Landlord and tenant –– Covenants –– User –– Whether covenant should be implied restricting use to specified use classes –– Assignment –– Assignee proposing use contrary to terms of lease –– Whether landlord entitled to withhold consent to assignment
By a development lease dated 28 April 1969, the appellant landlords granted a 114-year term of a large area of land for development. Following the contemplated development, the original tenant, with the landlords’ consent, assigned each plot to a number of separate occupiers, severing the premises demised by the lease. The respondent tenant held one such severed plot on the terms of the 1969 lease, save as to rent. The lease contained a lessee’s covenant to commence and complete the erection of a building development for uses within classes III, IV or X of the Town and Country Planning (Use Classes) Order 1963, and a covenant against assignment by the lessee of any part of the demised land without the previous written consent in writing of the landlords. The landlords had refused consent for an assignment of the plot to MMC Ltd on the ground that the assignee intended to use the plot for uses other than those falling within classes III, IV and X of the use classes order. At first instance, Mr David Donaldson QC (sitting as a deputy judge of the Chancery Division) held that: (i) the covenant relating to the erection of a building for certain specified uses imposed a secondary obligation on the tenant to use the building for such uses; and (ii) the landlords were entitled to withhold consent to an assignment for the reasons they had relied upon. The Court of Appeal allowed the tenant’s appeal only in respect of the second issue. The landlords appealed and the tenant cross-appealed.
Held: The appeal and cross-appeal were allowed.
(1) Per Lord Browne-Wilkinson, Lord Hoffmann and Lord Scott of Foscote, Lord Bingham of Cornhill and Lord Rodger of Earlsferry dissenting: On the proper construction of the lease, the tenant was not restrained from using the premises other than for uses within classes III, IV and X of the use classes order. (2) It cannot be said, as a matter of law, that the belief of a landlord, however reasonable, that the proposed assignee intends to use the premises for a purpose that would give rise to a breach of a user covenant cannot, of itself, be a reasonable ground for withholding consent to the assignment. The correct approach is to consider what the reasonable landlord would do when asked to consent in the particular circumstances: see Bickel v Duke of Westminster [1977] 1 EGLR 27. Although it would usually be reasonable for a landlord to withhold consent where an assignee proposed to use the premises in breach of the terms of the lease, there could be circumstances where the refusal of consent on this ground alone would be unreasonable. In so far as Killick v Second Covent Garden Property Co Ltd (1973) 227 EG 1849 laid down any rule of law, it should be overruled.
The following cases are referred to in this report.
Ashworth Frazer Ltd v Gloucester City Council (No 1) [1997] 1 EGLR 104; [1997] 26 EG 150, CA
Ashworth Frazer Ltd v Gloucester City Council (No 2) (1999) 80 P&CR 11; [2000] 1 EGLR 44; [2000] 12 EG 149, CA
Bates v Donaldson [1896] 2 QB 241, [1885-1889] All ER 170; (1886) 12 TLR 485, CA
Bickel v Duke of Westminster [1977] QB 517; [1976] 3 WLR 805; [1976] 3 All ER 801; (1976) 34 P&CR 22; [1977] 1 EGLR 27; 241 EG 387, CA
Granada TV Network Ltd v Great Universal Stores Ltd (1963) 187 EG 391
Houlder Brothers & Co Ltd v Gibbs; sub nom Gibbs and Houlder Brothers & Co Ltd’s Lease, Re [1925] Ch 575; [1925] All ER 128; (1925) 41 TLR 487, CA
International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] Ch 513; [1986] 2 WLR 581; [1986] 1 All ER 321; (1986) 51 P&CR 187; [1986] 1 EGLR 39; 277 EG 62, CA
Killick v Second Covent Garden Property Co Ltd [1973] 1 WLR 658; [1973] 2 All ER 337; (1973) 25 P&CR 332; 227 EG 1849, CA
LTSS Print & Supply Services Ltd v Hackney London Borough Council [1976] QB 663; [1976] 2 WLR 253; [1976] 1 All ER 311; (1975) 74 LGR 210; 31 P&CR 133; [1976] 2 EGLR 148; 240 EG 711, CA
Packaging Centre Ltd v Poland Street Estate Ltd (1961) 178 EG 189, CA
Pimms Ltd v Tallow Chandlers Co [1964] 2 QB 547; [1964] 2 WLR 1129; [1964] 2 All ER 145, CA
Tredegar (Viscount) v Harwood [1929] AC 72; [1928] All ER 11; (1928) 44 TLR 790, HL
West Layton Ltd v Ford; sub nom West Layton v Joseph [1979] QB 593; [1979] 3 WLR 14; [1979] 2 All ER 657; (1979) 38 P&CR 304; [1979] 1 EGLR 59; 250 EG 345, CA
This was an appeal by the landlords, Gloucester City Council, and a cross-appeal by the tenant, Ashworth Frazer Ltd, from a decision of the Court of Appeal allowing an appeal by the tenant against a decision of Mr David Donaldson QC (sitting as a deputy judge of the Chancery Division) dismissing the tenant’s claims for declarations in proceedings against the landlords.
Christopher Pymont QC and Andrew Westwood (instructed by Sharpe Pritchard, as agent for the solicitor to Gloucester City Council) appeared for the appellants; Kim Lewison QC and Edward Peters (instructed by Rowe & Maw) represented the respondent.
Giving his opinion, LORD BINGHAM OF CORNHILL said:
My lords,
1. There are before the House an appeal by Gloucester City Council (the landlords) and a cross-appeal by Ashworth Frazer Ltd (the tenant). On the issues arising in both the appeal and the cross-appeal, I am in complete agreement with the opinion of my noble and learned friend Lord Rodger of Earlsferry, whose account of the facts and background I gratefully adopt.
Landlords’ appeal
2. The combined effect of clause 2(viii) of the lease and section 1 of the Landlord and Tenant Act 1988 is, in my opinion, clear. The tenant
3. When a difference is to be resolved between landlord and tenant following the imposition of a condition (an event which need not be separately considered) or a withholding of consent, effect must be given to three overriding principles. The first, as expressed by Balcombe LJ in International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] Ch 513* at p520A is that:
a landlord is not entitled to refuse his consent to an assignment on grounds which have nothing whatever to do with the relationship of landlord and tenant in regard to the subject matter of the lease…
* Editor’s note: Also reported at [1986] 1 EGLR 39
The same principle was earlier expressed by Sargant LJ in Houlder Brothers & Co Ltd v Gibbs [1925] Ch 575 at p587:
in a case of this kind the reason must be something affecting the subject matter of the contract which forms the relationship between the landlord and the tenant, and… it must not be something wholly extraneous and completely dissociated from the subject matter of the contract.
While difficult borderline questions are bound to arise, the principle to be applied is clear.
4. Second, in any case where the requirements of the first principle are met, the question of whether the landlords’ conduct was reasonable or unreasonable will be one of fact to be decided by the tribunal of fact. There are many reported cases. In some, the landlord’s withholding of consent has been held to be reasonable (as, for example, in Pimms Ltd v Tallow Chandlers Co [1964] 2 QB 547 and Bickel v Duke of Westminster [1977] QB 517*), in others, unreasonable (as, for example, in Bates v Donaldson [1896] 2 QB 241, Houlder Brothers and International Drilling). These cases are of illustrative value, but, in each, the decision rested on the facts of the particular case, and care must be taken not to elevate a decision made on the facts of a particular case into a principle of law. The correct approach was very clearly laid down by Lord Denning MR at p524 of Bickel
* Editor’s note: Also reported at [1977] 1 EGLR 27
5. Third, the landlord’s obligation is to show that his conduct was reasonable, not that it was right or justifiable. As Danckwerts LJ held in Pimms at p564:
it is not necessary for the landlords to prove that the conclusions which led them to refuse consent were justified, if they were conclusions which might be reached by a reasonable man in the circumstances…
Subject always to the first principle outlined above, I would respectfully endorse the observation of Viscount Dunedin in Viscount Tredegar v Harwood [1929] AC 72 at p78 that one “should read reasonableness in the general sense”. There are few expressions more routinely used by British lawyers than “reasonable”, and the expression should be given a broad, common-sense meaning in this context, as in others.
