Refusal reasonable even when use permitted

By a narrow majority, the Supreme Court has held that a landlord may reasonably refuse consent to a tenant’s application for planning permission for residential use even though the lease permitted that use.

Leases usually contain a user clause that sets out the permitted uses for the property let. User clauses can be drafted narrowly to allow one specific use or, more broadly, permit a range of potential uses. The user clause may permit changes of use with the landlord’s consent. Regardless of the user clause, the actual use to which the property can be put must also be authorised by planning permission.

If a tenant wants to change the use of a property it must ensure that the lease permits the new use and, if the lease requires landlord’s consent to the change, obtain that consent. If required, the tenant must also obtain planning permission for the new use. It is sometimes overlooked that the tenant may also require the landlord’s consent to apply for that planning permission, as was the case here.

Facts

In Sequent Nominees Ltd (formerly Rotrust Nominees Ltd) v Hautford Ltd, Hautford was the tenant of a lease that permitted a wide range of uses for the property, including residential use. Therefore, landlord’s consent was not required for a change of use when the tenant wanted to convert additional floors of the property for use as flats. However, planning permission was required. The landlord, Sequent, refused consent to the tenant making that application. The reason for the refusal was that if the property was used primarily for residential purposes, the tenant might be able to acquire the freehold title to the property under the Leasehold Reform Act 1967. The landlord would lose control of the property and control, for estate management purposes, of the block containing the property. This would have an adverse impact on the value of the landlord’s investment in the block.

At first instance and in the Court of Appeal, it was held that the landlord was being unreasonable in withholding consent. As the user clause already permitted residential use, the landlord was seeking to obtain a collateral advantage by doing so. The risk of the tenant acquiring the freehold title was already present and so the landlord could not use this as a pretext for withholding consent to a planning application for residential use. The landlord appealed to the Supreme Court.

The decision

By a three to two majority, the Supreme Court allowed the appeal. It said that the user clause had to be read together with the requirements for obtaining planning permission for residential use. Residential use would be permitted under the lease if the tenant obtained planning consent. The landlord could potentially withhold consent to a planning application for a use that was already permitted by the terms of the lease.

The landlord had to act reasonably when considering the tenant’s request. In deciding whether the landlord was being reasonable, the court could not assume that the purpose of the restriction on applying for planning permission was limited to protecting the landlord from being subject to unreasonable planning conditions. The right approach was to decide whether the landlord’s refusal served a purpose that was sufficiently connected with the landlord and tenant relationship. Here, the landlord had a legitimate interest in protecting the value of its interest in the property that justified withholding consent.

The Supreme Court also rejected an argument that the landlord would be equally at risk of a claim for enfranchisement if a third party applied for planning permission for residential use, so it made no sense to allow the landlord to refuse the right of the tenant to make the application. As no application had been made by a third party, the restrictions on applying for planning permission gave the landlord a measure of control over the use of the property.

Although the lease, when granted, was potentially at risk of creating a right to acquire the freehold, whether the landlord was being reasonable had to be judged at the date of the tenant’s application for consent. In this case, allowing the application to be made would substantially increase the risk of enfranchisement. The landlord could therefore take this into account and it was reasonable for the landlord to withhold consent.

Conclusion

The arguments for and against the landlord being reasonable in withholding consent were finely balanced. Landlords will be relieved that the Supreme Court took a generous and holistic approach to interpreting the terms of the lease and the grounds on which the landlord could withhold consent to a planning application.

The facts in this case were relatively unusual. Leases do not usually allow a wide range of uses without landlord’s consent being required. Had the tenant needed to obtain consent to the change of use itself, the landlord might have been able to refuse consent without having to take lengthy and costly legal proceedings to justify its right to do so.

Sequent Nominees Ltd (formerly Rotrust Nominees Ltd) v Hautford Ltd [2019] UKSC 47