The freeholder of a Soho building refused consent to a planning application which would have changed two floors to residential use and substantially increased the tenant’s chance of buying the freehold under the Leasehold Reform Act 1967. The judge and the Court of Appeal held that refusal unreasonable. A majority of the Supreme Court held that it was reasonable.
What the tenant wanted to do
Hautford Ltd was the tenant of 51 Brewer Street, London W1, under a 100-year lease granted on 4 April 1986 from 25 December 1985, at a premium of £200,000 and a peppercorn rent. Sequent Nominees Ltd, formerly Rotrust Nominees Ltd, was the freeholder. In 1986 the basement and ground floor were in retail use, the first and second floors were used for storage and as a staff area, and the top two floors were in occasional residential use. In planning terms, residential use was permitted only on the top two floors.
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Clause 3(11) provided that the premises were not to be used otherwise than as a retail shop, offices, for residential purposes, for storage or as a studio. It did not warrant that those uses were lawful under planning law. Clause 3(19) required the tenant not to apply for planning permission without the landlord’s prior written consent, such consent not to be unreasonably withheld. Lord Briggs described this as a fully qualified covenant: the tenant may not do the act without consent, and consent must not be withheld unreasonably. Between 2013 and 2015 the sub-tenant, Romanys Ltd, converted the four upper floors into self-contained flats, and Hautford paid for the works. The landlord knew of the works but reserved its rights. The first and second floors remained vacant.
On 17 April 2015 Hautford asked the then freeholder, Tuesday One, for consent to apply for planning permission to change those two floors to residential use. Tuesday One refused on 30 April 2015 because of the increased risk of a claim under the Leasehold Reform Act 1967. It said that success would deprive it of the reversion entirely, and would also affect management of the terrace. It did not admit that a claim would necessarily succeed. It was common ground that one purpose of the application was to improve the prospects of enfranchisement. Judge Collender QC found, and it was no longer disputed, that permission would substantially enhance those prospects.
Why the risk of buying the freehold arose
When the lease was granted, a company tenant could not enfranchise because the 1967 Act imposed a residence qualification. That qualification was removed by the Commonhold and Leasehold Reform Act 2002. Residential use confined to the top two floors still did not make the building a house reasonably so called within section 2(1). Hautford served a claim notice in October 2012 and abandoned it in January 2013 for that reason. In the Supreme Court the landlord accepted that its separate concern about estate management of the terrace could not, by itself, make the refusal reasonable.
The decisions below
Hautford succeeded before the judge and in the Court of Appeal. Judge Collender held that clause 3(19) protected the landlord from the possible effects of a planning application, including enforcement, and was not a means of limiting the uses in clause 3(11). Using the refusal to impose a restriction which had not been negotiated was, in his view, a collateral purpose and unreasonable. Sir Terence Etherton MR agreed. Because any third party could apply for the same permission, he thought it inconceivable that the tenant was intended to be unable to apply for the 70 or so years then remaining. Both courts also treated earlier cases, in which refusal had been upheld because of an enfranchisement risk, as limited to leases granted before the 1967 Act.
The majority
Lord Briggs, with whom Lord Carnwath and Lord Hodge agreed, held that the courts below had made an error of law by deciding the case through too narrow a construction of the covenant. He applied the principles stated by Lord Bingham in Ashworth Frazer Ltd v Gloucester City Council. A landlord may not refuse consent on a ground which has nothing to do with the landlord and tenant relationship concerning the property. If the ground is connected with that relationship, reasonableness is a question of fact at the date of the request. The landlord must show that the refusal was reasonable, not that it was right or justifiable. Lord Denning’s judgment in Bickel v Duke of Westminster warned against confining the landlord’s grounds under the guise of construing the lease.
An increased risk of enfranchisement was not a permissible ground only where the lease predated the 1967 Act. In Norfolk Capital Group Ltd v Kitway Ltd and in Bickel, likely loss of the freehold, or a reduction in the value of the reversion, was treated as eminently reasonable. Lord Denning was recognising that the landlord may rely on a risk which the parties had not foreseen, judged when consent is sought. Clause 3(11), read with clause 3(19), did not give an unqualified right to use every floor residentially. Residential use was permitted only where planning law allowed it. In April 2015 use of the first and second floors was still unlawful and therefore forbidden by the lease. Protection against planning conditions might be one purpose of the covenant, but that did not exclude others. No third party had applied, or was threatening to apply, so refusal still gave the landlord real protection.
On the judge’s findings, permission was likely to be granted. It would significantly increase a risk which did not then exist, with a real adverse effect on a reversion of real value, even after statutory compensation. Avoiding that harm was not extraneous to the landlord and tenant relationship. Damage to the reversion was the central kind of reason for treating a refusal as reasonable.
The dissents
Lady Arden would have dismissed the appeal for the reasons given below. She would not read clause 3(11) as limited to parts already permitted by planning law, because that would add words to the user clause. The power to refuse consent could protect the landlord only within its proper purpose, and it was not given so that the landlord could cut down the permitted use. A third party could obtain the planning permission, and the tenant could assign the whole to an individual who, once qualified, could have claimed enfranchisement even at the date of the lease. She also disagreed with the majority’s reading of Lord Denning.
Lord Wilson would also have dismissed the appeal. He regarded clause 3(11) as a specially drafted permission of unusual generosity, specifically allowing residential use of every part of the premises without requiring the freeholder’s consent to that use. If the refusal were reasonable, that permission would in his view be rewritten and deprived of substantial effect. He saw no significant flaw in the trial judge’s determination and considered that the majority’s conclusion conflicted with the principle that reasonableness is a question of fact.
Verdict: By three votes to two, the Court allowed the landlord’s appeal. The increased risk of the tenant acquiring the freehold made refusal of consent reasonable in these circumstances. Lady Arden and Lord Wilson dissented. The Court did not decide whether the tenant could enfranchise.