6. The Court of Appeal held itself to be precluded by Killick v Second Covent Garden Property Co Ltd [1973] 1 WLR 658* from holding, on the facts of this case, that the belief of the landlord, however reasonable, that the proposed assignee intended to use the demised premises for a purpose that would give rise to a breach of the user covenant was, of itself, a ground for withholding consent to assignment: see (1999) 80 P&CR 11† at p23, per Chadwick LJ. Lord Rodger has fully analysed that decision. I would myself criticise it on three grounds. First, it purported to treat as a question of law what was, in truth, a question of fact. Second, in holding that the landlord’s withholding of consent was unreasonable because the outcome that he wished to avoid was not a necessary consequence of the assignment (which was, it seems clear, based upon the landlord’s contention: see pp660- 661), the court accepted much too high a test. A reasonable landlord may seek to avoid not only an undesirable outcome that must occur but also one that he reasonably fears may well occur, not least where that involves the prospect of unwelcome litigation. Third, the decision, as expressed, gave quite inadequate weight to the user covenant in a lease. The lease is, after all, the contract between landlord and tenant, a contract with special characteristics and subject to special rules, but a contract all the same. It records what the parties respectively agree to do and not do. Unless a term is discharged, or consensually varied or revoked, a party is ordinarily bound by what he has agreed, even if (with the benefit of hindsight) he regrets his bargain. The contract is, as civil lawyers put it, the law between the parties, and it would rarely be right to hold that a landlord was unreasonable in withholding consent to an assignment that, in his reasonable judgment, would or might well lead to a breach of covenant. Killick should no longer be treated as authoritative.
* Editor’s note: Also reported at (1973) 227 EG 1849
† Editor’s note: Also reported at [2000] 1 EGLR 44
7. The reasoning of the deputy judge was, in my view, correct on this issue. The Court of Appeal’s decision was vitiated by its reliance upon Killick. I would restore the decision of the judge.
Tenant’s cross-appeal
8. The tenant’s cross-appeal turns on a short question of construction: are the words “for uses within Use Classes III IV or X of the Town and Country (Use Classes) Order 1963” in clause 2(iii)(a) of the lease to be understood as restricting the uses to which the building development described by the clause might be put? On this question I have the misfortune to disagree with the majority of the House, but the consolation of agreeing with the deputy judge, both members of the Court of Appeal and my noble and learned friend Lord Rodger.
9. By clause 2(iii)(a), the tenant covenants to commence and complete a building development. Such building development must, among other things, be “in conformity with all licences permissions and consents required by bye-laws regulations planning provisions orders and statutes and in conformity with detailed plans elevations sections and specifications as shall previously be approved by the City Architect”. Since the landlords are the local planning authority, they thus have full control over the physical design, size, appearance, layout and location of the development. The use classes in the 1963 order do not describe buildings. They describe uses. There can have been no conceivable purpose in making reference to those use classes other than for the purpose of restricting the permitted user to those classes, expressed as they are in terms that will be as readily intelligible at the end of the lease as at the beginning. It is idle to speculate what use might be made of buildings other than those comprised in the development to which clause 2(iii)(a) applies in the absence of evidence to suggest that the site will accommodate any significant buildings once the building development described in clause 2(iii)(a) has been completed. The inclusion and terms of clause 2(vi) have been fully explained by the landlords’ earlier grant of leases to tenants carrying on the miscellaneous activities there specified and their desire to protect those tenants against competition. Clause 2(xiii) does not, in my opinion, throw light on the construction of clause 2(iii)(a). If the reference to the use classes in clause 2(iii)(a) does not apply to the user of the building development, it is entirely otiose.
10. I would, for my part, dismiss the tenant’s cross-appeal.
Giving his opinion, LORD BROWN-WILKINSON said:
My lords,
11. For the reasons given in the speeches to be delivered by my noble and learned friends, Lord Hoffmann and Lord Scott of Foscote, I agree that the cross-appeal should be allowed.
12. As to the appeal, I agree with the speeches of all your lordships that if, contrary to my view, clause 2(iii)(a) of the lease contains a restriction on user, the city council would not necessarily have acted unreasonably in refusing their consent to a proposed assignment on the grounds that the assignee proposed to commit a breach of such restriction.
Giving his opinion, LORD HOFFMANN said:
My lords,
13. There are two issues in this appeal. The first is whether the use of the premises for metal recycling would be a breach of covenant. The second question is whether a refusal of consent on that ground would be unreasonable.
14. Since the first question turns entirely upon the construction of the language of the lease and raises no question of general public importance, I can be brief in my reasons. I gratefully adopt the recital of the facts and relevant provisions of the lease set out in the speech of my noble and learned friend Lord Rodger of Earlsferry.
15. The provision relied upon as prohibiting the intended use is a phrase in clause 2(iii)(a):
The Lessee hereby covenants with the Corporation… to complete… the erection on the demised land [of]… a building development for uses within Use Classes III IV or X of the Town and Country (Use Classes) Order 1963 together with all necessary roads [etc]… (hereinafter called “the works”… )
16. The landlords contend that the words “a building development for uses within Use Classes III IV or X” mean not, or not only, that the building must be suitable for such uses, but that during the term of the lease it may be used only for such uses. But I find it impossible to construe clause 2(iii)(a) as having any application to the use that may be made of the premises. The purpose of the whole of clause 2(iii) is to describe what the tenant has positively covenanted to do. Subparagraph (a) describes the buildings he is to erect, (b) the road and cattle grid he is to build, (c) the materials he is to use, (d) the use to be made of the earth, clay, gravel and sand displaced by the construction, (e) the disposal of antiquities he may find, and (f) the fences to be built and maintained. The subject matter of the whole clause is altogether different from restrictions on the use of the premises. They are contained in clauses 2(v)(vi) and (xi).
17. The argument that a restriction on user has been embedded in the description of the premises to be constructed is based upon the argument that the lease is badly drafted. But that seems to me to beg the question. It is only badly drafted if one assumes that clause 2(iii)(a) was intended to restrict the use of the premises. To slip a rather ambiguous user clause into the middle of a description of the buildings would indeed be poor drafting. On the other hand, if one assumes that the parties intended, in orthodox fashion, to describe the buildings to be erected in one clause and the restrictions on the use of the premises in another, there is nothing particularly bad about the drafting. Clause 2(iii)(a) may be somewhat prolix, or even contain redundant material, but few leases could escape that reproach.
18. The argument from redundancy is that since clause 2(iii)(a) provides that the plans for the buildings must have been approved by the city architect, there was no reason why it should go on to stipulate that they should be suitable for any particular use. The city architect would, in any case, have had full control over the kind of buildings that could be erected.
19. Even if this were true, I would be more inclined to accept some degree of redundancy rather than assume that the draftsman had muddled up the question of what the tenant had to build within five years (which was part of the consideration for the lease) with the question of what use could be made of the premises during its 114-year term. But I am far from satisfied that it is true. We have very little evidence of the factual background against which the lease was executed. The parties may already have had some mutual understanding about the buildings to be erected, but we have no idea of how far this had gone. The city architect could not unreasonably withhold approval of the plans. Perhaps the reference to the use classes was intended to pre-empt argument over whether it would be reasonable to object to buildings that were not suitable for those uses. These matters are entirely speculative. So I do not think that the argument from redundancy has enough weight to displace an interpretation based upon the conventional structure of the clauses.
