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The Supreme Court revisits reasonableness

  • November 08, 2019
  • By Peter Robinson, Partner

In the case of Sequent Nominees Limited v Hautford Limited [2019] UKSC 47, the Supreme Court has revisited the issue of reasonableness in the context of a tenant’s application for consent under a lease covenant which provides that the landlord cannot unreasonably withhold consent.

Hautford was the tenant of a building in Soho under a lease granted in 1986 for a term of 100 years of which Sequent, was the landlord. The building comprised six floors and a basement

Clause 3(11) of the lease permitted the tenant to use the building as a) retail shop b) offices c) residential d) storage e) studio or any one or more of those uses.

At all material times, the permitted uses under the planning regime were:

  • Ground Floor and Basement – Retail
  • First and Second Floor – storage and staff area ancillary to retail use
  • The top two floors – residential.

The top four floors had been converted to residential use, although pending obtaining planning permission for such use of the First and Second Floors, those had remained vacant.

The relevant provisions of the lease were:

  • The user clause (Clause 3(11) – as summarised above;
  • Clause 3 (19) under which the tenant covenanted not to ‘…apply for any planning permission without the prior written consent of the Landlord such consent not to be unreasonably withheld;
  • The alienation provision which allowed the assignment of the whole (but not part) of the building and a sub-letting of the whole or part of the building otherwise than during the last seven years of the term.

Hautford applied to Sequent’s predecessor in title as landlord for consent to apply for planning permission to the change of use of the First and Second Floors to residential. The application was refused primarily on grounds of the increased risk of a successful claim for enfranchisement under the Leasehold Reform Act 1967 which would be consequential on such a planning permission being granted.

Hautford claimed that the refusal of consent under Clause 3(19) by the, then, Landlord was unreasonable and in breach of that clause. At first instance, Collender J. held that the landlord’s refusal was unreasonable because the landlord was seeking to achieve a collateral purpose (not having its freehold enfranchised) by way of the imposition of a restriction on use not contemplated by Clause 3(11).  The Court of Appeal agreed. Sequent, by now the landlord, appealed to the Supreme Court.

Lord Briggs (with whom Lord Carnwath and Lord Hodge agreed) summarised the basic principles applicable to deciding whether an approval was being unreasonably withheld in the context of alienation (which applied equally to the refusal of consent in this case) as those set down by Balcombe L.J. in International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] Ch 513 at 519H – 521 and condensed by Lord Bingham in Ashworth Frazer v Gloucester City Council [2001] 1 WLR 2180, into three overriding principles :

  • A landlord is not entitled to refuse his consent on grounds which have nothing whatever to do with the relationship of landlord and tenant in regard to the subject matter of the lease;
  • Where the requirements of the first principle were met, the question of reasonableness was one to be decided by the tribunal of fact. Care must be taken not to elevate a decision made on the facts of a particular case, into a principle of law;
  • A landlord’s obligation is to show that his conduct was reasonable, not that it was right or justifiable.

Lord Briggs endorsed an earlier dicta of Lord Denning in Bickel v Duke of Westminster [1977] QB 517 at 524 that when a court came to interpret the words ‘such licence shall not be unreasonably withheld’

‘…I do not think that 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 ‘

The correct approach was to construe Clause 3(19) to discover what it permitted the landlord to do and then decide the question of unreasonableness by asking whether the landlord’s refusal serves a purpose sufficiently connected with the landlord and tenant relationship, in accordance with the first of Lord Bingham’s three principles in Ashworth Frazer.

As a question of fact, the landlord’s ability to refuse consent continued to accord a real measure of protection against enfranchisement of the freehold. It was also a fact that, at the time of the application, no third party had applied for planning permission for the applicable change.

By reference to Lord Bingham’s principles in Ashworth Frazer:

  • a significant increase in the risk of enfranchisement, with consequent damage to the reversion, was not something extraneous to or disassociated from the landlord and tenant relationship. Such damage was the quintessential type of consideration rendering reasonable the refusal of consent;
  • a factual analysis of the economic consequences to the landlord plainly suggested that a refusal was reasonable an;
  • the third principle did not apply as the Appellant did not need to show that the refusal was right or justifiable, merely that it was reasonable.

In a dissenting judgement, Lady Arden did not agree that the tenant’s right to use parts the whole of the building, as it was permitted to do by Clause 3(11). If it wished to do so, was subject to the tenant obtaining landlord’s consent to a change of use to residential. That would involve writing words into the user clause as opposed to treating the landlord’s power reasonably to withhold consent under Clause 3(19), as impliedly limited to other aspects of a planning application.

Lady Arden further commented that the tenant could assign the lease to a third party who had already, without being bound to obtain the landlord’s consent to applying for the necessary planning permission, obtained a change of use. That person could then apply to enfranchise. The landlord must be taken to have been aware of this.

Lord Wilson, also dissenting, pointed out that Clause 3(11) was singularly generous to the tenant and that had some bearing on the amount of the original premium. Clause 3(19) was, however, a boilerplate clause. Were it reasonable for the landlord not to consent to an application to make residential use of the First and Second Floors, the provisions of Clause 3(11) would be deprived of substantial effect. That clause would become a fully qualified clause, thereby in effect, re-writing that clause.

It is unusual to see a relatively straightforward dispute such as in this case reaching the rarefied judicial heights of the Supreme Court. However, given the likely value of releasing four floors of developable freehold in Soho it is easy to see why neither party would wish to settle short of a final decision.

As per Lord Denning’s dicta in Bickel, the issue of reasonableness of refusal is one which should have no strict legal guidelines. That said it is difficult to see how, in the light of this decision, a refusal by a landlord to give consent to an application which would have the effect of allowing a tenant to successfully enfranchisement could now ever be considered anything other than reasonable.

In her judgement, Lady Arden observed that the constraints on making the relevant planning application which bound the tenant, did not stop someone who wasn’t the tenant applying for and obtaining the necessary planning consent. Having done so, the tenant could then assign the lease with the benefit of that planning consent. The commercial realities of achieving such an outcome were not elaborated on and is difficult to see such an attractive outcome for the tenant coming about, as it were, and serendipitously and without a number of pre-existing agreements being put in place by the tenant.

This type of case was a staple of landlord and tenant disputes before the enactment of the Landlord and Tenant (Covenants) Act 1995. Since 1996 the ability of landlords to stipulate in granting leases, what grounds would constitute reasonable withholding of consent to assignment has largely defused the potential for disputes. However, this decision serves as a reminder of the principles surrounding the issue of reasonableness of landlord’s refusal to consent – where that issue may remain open for debate.

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