. As found by Judge Collender, using Clause 3(19) to alter the meaning of Clause 3(11) was equivalent to rewriting the Lease
  2. As adopted by the Court of Appeal, that it made no sense to attribute such purpose to Clause 3(19) if third parties could apply for the same planning permission free of any such restraint and with the same adverse consequences to the Landlord
  3. Permitting the Landlord to refuse consent to a change of use expressly permitted under Clause 3(11) amounted to derogation from grant

Lord Briggs stated that the above arguments sought to address the issue of consent with an over-refined attempt to identify a limited purpose behind Clause 3(19):

Lord Briggs addressed each of the principles he had set out earlier in turn.

  1. Seeking to avoid the risk of enfranchisement and the consequential damage to the reversion was not extraneous to the landlord and tenant relationship. Instead, he stated “damage to the reversion is the quintessential type of consideration rendering reasonable the refusal of consent”
  2. A down to earth factual analysis of the economic consequences of consenting showed that refusal was reasonable
  3. A landlord only had to show refusal was reasonable, not right or justifiable. In his opinion refusal was reasonable in this case

Dissenting judgment

Both Lady Arden and Lord Wilson dissented. They argued that the user clause was a clear express indication of theintention of the parties. They stated that construing the user clause to be contingent on consent pursuant to the planning clause was, in effect, re-writing the lease. Lord Wilson further noted that the user clause was significant to the value of the Lease suggesting it would have been specifically drafted and negotiated by the parties.

Implications

The decision by a slender majority speaks to the convincing arguments on both sides.

This decision will be welcomed by landlords. Despite the open user clause, the court assisted the landlord in finding a justification to withhold consent to the tenant’s proposals.

However, landlords must balance including sufficient protections in a lease with ensuring the lease remains a valuable asset relative to the market.

Both landlords and tenants should take note that “reasonableness” will always be decided on a fact-specific basis. However, this decision points towards the court increasing the scope in which landlords will be deemed to act reasonably in withholding consent. Both parties should also strongly consider the risks and rights associated with enfranchisement and remember not to view each clause of a lease in isolation.

The article first appeared in our Real Estate Bulletin - March 2020.