20. There are other factors that point against 2(iii)(a) containing a user clause. First, it is common ground that it would apply only to the buildings erected pursuant to the covenant. But those buildings did not cover the entire 14.5 acre site. There was room for new ones and no covenant against new buildings. What would be the commercial purpose of prohibiting a use of the old buildings when a new one erected on vacant land could be used for that purpose? Second, it seems odd to define permissible user in a 114-year lease by reference to use classes in a 1963 statutory instrument. Such a description of the buildings makes perfectly good sense in a covenant that was intended to be spent within five years. But was it contemplated that the parties in 2080 would have to research mid-twentieth century planning law to discover the permissible user? (Although it is fair to say that this might be necessary if the premises had to be reinstated after a fire under clause 2(xiii).) Third, the covenant is absolute. The landlords are under no obligation to consent to a change, whether this would be reasonable or not. The tenant’s only escape is through the very limited jurisdiction of the court to vary such covenants under section 84 of the Law of Property Act 1925. Would the parties have been likely to intend such restrictions to endure for over a century? Fourth, the landlords were the planning authority. In that capacity, they could prevent any use that was undesirable on planning grounds. This control was supplemented by clause 2(vi), which contained prohibitions to protect existing tenants against competition, which could probably not have been justified on planning grounds. In combination, planning control and clause 2(vi) constitute a rational system for controlling the use of the premises.
21. For these reasons, I would allow the tenant’s cross-appeal. I also agree that the appeal should be allowed for the reasons given in the opinions of my noble learned friends Lord Bingham of Cornhill and Lord Rodger of Earlsferry.
Giving his opinion, LORD SCOTT OF FOSCOTE said:
My lords,
22. I have had the advantage of reading in draft the opinion of my noble and learned friend Lord Rodger of Earlsferry, and gratefully adopt his recital of the relevant facts. As is made plain in his opinion, there are two issues that arise on this appeal. One is a short issue of construction of one of the lessee’s covenants in the lease dated 28 April 1969, under which Gloucester City Council demised a site consisting of 14.5 acres of industrial development land to a developer for a term of 114 years from 25 December 1968. Clause 2(iii)(a) of the lease is expressed as a positive covenant requiring the lessee within five years to commence and complete the development of the site by erecting industrial buildings in conformity with plans to be approved by the city architect. The subclause describes the required development as “a building development for uses within Use Classes III IV or X of the Town and Country (Use Classes) Order 1963…”. Class III in the 1963 Order was “use as a light industrial building…”, Class IV was “use as a general industrial building” and Class X was “use as a wholesale warehouse or repository”. The issue of construction is whether clause 2(iii)(a), although in form a positive covenant requiring the lessee to construct a particular type of building development, contains also, by implication, a negative covenant by the lessee not to use the buildings for any use other than a use falling within one or other of the three specified use classes. At first instance, the deputy judge, Mr Donaldson QC, and, on appeal, the Court of Appeal, decided that clause 2(iii)(a) did impose this negative user covenant. Had that been the only issue in the case, I am sure that leave to appeal to this House would not have been granted. But the second issue raises an important point of general principle.
23. In Killick v Second Covent Garden Property Co Ltd [1973] 1 WLR 658, the Court of Appeal agreed that “a landlord may reasonably refuse
24. In the Court of Appeal in the present case, Chadwick LJ said in (1999) 80 P&CR 11 at p23:
In my view the decision in the Killick case precludes this court from holding that the belief of the landlord, however reasonable, that the proposed assignee intends to use the demised premises for a purpose which would give rise to a breach of a user covenant is, of itself, a ground for withholding consent to assignment…
25. The second issue, therefore, is whether, if that is indeed what Killick decided, Killick was rightly decided, and, if it was not, whether the council had unreasonably refused their consent to the proposed assignment by Ashworth Frazer Ltd to Mountstar Metal Corporation Ltd. It was this issue that led to leave to appeal to this House being granted.
Second issue
26. On this issue, I am in respectful and complete agreement with what Lord Rodger has said in paras 29 to 43 of his opinion. I concur in his conclusions, expressed in para 41, and in his reasons for reaching them. I agree also with the reasons given by my noble and learned friend Lord Bingham of Cornhill for reaching the same conclusions. Those conclusions would lead to this appeal being allowed if, but not unless, the first issue, the issue of construction, had been correctly decided in the council’s favour. To that issue I now turn.
Construction issue
27. The issue is a short one. It does not involve any point of principle and is not assisted by reference to any authorities. The lease was a building development lease for a term of 114 years. It was a lease that, over the first five years, was going to involve the lessee in the expenditure of a considerable capital sum in carrying out the proposed development. The rent for the first seven years of the term was nil, a peppercorn; for the period from 1970 to 1989 the yearly rent was £9,425, and thereafter it was to be either the £9,425 or 8% of the rack-rents receivable by the lessee from the developed site, whichever were higher. The relevance of these rental provisions is that they demonstrate that both parties had a commercial interest in the lessee being able to develop the site and sublet, or assign, the developed plots to the best financial advantage. User restrictions would naturally be important, in that they would restrict the types of business that could be carried on on the various plots forming part of the development.
28. It is obvious, and hardly worth saying, that the ability of the lessee to exploit the developed site, or of any sublessee or assignee to exploit any of the individual plots, to its best commercial advantage would depend not only upon the user covenants in the lease but also upon the user permitted under the applicable planning law. It is very usual to find in a lease a tenant’s covenant not to use the property in a manner in breach of planning law. In a development lease granted by a private lessor, it would be very surprising not to find such a covenant. In this lease, however, there is no such covenant. But this is not surprising. The council, the lessors, were the planning authority. They were able, wearing their planning authority hat, to exercise control over the uses to which the various plots on the site could be put. In clause 2(vi), the lease imposed specific user restraints on the lessee. These restraints had nothing to do with planning law but were imposed in order, it seems fairly clear, to protect from competition existing businesses located in the vicinity of the 14.5 acres. In my opinion, a development lessee, taking a 114-year lease in the form of the lease with which your lordships are concerned, would be entitled to suppose that, provided the user restrictions in clause 2(vi) were observed, the industrial buildings he erected could be used for any use from time to time permitted under the planning law.
29. It is argued that unless the reference in clause 2(iii)(a) is construed so as to impose a negative user covenant, additional to that in clause 2(vi) and restricting the permitted user to user within Use Classes III IV or X, no sensible purpose could be attributed to the reference in the subclause to those use classes. I am in respectful disagreement both with the premise to this argument and with the conclusion. The use classes describe the type of building development that the lessee is to commence and complete within the five years. The requirement that the city architect’s approval to the lessee’s building plans is not to be unreasonably withheld is thereby given a degree of definition that would otherwise be lacking. His refusal to approve plans that did not relate to a development consistent with those uses could not be challenged on unreasonableness grounds. If the references to the three use classes had not been included, the lessee might have proposed a more profitable development involving uses outside the three use classes, and then sought to categorise as unreasonable the city architect’s refusal to approve the plans. So there is, in my opinion, no cogency in the premise that there was no sensible commercial purpose in the reference to the three use classes other than the imposition of an unexpressed negative user covenant. But even if, contrary to my view, the premise had been sound, the conclusion that a negative user covenant should be implied does not, in my opinion, follow. The implied negative covenant is not necessary to give business efficacy to the subclause. If the subclause is accorded its literal meaning and read simply as a positive covenant to build, it lacks nothing in efficacy. Nor is the proposed implied term one that can be justified by the “Oh, of course the parties must have intended it” test. I would, for my part, find it easier to give an “Oh, of course” answer if asked whether the parties intended the user restrictions to be confined to those found in subclause (vi).
30. In my opinion, however, the strongest argument against the proposed implied term is that to imply into the lease an unexpressed user covenant would be thoroughly unfair to Ashworth Frazer Ltd, the assignee of a part of the developed site, who can reasonably have supposed that the subclauses in clause 2 meant what they said, that the building obligations in subclause (iii) were spent (unless rebuilding after a fire became necessary), and that the user restrictions were to be found in subclause (vi). If the council wanted additional contractual user restrictions to bolster the planning control that they could anyway exercise, they should, in my opinion, have included the restrictions in their lease. They did not do so expressly, and, in my opinion, cannot cure their failure by contending for an implied user restriction.
