Supreme Court by majority of 3 to 2 reverses unanimous Court of Appeal decision in Sequent Nominees Ltd v Hautford Ltd and holds that a landlord’s refusal of consent to an application for change of planning use was reasonable.
This case provides important clarification for practitioners as to the interpretation of contracts, and leases in particular. When considering the exercise of a contractual discretion (such as the common provision in a lease that the tenant shall not do a particular act without the landlord’s consent “such consent not to be unreasonably withheld” – known as a “fully qualified covenant”), and when determining what is and is not “reasonable”, the Court should look at the facts as they are at the date of the request for consent. The Court should not consider the reasonableness of a refusal of consent “by reference to an over-refined construction of the lease as at the time of its grant”.
The exercise is not therefore to attempt to identify the original purpose for which the parties might have included the right for one of them to refuse consent. Rather, the correct approach is simply to construe the clause so as to discover what upon its express terms it permits the (non-)consenting party to do. In the context of leases in particular, the question of reasonableness is then resolved by asking whether the refusal of consent serves a purpose that is “sufficiently connected with the landlord and tenant relationship as at the time when consent is requested”.
This would seem to be contrary to the approach taken in cases such as Bates v Donaldson  2 QB 241 (CA), Houlder v Gibbs  1 Ch 575 (CA) (per Sargant LJ: “in considering the operation and effect of a clause of this kind, you have to consider what was within the reasonable contemplation of the parties to the lease”; per Warrington J: “What was the danger which the lessor contemplated, and against which the lessee was content to allow the lessor to protect himself? What is to be inferred from what may be treated as being in the contemplation of the parties when the contract was made?”), and West Layton v Ford  1 QB 593 (CA) (where Roskill LJ stated that the enquiry was to “look first of all at the covenant in order to see what its purpose was when the parties entered into it”). It also seems contrary to the more general observations of Lord Neuberger as to contractual interpretation in Arnold v Britton  AC 1619. 
Nonetheless the majority of the Supreme Court (Lords Briggs, Carnwath and Hodge, with Lady Arden and Lord Wilson dissenting) held that the Courts below which had followed that earlier line of authority had adopted an erroneous construction of the lease and had therefore made an error of law which required the Court to consider the matter afresh.
The case concerned a 100 year lease of a whole building in Soho granted in 1986 for a premium of £200,000 at a peppercorn rent. The current tenant (Hautford) was an assignee of the original term. The current landlord (Sequent formerly known as Rotrust Nominees) was the original landlord by another name. At the date of trial there were just under 70 years remaining of the term. There was no restriction on assignment until the last 7 years of the term. The lease contained the following user covenant (clause 3(11)):
“Not to use the Demised Premises otherwise than for one or more of the following purposes (a) retail shop (b) offices (c) residential purposes (d) storage (e) studio…”
By clause 3(19) Hautford covenanted:
“to perform and observe all the provisions and requirements of all statutes and regulations relating to Town and Country Planning and not to apply for any planning permission without the prior written consent of the Landlord such consent not to be unreasonably withheld.”
The building extended over 6 floors, including a basement. At the time of trial the top two floors of the building had planning consent for residential use, the basement and ground floor were authorised for retail use and the first and second floors were authorised for office/ancillary use. Approximately 25% of the building was in residential use. Hautford wished to make a planning application to change the use of the first and second floors of the building to residential use. If that application were successful, approximately 52% of the building would be in residential use.
Sequent refused permission on the ground that giving consent would increase the prospect of a successful claim by Hautford to enfranchise (i.e. compulsorily purchase the freehold) under the Leasehold Reform Act 1967 (LRA 1967). Sequent also stated that it wanted to retain control of the building for estate management purposes as it forms part of a block of adjacent and contiguous properties in Sequent’s freehold ownership.
Sequent alleged that the purpose of the requirement to obtain consent to the making of a planning application is simply to protect the landlord from damage to its reversion. Hence refusal of consent was said to be reasonable because Sequent was protecting its property interests in the face of a potential claim under LRA 1967 which would deprive it entirely of its freehold interest in the building and would also have an adverse impact on the value of its investment in the wider adjacent estate.
Both Courts below found that Sequent’s refusal of consent was unreasonable (essentially) because to hold otherwise would be to re-write the user covenant and prevent the tenant from being able to use the entire demised premises for the permitted residential purposes.
Decision of the Supreme Court
Lord Briggs (with whom Lords Carnwath and Hodge agreed) held that the landlord should succeed in its appeal since seeking to avoid a significant increase in the risk of enfranchisement was the “quintessential type of consideration rendering reasonable the refusal of consent”. On “a down to earth factual analysis of the economic consequences to the landlord of giving or refusing the requested consent” the refusal of consent was reasonable.
For property practitioners this is a particularly important decision as it is the first case concerning the inter-relationship between a bespoke, individually-negotiated user covenant which expressly authorises as between landlord and tenant a particular use of the demised premises, and a “boiler plate” covenant to perform and observe all the provisions and requirements of planning legislation and not to apply to the local authority for permission to change the planning use of the premises without the landlord’s consent.
The Supreme Court held that in such a situation the user clause does not in fact confer an unqualified right on the tenant to use the premises for the purpose ostensibly permitted by the lease; rather the user clause must be read together with (and in effect subject to) the separate planning clause with the result that the tenant is only permitted to use such parts of the premises as are from time to time permitted by the planning regime to be used for those purposes.
In a pithy dissenting judgment Lord Wilson concluded that clause 3(11) was a bespoke clause “of singular generosity to the leaseholder” the effect of which was specifically to permit residential use of every part of the demised premises, unqualified by any requirement to secure the freeholder’s prior consent. He held (alluding to Hautford’s argument based on the principle of non-derogation from grant) that if the landlord could withhold consent to an application for planning permission to make residential use of the premises (or part of them) then the user clause would be deprived of substantial effect.
This is a very helpful decision for landlords. However as Lord Wilson pointed out in his judgment (again alluding to Hautford’s argument to this effect) the generosity or otherwise of the user clause in a particular lease will be reflected in the premium paid to the freeholder by the initial leaseholder, and in the subsequent premiums paid for later assignments of both the freehold and leasehold interests in the premises. Property practitioners will now wish to consider with their lay 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 (or 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.
You can read the full judgment here.