A landlord that refused consent for a retrospective planning application to change use of premises to residential, because it might leave it vulnerable to enfranchisement, was entitled to do so, the Supreme Court has ruled.
By a three-to-two majority, the court allowed the landlord’s appeal and overturned earlier rulings that its refusal of consent had been unreasonable.
According to Tiffany Scott QC of Wilberforce Chambers, who acted for the tenant, the decision has clarified the approach to interpretation of so-called “fully qualified leasehold covenants” – with “perhaps surprising” results that call for landlords, tenants and their advisers to take a closer look at similar clauses in their leases.
Sequent Nominees Ltd is the landlord of a six-storey terraced building at 51 Brewer Street, Soho, London W1. Hautford Ltd is the current tenant under a lease granted in 1986. Its sub-tenant, Romanys Ltd, runs an ironmonger’s shop from the basement and ground floor.
Under clause 3(11) of the lease, the tenant may use any part of the building for retail, offices or residential purposes, while clause 3(19) of the lease says the tenant cannot apply for planning permission without the landlord’s consent, which must not be “unreasonably withheld”. This is known as a “fully qualified covenant”.
Between 2013 and 2015, the sub-tenant converted the first, second, third and fourth floors into self-contained flats, but the existing planning permission did not allow residential use.
The tenant sought the former landlord’s consent to apply for planning permission to use those two floors residentially, but it took the view that a change of use would damage its own financial interests, potentially leaving it vulnerable to enfranchisement. It refused consent.
The tenant said this was “unreasonable” and successfully challenged the landlord’s decision in the County Court. The Court of Appeal upheld that decision.
However, now the Supreme Court – by a three-to-two majority – has allowed the new landlord’s appeal and ruled that it was not unreasonable for its predecessor to refuse consent.
Giving the court’s main ruling, Lord Briggs said that the courts below had made their decision based on an “erroneous construction of the Lease”, adding that “it cannot possibly be said that seeking to avoid a significant increase in the risk of enfranchisement, with consequential damage to the reversion, was something extraneous to or dissociated with the landlord and tenant relationship created by the Lease”.
He continued: “On the contrary, damage to the reversion is the quintessential type of consideration rendering reasonable the refusal of consent… 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.”
Tiffany Scott QC said: “The Supreme Court has clarified the approach to interpretation of fully qualified leasehold covenants, and has for the first time considered the inter-relationship between a bespoke, individually-negotiated covenant (here, a user covenant) and a ‘boiler plate’ covenant (here, relating to planning) – with perhaps surprising results.
“By a majority of 3 to 2 it was held that the court should not indulge in an ‘over-refined construction’ of the meaning of the lease as at the time when it was granted. The task is not to identify the original purpose of the particular covenant at the time when the parties negotiated their obligations and executed the lease (contrary to the approach taken in the courts below, which in turn followed a line of authorities dating back to 1896). Rather, the court should look at the facts as they are at the date of the request for consent and consider whether the reason given for refusal is at that point ‘sufficiently connected with the landlord and tenant relationship’ so as to be reasonable.”
She added that the Supreme Court also held that, where a lease contains a user clause and a separate covenant requiring the tenant to observe and perform all the requirements of planning legislation, the user clause must be “read together with” the separate planning clause.
She explained: “So the tenant is in fact only permitted as between landlord and tenant to use such parts of the premises as are from time to time permitted by the planning regime to be used for those purposes. Property practitioners will wish to consider with their clients – both landlords and tenants – whether the decision of the majority in this case affects the valuation of their clients’ assets.
“Many leases will contain the same ‘boiler plate’ planning provisions alongside bespoke user clauses (and alongside alterations clauses, for example), and these clauses must now be construed together, with the result that a particular use that was thought by the parties to be permitted by the landlord may not, in fact, be permitted at all.”
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