31. In my opinion, for the reasons I have given, the user proposed by Mountstar would not have been in breach of any covenant contained in the lease. Nor would it have been in breach of the planning law. Whether in the circumstances the council’s refusal of leave to assign was unreasonable, or whether the council can excuse their refusal on the ground that they were proceeding on a genuine and reasonable, although mistaken, view as to the effect of clause 2(iii)(a) is an issue of fact that has yet to be decided.
32. I would allow the council’s appeal on the Killick point, allow Ashworth Frazer Ltd’s cross-appeal on the construction point and set aside the declarations made by the first instance judge and by the Court of Appeal. I would make a declaration that clause 2(iii)(a) of the lease does not constitute a covenant by the lessee not to use the premises for any use other than those set out in Classes III, IV and X of the 1963 Order, and remit to the Chancery Division the question of whether, in all the circumstances, the council’s refusal to consent to the assignment to Mountstar was unreasonable, and, if so, what if any consequences as to damages should follow.
Giving his opinion, LORD ROGER OF EARLSFERRY said:
My lords,
Facts
33. By a lease dated 28 April 1969, the Mayor, Aldermen and Citizens of the City of Gloucester, the predecessors of the appellants, Gloucester City Council (the council), demised to Mackenzie Hill Ltd 14.5 acres of land at the Cattle Market, St Oswald’s Road, Gloucester. The lease was
34. By clause 2(viii) the lessee covenants with the council:
not to assign the demised land or any part thereof (other than to a subsidiary of the Lessee) to any person without the previous consent in writing of the Corporation such consent not to be unreasonably withheld in the case of a respectable and responsible assignee being proposed…
35. At some time before November 1996, Mountstar Metal Corporation Ltd (Mountstar), which was not, of course, tenant under the lease, applied to the council, as planning authority, for planning permission to use the premises, described as “the former Kentron Plastics site”, for metal recycling. The council refused that application in November 1996, but on 26 February 1997 Mountstar submitted an amended application, and on 13 May 1997 the council granted planning permission for the “use of land and building for metal recycling and erection of boundary fencing and storage bay enclosures”. To judge from the correspondence between Mountstar’s agents and the planning department, while the two applications were being considered, the council’s planning officials, at least, must have been given a considerable amount of information about Mountstar’s proposed operations on the premises.
36. Two months later, on 16 July 1997, solicitors acting on behalf of the respondent, as lessee, wrote to the council saying:
Our client wishes to assign the Lease to Mountstar Metal Corporation Limited and accordingly we are applying to you for consent to the assignment.
Counsel referred to only one other letter dealing with the matter at this time. It is from Mr David Hook, the council’s senior surveyor and valuer, to the solicitors and is dated 16 September 1997. Mr Hook refers to a previous letter, dated 12 September, and continues:
The City Secretary and Solicitor having regard to the User Clause in the Lease is of the opinion that Mountstar Metal’s proposed use for the site is contrary to the existing User Clause and therefore he is not prepared to exercise delegated authority to approve an assignment which would be in breach of the User Clause.
Gloucester City Council as landlords will not therefore be approving your request.
In the present proceedings against the council, the respondent seeks a declaration that the council are not entitled to refuse their consent to the assignment, a second declaration that the respondent is entitled to assign the lease to Mountstar without the further consent of the council, and damages. It is agreed that Mountstar is a respectable and responsible company.
Issues
37. Before this House and the Court of Appeal, there were two main issues in dispute between the parties. As Mr Hook made clear in his letter, the council refused to approve the respondent’s application for consent to assign the lease of the premises to Mountstar because they considered that Mountstar’s proposed use was “contrary to the existing User Clause”. It is common ground that Mr Hook was referring to subclause 2(iii)(a):
The Lessee hereby covenants with the Corporation as follows:––
(iii)(a) to commence within a period of One year from the date hereof and within the period of five years from the date hereof to complete the erection on the demised land fit for immediate occupation and use in a substantial and workmanlike manner with good quality materials and in conformity with all licences permissions and consents required by bye-laws regulations planning provisions orders and statutes and in conformity with detailed plans elevations sections and specifications as shall previously be approved by the City Architect (such approval not to be unreasonably withheld and be given within one month of the submission of the said plans and specifications) a building development for uses within Use Classes III IV or X of the Town and Country (Use Classes) Order 1963 together with all necessary roads amenity areas cattle grids fences drains and sewers (hereinafter called “the works” which expression shall also be deemed to mean any work which may from time to time be necessary for the replacement maintenance alterations or repair of such buildings erections or constructions)…
The council contend that this covenant includes a negative covenant that the buildings erected in terms of this obligation will not be used for uses falling outside Use Classes III, IV or X of the Town and Country Planning (Use Classes) Order 1963. For its part, the respondent submits that the subclause simply imposes an obligation to erect buildings of a certain kind and contains no negative covenant restricting their use. The only restrictions on use, it contends, are to be found in clause 2(v) and (vi). On the basis of their own preferred interpretation of subclause 2(iii)(a), however, the council refused consent to the respondent’s application to assign the lease to Mountstar because they considered that Mountstar’s proposed use of the premises for recycling scrap metal was not one of the uses permitted under subclause 2(iii)(a) and so would be in breach of the covenant in that subclause. The respondent contends that, in terms of clause 2(viii), it was unreasonable of the council to withhold consent on this ground alone.
38. Mr David Donaldson QC, sitting as a deputy judge, found in favour of the council on the interpretation of the covenant in subclause 2(iii)(a). He also made a declaration that, even if the user proposed by Mountstar would constitute a breach of the lease, that does not of itself render unreasonable the council’s objection to the proposed assignment to Mountstar. The respondent appealed and the decision of the Court of Appeal is reported as Ashworth Frazer Ltd v Gloucester City Council (No 2) (1999) 80 P&CR 11. The Court of Appeal (Waller and Chadwick LJJ) agreed with the deputy judge on the interpretation point, and therefore left undisturbed his first declaration that the only uses permitted by the lease are those set out in the relevant Use Classes and subject to the user restrictions in clause 2(vi). As Chadwick LJ noted at pp24-25, the particular point upon which the deputy judge had focused in the second of his declarations was not argued before the Court of Appeal, where the contention for the respondent was simply that, if the only objection to the use proposed by Mountstar is that it would, or might, be a breach of the lease, it is unreasonable for the council to refuse consent to an assignment to Mountstar on that ground alone. In those circumstances, since it had not been challenged, the Court of Appeal was content to leave the deputy judge’s second declaration standing. But on the consent point, as argued before it, the Court of Appeal held in favour of the respondent. It therefore allowed the appeal and added a third declaration to the effect that if the only objection to the use proposed by the prospective assignee is that it would, or might, be a breach of the lease, it is unreasonable for the landlord to refuse consent to an assignment on that ground alone. The council have appealed against the order of the Court of Appeal in respect of this third declaration, while the respondent has cross-appealed in respect of the deputy judge’s first declaration, which the Court of Appeal left undisturbed. The point in the second of the deputy judge’s declarations was not reopened before this House.
39. The council accept that, if the respondent succeeds in its cross-appeal, the council will have to give consent to the assignment, since the only ground upon which they refused consent was that the proposed use would be in breach of subclause 2(iii)(a). On the other hand, Mr Christopher Pymont QC emphasised that this concession did not imply any further concession that, in refusing consent on the basis of their interpretation of the subclause, the council had acted
40. I turn to the point of interpretation raised in the cross-appeal since, logically, it arises first.
Interpretation of subclause 2(iii)(a)
41. No one could pretend that the lease is well drafted. It comes as no surprise to find that the rent review clause was indeed the subject of earlier proceedings between the same parties in the Court of Appeal, and that the judges were divided as to the proper interpretation: Ashworth Frazer Ltd v Gloucester City Council (No 1) (1997) 26 EG 150*. History repeats itself, for it is my misfortune to find that I indeed differ from the majority of your lordships as to the interpretation of the terms now in question. Because of the drafting, there is a risk that, whatever interpretation is adopted of a particular provision, there may be unsatisfactory aspects when the terms of the lease as a whole are considered. I therefore prefer to begin by concentrating upon the terms of subclause 2(iii)(a) before considering how the subclause fits into the overall scheme of the lease.
