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Landlord consent case splits the Supreme Court

Property cases do not often make it all the way to the Supreme Court, let alone cases relating to a landord’s refusal of consent under a lease.  For that reason alone, the Supreme Court Justices’ decision in the case of Sequent Nominees Limited v Hautford Limited this Autumn is valuable reading. That said, it was a case that divided the Supreme Court, with three of the five judges finding in favour of the landlord, and two judges dissenting.

The case concerned a tenant’s request for landlord’s consent to the making of a planning application. Consent was required under the terms of the tenant’s lease, but it was refused by the landlord.  The landlord was required under the lease not to unreasonably withhold consent, and the tenant applied to court for a declaration that the landlord’s consent had in this case been unreasonably withheld.  The High Court and Court of Appeal agreed with the tenant, but by a 3:2 majority the Supreme Court found that the landlord’s reasons for refusing consent had been reasonable.

So, what were the landlord’s reasons for refusing consent, and how was it that this issue should go all the way to the Supreme Court?

The tenant’s lease was of the whole of a six storey terraced building, and the user clause permitted a wide variety of uses, including office, retail and residential use.  The ground floor and basement had previously been used for retail purposes, with offices on the first and second floors and two storeys of residential premises above.  When the tenant decided to convert the first and second floors for residential use, they therefore didn’t need the landlord’s consent for the alterations or the change of use.  They did, however, need the landlord’s consent to the planning application that would be necessary to render the change of use lawful for planning law purposes.

The landlord was concerned that having residential user on the first and second floors as well as the third and fourth would render the whole premises susceptible to the process of “enfranchisement” (ability to buy the freehold – see below) by the tenant.  By exercising the right to refuse consent to the planning application, the landlord was seeking to limit the residential user.

Under the Leasehold Reform Act 1967 (“LRA 1967”), a tenant with a long lease of a “house” can exercise a statutory right to acquire the freehold of the property in return for a premium calculated under LRA 1967.  This can be a very valuable right for the tenant, but many landlords understandably feel that the mere risk of enfranchisement will devalue their reversion.  After all, a prospective buyer of the freehold would be taking a big risk if they paid more for the freehold on the open market than they could receive by way of statutory premium in the event that their tenant exercised the right to buy the freehold.

In order to qualify for enfranchisement, the building must be a house “reasonably so called”.  That nebulous definition has been the subject of extensive judicial analysis. (Please see our previous blogs A brace of cases on the right to enfranchise, Radical proposals on enfranchisement rights and Consultation launched on enfranchisement rights). For present purposes, it’s enough to say that the building does not have to be wholly adapted for use as a house in single occupation in order to qualify as a “house” for the purpose of LRA 1967.

In this case, the landlord was clearly worried that more residential accommodation would bring the building closer to being treated as a “house”, and so susceptible to an enfranchisement claim.  Unable to exercise direct control over the tenant’s right to change the use of the building under a qualified user covenant, the landlord resorted to refusing consent to the planning application, so as to prevent residential use on the first and second floors.

One of the main arguments in favour of the tenant was the absence from the lease of an express right for the landlord to exercise control over change of use (that is to say, a covenant prohibiting change of use without consent). However, the majority of the Supreme Court Justices decided that the right to refuse consent to a planning application should be read together with the user covenants in the lease: so that a change of use could only be permitted if the new use was permitted under planning law.  Therefore, the landlord was entitled to use the planning permission clause to exercise control over change of use.  In addition, it was reasonable for the landlord to exercise that control to mitigate against the damaging effect that the risk of enfranchisement would have for the landlord’s reversion.

Notwithstanding the close decision, which divided the Supreme Court, there are a handful of key points that landlords and long leaseholders can take away from this decision:

  • As was already generally accepted, it can be reasonable as a matter of principle, for a landlord to exercise a right to refuse consent under a lease, in order to protect the value of their reversionary interest from potential damage and loss.
  • That includes reasonably refusing consent in circumstances where the giving of consent might give rise to an increased risk of enfranchisement, whether or not the incumbent tenant intends to exercise that right at the time of the application.
  • When looking at a case like this, you must consider all of the tenant covenants in the round.  Whilst at face value the tenant had a broadly unfettered right to change the use of the premises, the purpose of a landlord’s right to oppose a planning application is to give the landlord some control over alteration works and changes of use, to the extent that they require planning permission.