On 30 October 2019, the Supreme Court handed down its much-awaited judgment in Sequent Nominees Ltd v Hautford Ltd. The unanimous decision of the Court of Appeal was reversed by a majority of 3 to 2, and it was held that a landlord reasonably withheld consent to its tenant when applying to the local authority for permission to change the use of demised premises.
Leases commonly contain covenants by the tenant not to do things, typically relating to assignment, sub-letting and the use of the demised premises. By what is called a “fully qualified covenant”, the tenant promises not to do something without the landlord’s consent, which is ordinarily not to be unreasonably withheld. Many leases will also contain the same “boiler plate” planning provisions alongside those bespoke qualified covenants. These clauses must now be construed together, with the result that a particular use that was thought by the parties to be permitted by the landlord may not, in fact, be permitted at all.
The case concerned a 100-year lease of a whole building in Soho granted in 1986 for a premium of £200,000 at a peppercorn rent. The lease contained the following user covenant (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…”
By clause 3(19) the tenant covenanted:
“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.”
At the time of the grant of the Lease in 1986, the ground floor and basement were in retail use. The first and second floors were used for storage and as a staff area. The top two floors were in occasional residential use.
In 2015, the tenant converted the first to fourth floors into flats. The tenant wished to seek planning permission for a change of use for the first and second floors from commercial to residential. If that application were successful, approximately 52% of the building would be in residential use. The Landlord refused consent on the basis this would increase the risk that the tenant could compulsorily purchase the freehold under the Leasehold Reform Act 1967. The landlord also stated that it wanted to retain control of the building for estate management purposes as it forms part of a block of adjacent and contiguous properties in its freehold ownership.
The first instance judge and the Court of Appeal both agreed that as the lease permitted the tenant to use the whole of the premises for residential purposes, the landlord was unreasonably withholding consent. To hold otherwise would be to re-write the user covenant and prevent the tenant from being able to use the entire demised premises for the permitted residential purposes.
Supreme Court Finding
The landlord’s successor in title appealed to the Supreme Court on the basis that protection against an increased risk of enfranchisement was a legitimate reason for refusing consent.
The appeal was allowed.
The Supreme Court found that granting of consent would have a real, rather than theoretical, adverse consequence in terms of the value of the freehold reversion to the landlord. On this analysis of the economic consequences to the landlord of giving or refusing the requested consent, the Court found that a refusal was reasonable. The landlord did not need to show that a refusal was right or justifiable, but merely that it was reasonable.
This is a particularly important decision as it is the first case to consider the inter-relationship between a bespoke, individually-negotiated user covenant and a “boiler plate” covenant.
Whilst on the face of it, Clause 3(11) allowed the tenant to use the property for residential use, the Court found that the lease did not give the tenant an unqualified right to use all or part of the property for residential purposes.
Clause 3(11) had to be read together with the qualified covenant in Clause 3(19) and together they permitted the tenant to use the property for residential purposes only to the extent that the planning regime permitted.
The correct approach is to construe clause 3(19) to understand what it permits the landlord to do and then to decide the question of unreasonableness; by asking whether the landlord’s refusal serves a purpose sufficiently connected with the landlord and tenant relationship, as at the time when consent is requested.
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