* Editor’s note: Also reported at [1997] 1 EGLR 104
42. Subclause 2(iii)(a) embodies what is perhaps the principal obligation of the lessee, to complete within five years “the erection on the demised land fit for immediate occupation and use… a building development for uses within Use Classes III IV or X… together with all necessary roads amenity areas cattle grids fences drains and sewers…”. If stripped down in this way, the covenant is remarkably vague, since it does not spell out the scale of the building development. It does not specify, for instance, how many buildings are to be constructed or how they are to be laid out on the demised land. But, of course –– even though there is no evidence on the point –– it can safely be said that the developers could hardly have entered into the lease unless these matters had been explored with the council so that the developers knew what their financial and other obligations under the lease would be. The subclause contains provisions that would, in practice, have resulted in these matters being clarified. First, it envisages that the development will be “in conformity with all licences permissions and consents required by bye-laws regulations planning provisions orders and statutes”. In other words, it must comply with all the public law requirements that apply to it. Since the council were also the local planning authority, they would be responsible, with that hat, for considering any planning applications relating to the development. And, obviously, the finalised detailed planning consent would deal with various aspects not only of the siting of the buildings making up the development but also of the design, including the height and appearance, of those buildings. The subclause next envisages that the development will be built to detailed plans approved by the city architect. And again, that provision would mean that, through their architect, the council would have control over the design, including the detailed design, of the buildings to be erected. Taken together, these provisions would, in my view, constitute a more than sufficient mechanism for specifying the form of the building development that was to be erected.
43. The contention for the respondent is, however, that when the parties agreed that the development was to be fit for immediate occupation and use “for uses within Use Classes III IV or X of the Town and Country (Use Classes) Order 1963” they were simply concerned to give some (further) indication of the type of building to be erected, rather than to specify the uses to which the buildings were to be put after completion. In other words, the parties were doing no more than agreeing that the buildings comprising the development were to be of a form that would be suitable for the uses permitted under those use classes. So, once the buildings were up, any lessee or sublessee could immediately proceed to use them for any purpose whatever, provided only that they could obtain the necessary planning and other consents.
44. Confining myself, for the moment, to the terms of subclause (iii)(a), in agreement with the deputy judge and the Court of Appeal, I find the respondent’s construction unpersuasive. The covenant is concerned with the development as a whole: the lessee’s obligation is to complete a building development that will be fit for immediate occupation and use for the uses in the relevant use classes. Given the provisions that the covenant already contains about planning permission and the city architect’s consent, it is hard to see why the parties should have considered it necessary to insert yet another provision dealing with the design of the buildings. But, even supposing that they had wished to do so, a requirement that the development was to be fit “for uses” in these use classes would add nothing, so far as design was concerned, to the immediately preceding provisions in the same subclause. At best, therefore, it would be superfluous. This is only to be expected because, under the planning system, use classes are concerned with the use, not with the form, of buildings. Their whole purpose is indeed to describe a range within which the use of premises can be changed without the need to make a fresh application for planning permission. The descriptions are couched accordingly. In the 1963 Order Class III was “use as a light industrial building for any purpose”, Class IV “use as a general industrial building for any purpose” and Class X “use as a wholesale warehouse or repository for any purpose”. Under the lease, these broad descriptions would indicate satisfactorily the uses to which the buildings in the development were to be put. But, in themselves, they would tell the parties nothing about the form of the buildings to be erected, and certainly nothing that would add to what would be specified by the council planning officials and the city architect. The respondent’s construction therefore robs the words in question of all real practical effect. For that very reason I regard it as unsatisfactory.
45. Looking at the covenant in subclause 2(iii)(a) in isolation, therefore, I prefer what I regard as, in any event, the more natural construction of the wording. On that approach, the words “fit for immediate occupation and use… for uses within Use Classes III IV or X” are intended to set out the uses to which the building development –– which is ex hypothesi designed to meet the council’s planning requirements and based upon plans approved by the city architect –– is to be put. The buildings can be used for light industry or general industry or as warehouses or repositories, and, therefore, for no other purpose. While Mr Pymont did not argue that the words in subclause (iii)(a) imposed a positive covenant on the lessee to occupy the buildings for the specified uses, he did submit that the covenant against other uses was an express covenant. In my view, however, any covenant against other uses must be derived by implication from the positive specification of the uses for which the development is to be fit.
46. So far, I have proceeded simply on the basis of the words in subclause 2(iii)(a). But the subclause has, of course, to be considered within the wider context of the lease as a whole. As Mr Lewison QC emphasised, subclause (iii)(a) is found in that part of clause 2 that is concerned with the lessee’s obligations in relation to the erection of the building development “together with all necessary roads amenity areas cattle grids fences drains and sewers” –– taken together, they are called “the works”. The remaining subclauses of clause 2(iii) all deal with matters, of a somewhat physical nature, that may arise while the works are being carried out within the five-year period allowed for their completion. The only exception is the obligation in subclause (f) “as soon as practicable to erect construct and thereafter maintain on the boundaries of the demised land good and sufficient stock proof fences in all respects to the reasonable satisfaction of the city architect”, where the obligation to “maintain” the fences would continue beyond the five-year period. Even allowing for that limited exception, clause 2(iii) as a whole is concerned with the lessee’s obligations to carry out the development within the five-year period.
47. If the developers completed the development within five years by constructing the various buildings as specified in the planning and other consents, and in the plans approved by the city architect, then they would have complied with the covenant in subclause 2(iii)(a). It is apparent, however, that the parties recognised that buildings other than those to be built under subclause 2(iii)(a) might be erected on the demised land. This emerges, for instance, from clause 2(ix), with its obligation to repair and keep in good tenantable repair “the demised land and every part thereof and all additions thereto and all other
as often as all or any buildings erection or structure of any part of the same now or hereafter erected on the demised land shall be destroyed or damaged by fire forthwith to rebuild and reinstate the same under the surveillance and to the reasonable satisfaction of the City Architect and in all respects in accordance with the provisions of Clause 2(iii) of this Lease as if those requirements had mutatis mutandis been herein repeated in full…
(Emphasis added.)
48. Although it is impossible on the evidence to tell what scope there would actually have been for further building, the fact that the parties specifically envisage that the lessee may erect other buildings at some future date has two related consequences for the construction of the lease. First, since those other buildings will not be erected in terms of the lessee’s obligation under subclause 2(iii)(a), the provisions of that subclause will not apply to them. As Mr Pymont accepted, this means that even on his construction, the lessee may erect buildings on the demised land that will not be subject to any user restriction contained in subclause (iii)(a). Second, and conversely, the covenants of general application in the other subclauses of clause 2 will apply not only to the buildings erected under subclause 2(iii)(a), but to any other building that the lessee may put up on the demised land. Indeed, clause 2(v), for instance, has an even wider effect, since the lessee’s obligation not to create or permit a nuisance must apply to things done anywhere on the demised land and not simply to operations carried out in any buildings erected on it.
49. Among the covenants that apply to all buildings, whether forming part of the original development or built later, is clause 2(xiii), which deals with the situation where a building is burned down or damaged by fire. It is to be rebuilt and reinstated under the surveillance of the city architect and “in all respects in accordance with the provisions of clause 2(iii) of this Lease as if those requirements had mutatis mutandis been herein repeated in full”. While it is difficult to work out precisely what the parties intended should happen in some situations, it seems clear that, in the case of a building that had been constructed as part of the original development, it would have to be rebuilt so as to be fit for immediate occupation and use for uses within the use classes specified in subclause (iii)(a). Like the Court of Appeal, I find it hard to see why that obligation should have been imposed on the lessee if, before the fire, the building could have been used for any purpose whatever. While I would not attach great weight to it, that consideration tends to confirm the interpretation of subclause (iii)(a) that I prefer.
