On 30 October 2019, the Supreme Court ruled in favour of a landlord who withheld consent to a tenant's planning application for change of use.
That application would have enabled the tenant to proceed with the enfranchisement of a building. The Supreme Court was divided, with three of the five judges finding in favour of the landlord. Whilst the outcome is positive for landlords, it appears that there is still a discussion to be had around this topic.
The case of Sequent Nominees Ltd (formerly Rotrust Nominees Ltd) v Hautford Ltd concerned a leasehold building within an estate (which was managed by the landlord) which was used for retail, office and residential. The lease contained a provision prohibiting the tenant from applying for planning permission without the prior written consent of the landlord. The user clause in the lease permitted the tenant to use the premises for residential purposes.
As required by the lease, the tenant requested consent from its landlord to apply for planning permission to change the use of the two floors previously used as offices to use for residential purposes. The consent provisions were "fully qualified" (i.e. the tenant was required to seek the landlord's consent, such consent not to be unreasonably withheld). The landlord refused to provide consent on the grounds that increasing residential space would:
- enhance the tenant's ability successfully to enfranchise under the Leasehold Reform Act 1967 (i.e. acquire the freehold in return for a premium calculated under the 1967 Act and subject to satisfaction of necessary conditions if the majority of the building was used for residential purposes), and
- diminish the landlord's ability to effectively manage its estate; the landlord claimed that the requirement to obtain consent was to protect its reversionary interest.
The tenant contested the landlord's refusal to give consent in the County Court, on the basis it made the user clause more restrictive than intended. It also argued that the landlord would still be protected under the 1967 Act, which enables restrictive covenants to pass when property is transferred. The County Court ruled in favour of the tenant, finding that the landlord's refusal of consent was unreasonable; its reasoning was that otherwise, it would mean re-writing the user covenant and preventing the tenant from using the premises as was contemplated at the time that the lease was granted. The landlord appealed.
The Supreme Court held that the landlord was only required to show that its refusal was "reasonable" rather than being "correct" or "justifiable". In applying this principle to the facts of the case, allowing the tenant to apply for planning permission could give rise to the possibility of enfranchisement, which in turn, could affect the value of the landlord's freehold reversion. The potential detrimental effect on value was a reasonable reason for the landlord to withhold its consent.
In fact, the Supreme Court found that the lease had to be read as a whole, so that the tenant's ability to use the property for residential purposes had to be read in conjunction with the added requirement that planning permission has been obtained.
This case acts as a reminder to tenants to ensure that user clauses are read in conjunction with other provisions in the lease. As for landlords, this is a welcome decision for those who have granted leases in mixed-use blocks where enfranchisement is a risk.
Howard Kennedy LLP is a leading firm dealing with landlord and tenant matters. We have extensive experience of dealing with requests for consent and leasehold enfranchisement matters, acting for both landlords and tenants. If you require any assistance in any such matters, please contact our real estate disputes team.