Supreme Court considers reasonableness of landlord's refusal of consent

20th November 2019

Following on from his ‘Back to basics’ article, Andrew Maclean highlights a recent Supreme Court decision on whether a landlord acted reasonably in refusing a tenant’s application for consent to apply for planning permission for change of use.

Why is this case of interest?

Where a tenant needs its landlord’s consent to deal with its property in some way – whether that be to assign or sub-let the premises, or to change its use, for example – matters can frequently become contentious as the parties’ interests in, and intentions for, the property can differ greatly.  Most modern commercial leases, and the Landlord and Tenant Acts 1927 and 1988, try to regulate any such situation by imposing an obligation on the landlord not to unreasonably withhold or delay consent.  However, what is reasonable will depend on the particular circumstances of any individual case.  Despite case law providing some guidance for landlords, tenants and agents, the question sometimes falls to the courts to decide.

The case of Sequent Nominees Ltd v Hautford Ltd [1] is of interest because the question of whether the landlord acted reasonably in refusing a tenant’s application for consent went all the way to the Supreme Court, and even the highest court in the land could not reach a unanimous decision.  The case therefore demonstrates how arguments in such cases can be finely balanced.

The case is also a cautionary reminder that the outcome of any litigation can be uncertain, and that pursuing a case to trial can ultimately prove costly – in terms of time and money – for both parties.  Wherever possible, therefore, it may make commercial sense for parties to negotiate a compromised solution.

Whilst the facts and lease provisions in the Hautford case are relatively unusual [2], the judgment provides a helpful summary of relevant principles and authorities which can help landlords, tenants and agents to assess reasonableness in this context.  It also emphasises the importance of considering any application for consent in an holistic manner, which takes into account the landlord and tenant relationship, the terms of the lease as a whole, and the wider factual and legal circumstances.

What practical advice arises?

Landlords, tenants and agents should note that covenants that are subject to the landlord’s consent will be automatically upgraded to a fully qualified covenant under section 19 (1) of the Landlord and Tenant Act 1927.  The Landlord and Tenant Act 1988 then applies to require that the landlord must act reasonably when giving or refusing consent. What is reasonable will differ depending on the legal and factual circumstances of any given case.  If in doubt, parties should seek specialist legal advice as to whether a landlord’s decision is reasonable.

Where, as in this case, properties have mixed residential and commercial uses and tenants seek consent to increase residential use, landlords should note the risk of enfranchisement [3] and should take that into account when assessing reasonableness. On the one hand, there are circumstances where the risk of enfranchisement is already so great and so obvious that it is not materially increased by the tenant doing that for which he seeks the landlord’s consent.  The landlord’s refusal might not, therefore, be reasonable. (Leases with long terms that allow for tenants to change the use of the property to solely residential, either by obtaining planning permission or through the construction of the user clause and the ‘permitted uses’, will fall into this category.) On the other hand, if the giving of consent would substantially increase the risk of enfranchisement, the refusal of consent may be reasonable because of the threat suddenly posed to the landlord’s reversionary interest and its value.

A landlord should therefore take care, both at the initial drafting stage of a lease and when the question of any dealing or of any application for consent arises in respect of any demise in the building or estate.  It should consider the extent to which it is exposed to the risk of enfranchisement. For example, how wide is the definition of the use of the property; to what extent can user be changed without landlord’s consent; what is the scope for a tenant to apply for planning permission?  It may be possible, in many circumstances, for landlords to avoid questions as to reasonableness of refusal arising by ensuring that leases are drafted as narrowly as possible in the first instance.

Parties should also note that a court’s determination as to whether a refusal is reasonable is measured as at the date consent was sought, and not by reference to what the parties contemplated at the date the lease was granted.  Landlords and tenants should therefore take care to effectively document the reason[s] for the refusal and communicate their intentions and reasons clearly at the time of the decision.  That information could constitute essential evidence in any subsequent litigation.

What happened in the case?

The tenant made an application for planning permission to change the use of the third and fourth floors of a mixed use property from retail to residential. The landlord refused consent on the basis that this would substantially increase the risk that the tenant could compulsorily acquire the freehold reversion.

The County Court and Court of Appeal ruled that consent had been refused unreasonably on the grounds that the landlord was trying to achieve a collateral purpose.  The lease permitted residential use and the landlord was attempting to obtain a collateral advantage by refusing consent to apply for the requisite planning permission. The Court of Appeal also noted that even if there was an increased risk of enfranchisement as a consequence of consent, a third party could easily make the planning application in any event.  The risk to the landlord would not, therefore, be sufficiently increased by the granting of consent.

However, by a 3-2 majority, the Supreme Court allowed the landlord’s appeal. Lord Briggs, who gave the main judgment, reasoned:

• the court should not approach ‘reasonableness’ doctrinally or rigidly
• the court should not limit the landlord’s ability to refuse consent “under the guise of construing the words”
• the right approach is to decide whether the landlord’s reason for refusal, at the time the decision was made, was sufficiently connected with the landlord and tenant relationship
• the real issue in this case was whether granting consent would result in a significant increase in the risk of enfranchisement with consequential damage to the reversion (and it would not).

_________________________________

[1] [2019] UKSC 47
[2] the lease permitted a wide range of uses, but also included an obligation on the tenant to obtain landlord’s consent to apply for planning permission for change of use to a permitted user
[3] that is, a tenant’s compulsory acquisition of the freehold under the Leasehold Reform Act 1967