50. Mr Lewison argued, however, that this interpretation was incompatible with the overall structure of the lease. His first and more general submission was that you would not expect to find a continuing restriction upon the use of the premises in subclause 2(iii)(a), which deals with the lessee’s obligation to build and complete the development within five years. As a general observation that may well be true. But, in any given case, the content of the obligations to be found in any part of a lease depends upon what the draftsman has provided. In this case, it depends upon the wording of subclause 2(iii)(a). For the reasons that I have given, I consider that, despite its position, the wording of that provision is apt to impose a continuing restriction upon the use of the premises.
51. Mr Lewison went on to reinforce his general submission by pointing out that the lease does in fact contain express provisions that impose restrictions upon the use of the premises. These are to be found in clause 2(v) and (vi):
(v) not to do or permit to be done any act or thing which in the reasonable opinion of the Corporation may be or become a nuisance or annoyance or cause damage or inconvenience to the Corporation or any lessees tenants or occupiers of any adjoining or neighbouring land or premises
(vi) not to use the demised land for the purposes of a garage and filling station café restaurant public house abattoir the storage of meat except as a small part of a cash and carry or wholesale grocers or the sale of fuel oils lubricants or inflammable liquids provided that nothing in this clause shall prohibit the storage of fuel oils lubricants or inflammable liquids in properly constructed containers for the lessee [‘] or its sublessee’s own use…
He argued that these provisions constituted the only restrictions upon the permissible use of the premises and that, where the parties had dealt with the matter expressly, a court should be slow to read an implied use restriction into subclause 2(iii)(a), especially when the lease made perfectly good business sense without it. In particular, it seemed unlikely that, when drawing up a lease to run for 114 years, the parties would have wanted to limit the possible use of the premises by reference to use classes that might have been appropriate in planning terms in 1969, but that, as the city developed and commerce changed, would almost inevitably become outmoded long before the lease expired.
52. The argument –– that the parties would have been unlikely to include a negative user covenant in subclause (iii)(a), when they had inserted specific provisions restricting use in clause 2(vi) –– would obviously be extremely powerful if the only buildings to which clause 2(vi) could apply were buildings erected under subclause (iii)(a). The argument appears to me to lose all, or much, of its force, however, once it is realised that the restrictions in clause 2(vi) apply more widely. There is nothing particularly surprising in the idea that the parties may have agreed a special restriction upon the use of the buildings comprising the original development. The purpose may have been, for instance, to encourage the growth of industry as the core of the development. However that may be, a special restriction of this kind is quite consistent with the imposition of other restrictions that will apply to all the buildings erected on the demised land – whether comprising the original development or not. In these circumstances, I do not regard the existence of the non-user provisions in clause 2(vi) as a reason, in itself, to conclude that no restriction upon the use of premises would be found in subclause 2(iii)(a).
53. I therefore find nothing in the mere existence of the use restriction in clause 2(vi) that would affect my interpretation of subclause 2(iii)(a).
54. The respondent goes further, however. It draws attention not merely to the existence of clause 2(vi) but to the express provisions that it contains. It spells out what appears to be a ragbag of uses to which the demised land is not to be put. These include use as a café, restaurant or public house, and use for the storage of meat “except as a small part of a cash and carry or wholesale grocers”. The argument is that use as a café or restaurant, for instance, would, in any event, fall outside the scope of Use Classes III, IV or X and so there would have been no need to exclude those uses specifically in clause 2(vi) if subclause (iii)(a) had been intended to prevent the buildings being used for any purpose outside those use classes. The respondent backs this argument up with a slightly different point. Use as a cash and carry, it is said, would not have fallen within any of the relevant use classes (LTSS Print & Supply Services Ltd v Hackney London Borough Council [1976] QB 663*) and so would not have been permissible if subclause (iii)(a) contained a restriction. Therefore, since clause 2(vi) envisages that premises could be used for storing meat as a small part of a cash and carry or wholesale grocers, the parties cannot have intended, by referring to the use classes in subclause (iii)(a), to prevent the buildings from being used as a cash and carry or wholesale grocers. It follows, so runs the argument, that subclause (iii)(a) contains no bar on the use of the buildings for a purpose that would fall outside the relevant use classes.
* Editor’s note: Also reported at [1976] 2 EGLR 148
55. It may well be, as the council submit, that the somewhat eclectic list of forbidden uses in clause 2(vi) is to be explained by a desire on the part of the council to give a measure of protection to other traders who had already leased premises from the council on land bordering the development. I am also prepared to assume, without deciding, and without examining the LTSS case, that use as a cash and carry would not have been use in accordance with any of the relevant use classes.
56. Whatever the precise position may be on these matters, the important point remains that clause 2(vi) applies not simply to the original development under subclause 2(iii)(a) but to the demised land as a whole. In other words, clause 2(vi) applies to any buildings or structures erected during the currency of the lease. The sphere of application of the two provisions is therefore different, with clause 2(vi) being wider. That being so, it is scarcely surprising to find that clause 2(vi) bans various uses that would not have been permitted under any of the relevant use classes and that would therefore not have been permitted under subclause (iii)(a). The overlap to which the respondents point is not an indication of inconsistency between the two provisions. Nor does it show that subclause (iii)(a) contains no restriction upon the use of the original development.
57. The respondent’s cash and carry argument is also unconvincing. Clause 2(vi) applies, inter alia, to buildings that are not subject to the restrictions in subclause 2(iii)(a). So, other things being equal, those buildings could be used as a cash and carry or wholesale grocers. An exception in clause 2(vi), allowing meat storage as a small part of a cash and carry or wholesale grocers, is therefore not inconsistent with the existence of a use restriction in subclause (iii)(a) applying to the original development.
58. In these circumstances, I find nothing in the specific terms of clause 2(vi) that is incompatible with the interpretation of subclause (iii)(a) that I prefer.
59. Finally, as I have noted, the respondent argued that the restriction on the use of the buildings in the development to uses in accordance with the particular use classes would make little sense in a lease of this length. In the absence of evidence, it is dangerous to travel beyond the agreed terms and to speculate as to the intentions of those who entered into this lease more than 30 years ago, and as to what would have seemed sensible to them at that time. But I have already suggested that the landlords may have wanted to encourage industry in this area of Gloucester. If so, that would not be an outlandish aim, even in the long term, for landlords that were also the local council. The respondent argued that, if the council had wished to restrict the use of the premises in this or any other way, they could have done so without having a restriction in the lease, since they could have taken appropriate steps in their role as the local planning authority. But that argument proves too much. It would, after all, apply equally –– or a fortiori –– to the respondent’s preferred construction of the relevant words in subclause (iii)(a) as dealing simply with the form of the development: that matter also could be dealt with by the council, as planning authority, when giving the permissions that are specifically mentioned in the subclause.
60. For all these reasons, I agree with the interpretation of subclause 2(iii)(a) favoured by the Court of Appeal. I would therefore dismiss the cross-appeal. In that situation it is necessary to consider the council’s appeal against the Court of Appeal’s declaration that it was unreasonable of them to refuse consent to the respondents’ application to assign the lease to Mountstar.
Did the council withhold consent unreasonably?
61. The covenant in clause 2(viii), providing that the demised land is not to be assigned without the previous consent of the council, “such consent not to be unreasonably withheld in the case of a respectable and responsible assignee”, is of a familiar kind. Its purpose is well settled. In Bates v Donaldson [1896] 2 QB 241 AL Smith LJ rejected any suggestion that a similar clause had been inserted so as to allow the landlord to regain possession of the premises before the expiry of the lease. He went on to say, at p247:
It was in my judgment inserted alio intuitu altogether, and in order to protect the lessor from having his premises used or occupied in an undesirable way or by an undesirable tenant or assignee…
The clause must be interpreted and applied so as to give effect to this purpose. It is equally well settled that, under such a clause:
a landlord is not entitled to refuse his consent to an assignment on grounds which have nothing whatever to do with the relationship of landlord and tenant in regard to the subject matter of the lease (International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] Ch 513, per Balcombe LJ at p520A).
