The Supreme
Court has recently held* (by a narrow
majority of three to two) that a landlord was acting reasonably in withholding
consent to a tenant's planning application, on the ground that the additional
residential use proposed would increase the risk of the property being
enfranchised under the Leasehold Reform Act 1967.
What’s most
interesting about this case is the degree of disagreement at all levels on how
you answer the question of whether a landlord is acting reasonably in
withholding its consent.
The majority
judgment of the Supreme Court, delivered by Lords Briggs, was arrived at
together with Lords Carnwath and Hodge.
However, two
Supreme Court judges, Lady Arden and Lord Wilson, disagreed with the majority
view, which overturned the previous ruling of the Court of Appeal, which itself
had upheld the earlier judgment of the High Court.
The case involves
the interplay between a bespoke negotiated user covenant and a boilerplate
planning covenant.
The property is a terraced building comprising a basement, ground floor
and four upper floors.
A lease of the whole building was granted in 1986 for a premium of
£200,000 for a term of 100 years at a peppercorn rent.
At the time the lease was granted, the basement and ground floor were
used for retail; the first and second floors were used for storage and a staff
area ancillary to the retail use on the lower floors; and the third and fourth
floors were in occasional residential use.
The landlord owned the freehold as part of a block.
The lease contained at clause 3(11) the following user covenant which,
on the face of it, allowed a variety of uses:
“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.”
It also
contained at clause 3(19) the following planning covenant:
“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 …”
The tenant applied to the landlord for consent to apply for planning
permission to change the use of the first and second floors of the Property to
residential.
The landlord refused consent, on the basis that:
·
the change of use would increase the prospect of a
successful claim for enfranchisement under the1967 Act (the law on enfranchisement
had changed since 1986); and
·
enfranchisement would be detrimental to the
landlord’s management of the estate.
The question for the court - was the landlord being reasonable in
refusing consent?
The High Court said no, ruling that the landlord’s refusal of consent
under clause 3(19) was unreasonable “because thereby they are seeking to
achieve a collateral purpose, ie the imposition of a restriction on use that
was not negotiated and is not included in clause 3(11).”
In other words, the landlord was attempting to re-write the user covenant
and limit the amount of the property that could be used for residential purposes.
The Court of Appeal agreed, although primarily for a different reason,
emphasising that any third party, other than the tenant, could apply for the
same planning permission, which the landlord would be powerless to oppose, and
which would give rise to the same increased risk of enfranchisement (the
Supreme Court judgment does not state whether the lease also prohibited the implementation
of a planning permission without landlord’s consent).
Both courts regarded the estate management argument for opposing consent
as insufficient to be reasonable.
The Supreme Court’s majority verdict was that the lower courts had erred
in law.
In overturning the judgment of the Court of Appeal and finding that the
landlord was reasonable in withholding its consent, Lord Briggs set out the
three overriding principles, distilled in a 2001 case**, on the question of
consent in leases:
1.
A landlord is not entitled to refuse consent on
grounds which have nothing to do with the relationship of landlord and tenant
in regard to the subject matter of the lease.
2.
The question of whether the landlord’s conduct was
reasonable or not will be one of fact to be decided by a tribunal of fact.
Reported cases are of illustrative value, but in each case the decisions rested
on particular facts and care must be taken not to elevate a decision made on
facts into a principle of law.
3.
The landlord’s obligation is to show that its conduct
was reasonable, not that it was right or justifiable.
As you can see, the answer to the question - what is reasonable? – is not
straightforward.
However, the thrust of the majority Supreme Court judgment is to try and
reduce “reasonableness” to its core meaning, rather than to use construction of
the words in the lease to arrive at a different view.
Lord Briggs quotes from a 1929 case***, where the observation was made
that “one should read reasonableness in the general sense” and from the
2001 case mentioned above that “there are few expressions more routinely used
by British lawyers than “reasonable” and the expression should be given a
broad, common sense meaning in this context as in others” and that the
concept of reasonableness has been found useful “precisely because it
prevents the law becoming unduly rigid” allowing the law “to respond
appropriately to different situations as they arise”.
In arriving at this judgment, Lord Briggs relied heavily on the comments
of Lord Denning in a 1977 case****:
“The
words of the contract are perfectly clear English words: ‘such licence shall
not be unreasonably withheld’. When those words come to be applied in any
particular case, I do not think the court can, or should, determine by strict
rules the grounds on which a landlord may, or may not, reasonably refuse his
consent. He is not limited by the contract to any particular grounds. Nor
should the courts limit him. Not even under the guise of construing the words.”
Lord Briggs
was not prepared to construe the wording of the lease narrowly so as to make the
user covenant override the planning covenant and the landlord’s general
concerns about enfranchisement.
He found that
resisting an increased risk of enfranchisement was a legitimate purpose of the
right to refuse consent under clause 3(19).
Although, on
the face of it, clause 3(11) appears to give an unqualified right to use the
whole or any part of the building for residential purposes, it is quite
different when you look at the lease as a whole.
So, clause
3(11) must be read together with clause 3(19), which required the tenant to
comply with planning legislation.
If the user
covenant is read together with the planning covenant, it is in effect subject
to the planning covenant.
Applying the
three tests, Lord Briggs found the landlord passed on all of them, and that it had
acted reasonably on all counts.
But then we
come to the two dissenting judgments in the Supreme Court.
Lady Arden succinctly
said that the appeal should be dismissed effectively for the reasons given by
the Court of Appeal and the High Court judge.
She said
that the power to refuse consent to a planning application was not granted to
enable the landlord to cut down the user clause.
Lord Wilson
too disagreed with Lord Briggs and the majority, stating that clause 3(11) is
crucial. It was not a common form or boilerplate clause, but rather “it is a
bespoke subclause of singular generosity to the leaseholder…the proviso which
excludes any warranty on the part of the freeholder about accordance with
planning laws in no way detracts from the width of its permission” and was no
doubt reflected in the premium paid of the lease.
Although the
result of this case will be of particular interest to those dealing with enfranchisement,
it has wider implications.
When exercising
a contractual discretion and determining what is or is not reasonable, the judgment
directs courts to look at the facts as they are at the date of the request for
consent, and not consider the reasonableness of a refusal of consent “by
reference to an over-refined construction of the lease as at the time of its
grant”.
It
emphasises the need to read leases as a whole.
Especially as
in this case the bespoke user covenant was found to be subject to the
boilerplate wording of the planning covenant – something to be aware of when
drafting and negotiating the terms of new leases.
It also has
implications for the valuation of existing leases.
A generous
user covenant must be read alongside the rest of the lease, where there may be
general restrictions both in planning/legislation covenants and alterations covenants
that result in cutting down the breadth of the use permitted by the user covenant
or stopping it altogether.
*Sequent
Nominees Ltd (formerly Rotrust Nominees Ltd) v Hautford Ltd [2019] UKSC 47(30
October 2019)
**Ashworth
Frazer Ltd v Gloucester City Council [2001] 1WLR 2180
***Viscount Tredegar v Harwood [1929] AC 72
****Bickel
v Duke of Westminster [1977] QB 517
