Windfall for the tenant v reasonable refusal of consent

Landlords can refuse consent to a tenant’s request to do something to (or with) the property that is otherwise prohibited under the lease terms. Typically, such consent is ‘not to be unreasonably withheld’. However, a dispute can arise when the landlord says ‘No’ - but the tenant says this refusal of consent is unreasonable.

A recent ruling of the Supreme Court followed a tenant’s application for planning permission to change the use of the building, giving useful guidance on the correct approach in such cases.

What’s the background?
The lessee in Sequent Nominees Ltd v Hautford Ltd [2019] UKSC 47 leased the property in 1986. The property is a six-storey terraced building in Soho. The subtenant (tenant for the purposes of this article) ran an ironmonger’s shop from the basement and ground floor.

Under the lease, the property could be used for retail, offices or residential purposes and the tenant was prohibited from applying for planning permission without the landlord’s consent (such consent not to be unreasonably withheld).

By 2015, the tenant had converted floors one to four into self-contained residential flats. Though floors one and two had previously been used as storage and office space, existing planning permission did not allow residential use.

The tenant asked the landlord for its consent to apply for planning permission to use floors one and two for residential purposes. The landlord refused because it believed this would damage its own financial interests. But on what basis?

If planning permission was secured to turn those floors into residential use, the effect would be that the residential proportion of the property would jump from 25 per cent to around 52 per cent. To give consent would mean the tenant likely having the opportunity to compulsorily acquire the freehold under the Leasehold Reform Act 1967. This risk of enfranchisement would devalue the property.

However, the tenant said this refusal was unreasonable and took proceeding against the landlord.

Risk of enfranchisement
The landlord argued the requirement within the lease to obtain its consent was to protect it from damage to its interest in the property. It argued that it was reasonable to refuse the tenant consent in this case because to do so would increase the risk of enfranchisement which would affect the property value. If the tenant was to exercise its right to compulsorily purchase the freehold, the landlord would lose its freehold ownership.

However, the tenant relied on the fact that the lease terms specifically allowed a tenant to use the premises for residential use and refusing consent would restrict this, therefore the refusal was unreasonable.

The Supreme Court (on a three to two majority) ruled in favour of the landlord, disagreeing with the Court of Appeal’s ruling that the refusal was unreasonable.

The Court’s rationale
The key issue for the court was whether the courts below were right to construe the lease so as to prevent the landlord from having regard to an increased risk of enfranchisement from residential use.

Lord Briggs, giving the majority judgment, the Supreme Court ruled that the circumstances in which a landlord can be asked to give consent under a fully qualified covenant such as this are “infinitely variable”. Whether a landlord’s decision is reasonable is a question of fact and degree in each individual case.

The facts as at the date of the tenant’s request are what must be assessed in deciding whether or not the decisions is reasonable, not what the parties contemplated at the time the lease was granted (when the lease was originally granted, the freeholder faced no immediate risk of enfranchisement).

He said the right approach is to decide whether the landlord’s refusal serves a purpose which is sufficiently connected with the landlord/tenant relationship. Furthermore, at the time of the tenant’s request, the landlord’s ability to refuse consent gave the landlord a real measure of protection against enfranchisement. The landlord was, therefore, acting reasonably in protecting the value of its property.

The court ruled that the risk of the tenant compulsorily purchasing the property (ie. damage to the reversion) was a “quintessential type of consideration rendering reasonable the refusal of consent”.

Briggs LJ also concluded that on a “down to earth factual analysis of the economic consequences to the landlord of giving or refusing the requested consent in the present case plainly suggests that a refusal is reasonable”. Lastly, the landlord did not need to show that a refusal was right or justifiable, but merely that it was reasonable. In his opinion it clearly was.

Dissent
It is noteworthy that the county court, the Court of Appeal and two out of the five Supreme Court judges agreed with the tenant, including Arden L. She said: “I have no doubt that the lessor can seek to protect his own interests when exercising power to refuse consent in this way, but only when that is within the purposes for which the lease permits him to use the power to refuse consent. On my interpretation of the lease, the power to refuse consent to a planning application was not granted to enable the landlord to cut down the user clause.”

Referring to an earlier case, she said it is clear that Lord Denning MR had attached considerable weight to the fact that the parties had not known about the possibility of enfranchisement when they entered into the lease, and enfranchisement “was something of a windfall for the tenant”.

She took the view that the parties in this case cannot have intended that the landlord should be able to protect itself against the increased risk of enfranchisement, resulting from an increased use of the premises for residential purposes, by using the power to refuse consent to a planning application.

This particular case may have ended in the Supreme Court - but the ruling is unlikely to be the final say on the issue itself.

 

 

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