62. Here the council’s refusal of consent relates to the likely use of the premises for a purpose that they consider to be in breach of the non-user covenant in subclause 2(iii)(a). The respondent contends that, even so, consent is “unreasonably withheld” in terms of the clause if it is withheld simply because the prospective assignee is likely to wish to use the premises for a purpose that the landlord considers would be in breach of one of the terms of the lease. Mr Lewison outlined the situation in the present case in this way. Mountstar considered that subclause 2(iii)(a) did not restrict the use of the premises. If Mountstar were right on that point, then the council accepted that they would have to give consent to the assignment. But even if Mountstar were wrong on that point, there would be an issue as to whether the proposed use was indeed in contravention of the restriction in subclause (iii)(a). Finally, if the proposed use did indeed fall foul of the restriction, then an application might be made to the Lands Tribunal to vary the terms of the covenant. All these were legitimate points for Mountstar to take, and there was no question of them acting unlawfully in breach of the covenant. In that situation it was unreasonable for the council to withhold consent to the proposed assignment to them.
63. While counsel were, rightly, at pains to place the legal issue within the proper factual context, the respondent’s submission does not depend upon the facts of the case. Its fundamental contention is that, as a matter of law, the words “unreasonably withheld” in the subclause must be interpreted as meaning that the council cannot withhold consent simply on the ground that the prospective assignee is unwilling to comply with the terms of the lease. So, even if it appeared likely that the prospective assignee would actually breach the terms of the lease, it would nevertheless be unreasonable for the landlord to withhold consent. It was by persuading the court to apply this reasoning that the respondents secured victory in the Court of Appeal.
64. Uninstructed by the case law on this matter, I confess that I should have found the respondent’s proposition startling. It derives support, however, from the decision of the Court of Appeal in Killick v Second Covent Garden Property Co Ltd [1973] 1 WLR 658. The case involved a lease of premises in the City of London. The lease contained a user covenant preventing the premises being used:
for any other purpose than the trade or business of a printer nor have or permit any sale by auction in or upon the demised premises or any part thereof without [the landlords’] written consent which shall not be unreasonably withheld…
The underlessee had indeed used the premises for their trade or business as printers but, as Stamp LJ observed at p661A:
It is common ground that, owing to the situation of the premises in the City and for reasons which I need not specify, that trade or business can no longer be profitably carried on there.
In the circumstances, the lessee and sublessee applied for the landlords’ consent to assign their leases to Primaplex, a company that was not a printer and that proposed to apply for planning permission to use the premises as offices, and to do the necessary works to convert them for that purpose. The landlords did not give the necessary consent and the lessee and underlessee applied for a declaration that the landlords had unreasonably withheld their consent to the assignments. The judge at the Mayor’s and City of London Court made the declaration, and the Court of Appeal refused the landlords’ appeal.
65. Stamp LJ records that the ground on which the landlords sought to justify their refusal of consent as not being unreasonable was “simply that it will be a necessary consequence that there will be a breach of the user covenant”. In advancing that view, the landlords interpreted the covenant as absolute while the other parties argued that it was qualified. The critical passage in the judgment of Stamp LJ then follows at p661D-F:
Mr Priday, on behalf of the landlords, submitted that a landlord may reasonably refuse consent to an assignment if the assignment would necessarily involve a breach of covenant, and I will accept that submission as being well
In the present case, Chadwick LJ, with whom Waller LJ agreed, considered that the Court of Appeal was bound by the decision in Killick and, upon that basis, they allowed the respondent’s appeal and made the third declaration. Chadwick LJ put the matter in this way at pp23-24:
In my view the decision in the Killick case precludes this court from holding that the belief of the landlord, however reasonable, that the proposed assignee intends to use the demised premises for a purpose which would give rise to a breach of a user covenant is, of itself, a ground for withholding consent to assignment. Provided that, when giving consent to the assignment, the landlord does not disable himself, necessarily and inevitably (by waiver, estoppel, or otherwise), from continuing to insist on due observance of the user covenant by the assignee, he is in no worse a position, following assignment, than he would have been if the assignor had himself proposed to use the demised premises for that purpose. This is not a case in which the giving of consent (coupled, if the Council thinks fit, with notice to Mountstar that it intends to enforce the restrictions as to user contained in subclause 2(iii)(a) of the 1969 lease) will disable the Council from continuing to insist on due observance of those restrictions. It is not inevitable that, following assignment, there will be a breach of the user restrictions. Mountstar may succeed in its present contention that the use proposed by its planning application is within Use Class IV of the 1963 Order… discharge or modification of the restriction –– see section 84(12) of the Law of Property Act 1925. The Council is not entitled, by refusing consent, to compel the appellant to accept its interpretation of the user covenant. Nor is it entitled, as it seems to me, to refuse consent to assignment on the grounds that the proposed assignee may wish to exercise the rights which the law allows to a tenant under this lease.
66. As one part of his argument, Mr Pymont submitted that too much had been read into the passage in the judgment of Stamp LJ in Killick. As he pointed out, it appears that, perhaps because of the particular circumstances to which Stamp LJ alluded, counsel for the landlords had chosen to pitch his submission at the highest level: he had contended that a breach of the user covenant would be “a necessary consequence” of an assignment to Primaplex. All that the Court of Appeal decided was that, on the facts, a breach of the covenant was not a necessary consequence and, for that reason, they rejected the landlords’ submission. While that is indeed a possible interpretation of the case, it is plain, not least from the decision in the Court of Appeal in the present case, that Killick has been treated as laying down law that has to be applied in interpreting covenants of this kind. In the course of a somewhat chequered career the decision has even won the accolade of being “the refuge of the desperate”: J Gaunt, Principle and Pretext: The rules governing landlords’ consent (1987) 284 EG 1371. But that is only an additional reason why, when the point has been fully argued, the House should consider the principle that it has been thought to enshrine.
67. The test of reasonableness is to be found in many areas of the law, and the concept has been found useful precisely because it prevents the law from becoming unduly rigid. In effect, it allows the law to respond appropriately to different situations as they arise. This has to be remembered when a court is considering whether a landlord has “unreasonably withheld” consent to the assignment of a lease. In this context I would follow Viscount Dunedin’s advice in Viscount Tredegar v Harwood [1929] AC 72 at p78 that one “should read reasonableness in the general sense”. I have derived the greatest assistance, however, from the comments of Lord Denning MR in a passage in Bickel v Duke of Westminster [1977] QB 517. The Grosvenor Belgravia Estate had refused to consent to the assignment of the headlease of a house in Burton Mews, off Chester Square, to a lady who, if she had become tenant under the headlease and had remained so for five years, would have been entitled to buy the freehold from the estate. Having referred to a number of earlier cases, Lord Denning said at p524C-G:
If those cases can properly be regarded as laying down propositions of law, I would agree that we ought to hold the landlords’ refusal to be unreasonable. But I do not think they do lay down any propositions of law, and for this reason. The words of the contract are perfectly clear English words: “such licence shall not be unreasonably withheld.” When those words come to be applied in any particular case, I do not think 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 landlord has to exercise his judgment in all sorts of circumstances. It is impossible for him, or for the courts, to envisage them all. When this lease was granted in 1947 no one could have foreseen that 20 years later Parliament would give a tenant a right to buy up the freehold. Seeing that the circumstances are infinitely various, it is impossible to formulate strict rules as to how a landlord should exercise his power of refusal. The utmost that the courts can do is to give guidance to those who have to consider the problem. As one decision follows another, people will get to know the likely result in any given set of circumstances. But no one decision will be a binding precedent as a strict rule of law. The reasons given by the judges are to be treated as propositions of good sense –– in relation to the particular case –– rather than propositions of law applicable to all cases. It is rather like the cases where a statute gives the court a discretion. It has always been held that this discretion is not to be fettered by strict rules: and that all that can be properly done is to indicate the chief considerations which help to arrive at a just conclusion: see Blunt v Blunt [1943] AC 517; Ward v James [1966] 1 QB 273.
That statement of the general approach to be taken was endorsed by Roskill and Lawton LJJ, with whom Megaw LJ concurred, in West Layton Ltd v Ford [1979] QB 593*, at pp604H and 606C-D. I would respectfully adopt it. In International Fluids Drilling Ltd v Louisville Investments (Uxbridge) Ltd [1986] Ch 513, Balcombe LJ distilled a number of propositions from the earlier authorities on covenants of this kind but then, under reference to Bickel and West Layton, added at p521D:
Subject to the propositions set out above, it is in each case a question of fact, depending upon all the circumstances, whether the landlord’s consent to an assignment is being unreasonably withheld…
* Editor’s note: Also reported at [1979] 1 EGLR 59
68. Approaching the matter in this way, I am satisfied that it cannot be said, as a matter of law, that the belief of a landlord, however reasonable, that the proposed assignee intends to use the demised premises for a purpose that would give rise to a breach of a user covenant cannot, of itself, be a reasonable ground for withholding consent to the assignment.
69. I accept that, as Mr Lewison stressed in proceedings such as the present, the court is not concerned with whether the terms of the contract are reasonable as between the parties. The court is concerned only with the assignment and with whether it is reasonable for the landlord to withhold consent to that assignment. But, in determining that matter, as Bickel shows, the correct approach is to consider what the reasonable landlord would do when asked to consent in the particular circumstances. The rule of law derived from Killick introduces a rigidity that makes it impossible to apply that approach. It should, for that very reason, be rejected.
70. Indeed, the reasoning in Killick requires the landlord to proceed in a way in which, it appears to me, no reasonable landlord would actually proceed. It is accepted, by analogy with the position where a landlord is asked to consent to a sublease, that a landlord may act reasonably if he refuses consent where the assignment of the lease will necessarily result in a breach of a user covenant: Packaging Centre Ltd v Poland Street Estate Ltd (1961) 178 EG 189 and Granada TV Network Ltd v Great Universal Stores Ltd (1963) 187 EG 391; Killick at pp661G-662A. And one can easily see that a reasonable landlord, faced with such a
71. The central plank in the reasoning of the court in Killick seems to be that it would be unreasonable for the landlord to withhold consent, because the assignment does not change the legal relationship between the landlord and the tenant. So the landlord would have exactly the same powers to prevent a breach of covenant by the assignee as by the existing tenant. The landlord would therefore be in the same position, neither better nor worse, to enforce the user covenant. As an analysis of the landlord’s legal position, that is undoubtedly correct, but the reality is that a reasonable landlord could well look at the matter more broadly and see that his position would be significantly altered by the assignment. It is one thing to have a tenant who complies with the user covenant in the lease and against whom there is no need to take steps to enforce the covenant. It is quite another to have a new tenant who does not comply with, or who challenges the interpretation of, the user covenant and against whom the landlord might need to take steps to enforce it or to contest the tenant’s interpretation, with all the inconvenience and potential cost involved. It is also a different thing to have a new tenant who intends to apply to the Lands Tribunal under section 84 of the Law of Property Act 1925 to discharge or modify the user covenant. Again the landlord would face the prospect of becoming embroiled in legal proceedings. If they occurred, all or any of these matters would make a huge practical difference to the landlord. So the prospect that one or other of them will probably happen is one that a reasonable landlord must be entitled at least to take into account when asked to consent to the assignment of a lease. It is therefore, in my view, wholly unrealistic to suggest, as Killick does, that no reasonable landlord, faced with the probability of real changes of these kinds, would withhold consent to an assignment simply because, technically, his legal position and his legal remedies would remain the same. I accordingly reject the central strand of the reasoning upon which the decision in Killick depends.
72. Mr Lewison submitted that, if the council were permitted to withhold consent in a case like the present, they would, in effect, have the power to impose their interpretation of the user covenant, and the tenant would have no real interest to pursue the matter. So far as the tenant’s interest is concerned, the history of the present proceedings, where the respondent has pursued a point of interpretation all the way to this House, would seem, in itself, to show that the argument cannot be pressed too far. For the rest, it is simply not the case that the landlord would have power to impose his particular interpretation of a user covenant. On the contrary, a tenant who is faced with a refusal of consent based upon a particular interpretation may always apply to the county court for a declaration as to the proper interpretation. If the ruling shows that the landlord’s interpretation is wrong, then it would plainly be unreasonable for the landlord to continue to withhold consent on that basis.
73. For these reasons, I would reject the supposed rule of law that the Court of Appeal derived from Killick. In so far as Killick is thought to lay down any such rule, it should be overruled. Since the decision of the Court of Appeal to make the third declaration was based solely upon an application of Killick, it follows that the council’s appeal against that part of the court’s order must be allowed.
74. It is important not to exaggerate the effect of overruling Killick. In particular, it does not establish any contrary rule of law that it will always be reasonable for a landlord to withhold consent to an assignment, simply on the ground that the proposed assignee intends to use the premises for a purpose that would give rise to a breach of a user covenant. While that will usually be a reasonable ground for withholding consent, there may be circumstances where refusal of consent on this ground alone would be unreasonable. As Lord Denning stressed, it will depend on the circumstances of the particular case.
75. I would add this. In the course of his submissions, Mr Lewison referred to the Landlord and Tenant (Act) 1988, and in particular to section 1(3) and (6)(c):
(3) Where there is served on the person who may consent to a proposed transaction a written application by the tenant for consent to the transaction, he owes a duty to the tenant within a reasonable time –
(a) to give consent, except in a case where it is reasonable not to give consent,
(b) to serve on the tenant written notice of his decision whether or not to give consent specifying in addition ––
(i) if the consent is given subject to conditions, the conditions,
(ii) if the consent is withheld, the reasons for withholding it.
…
(6) It is for the person who owed any duty under subsection (3) above ––
…
(c) if he did not give consent and the question arises whether it was reasonable for him not to do so, to show that it was reasonable,
and, if the question arises whether he served notice under that subsection within a reasonable time, to show that he did.
Mr Lewison commented upon the succinct reply that the council official, Mr Hook, had sent to the respondent’s agents on 16 September 1997 and appeared to suggest that it might somehow limit the range of evidence or argument that the council could deploy in seeking to show that it had been reasonable for the council not to give consent on the ground set out in the letter. I would deprecate any such suggestion. As my noble and learned friend Lord Scott pointed out in the course of argument, the degree of detail contained in such a letter is likely to depend, to a large extent, upon what is said by the tenant in the application to which the landlord is responding. In practice, a dialogue may develop. Here, to judge from the terms of the letter from the respondent’s solicitors on 16 July 1997, the application for consent was brief and contained no elaboration. In those circumstances, an equally succinct reply was to be expected. Had the respondent continued the correspondence and elaborated its application in the light of the council’s reply, then the council might well have developed their thinking in more detail. Of course, once the landlord has stated in writing the ground on which he refuses consent, he cannot later rely upon any other ground. But that does not mean to say that, when seeking to show that it was reasonable for him not to consent on the stated ground, he is confined to what he has said in his letter. Section 1(6)(c) contains no such restriction. And rightly so. Otherwise, instead of being a straightforward practical document, the notice containing the landlord’s reasons for withholding consent would soon become a battleground for litigants and an increasingly sophisticated playground for conveyancers. Such cannot have been the intention of parliament in enacting the legislation.
76. In summary, for the reasons that I have given I would allow the council’s appeal and refuse the respondent’s cross-appeal.
Appeal and cross-appeal allowed.
