Supreme Court: landlord refusal of consent was reasonable

The Supreme Court found in favour of the landlord, overturning a Court of Appeal decision by a majority of three judges to two. Lord Briggs, giving the lead judgment of the court, said that the significantly increased risk of leasehold enfranchisement was "the quintessential type of consideration rendering reasonable the refusal of consent".

In addition, Lord Briggs said that "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".

Tenant Hautford had sought consent from its landlord to apply for planning permission to change the use of the first and second floors of a terraced property in Soho, London from office use, or use ancillary to retail use of the ground floor, to residential use. Its then landlord refused and the current landlord, Sequent Nominees Ltd, has continued to refuse its consent.

The property is subject to a long lease for 100 years, of which around 70 years remain. The lease contains a tenant's covenant not to apply for planning permission without the prior written consent of the landlord, and that this consent must not be unreasonably withheld. The lease also contains a user covenant permitting residential use of the property.

The 1967 Leasehold Reform Act (LRA) gives occupiers of premises which can reasonably be called a 'house' the right to buy out the freeholder of the property and convert a long lease to full ownership, through a process called leasehold enfranchisement. The landlord in this case argued that, should Hautford be granted the change of use sought, it would substantially increase the risk that Hautford could buy out the freehold.

Property disputes expert Matthew Baker of Pinsent Masons, the law firm behind Out-Law, said that the decision, while "on the surface" a simple landlord and tenant dispute, had "significant broader implications that could influence the way in which leases are drafted in the UK".

"This judgment is important because it provides a litmus test for what is considered to be a fair and reasonable refusal following a request from a tenant," he said.

"It further highlights the need for leases to be drafted carefully, as well as providing further clarity as to what constitutes reasonable grounds for refusal of tenants' applications for consent under leases. This is especially the case with leases granted for long periods of time creating long-term relationships between landlords and tenants that must try to take account of many different scenarios, some of which are clearly unknown when the lease is granted," he said.

The Court of Appeal, which found in favour of Hautford and against the landlord, had ruled that the withholding of consent had not been reasonable because it was being done for a "collateral purpose": namely, restricting the conversion of the property to residential use when this was something that was expressly permitted by the lease. Master of the Rolls Sir Terrence Etherton noted that a third party, other than the tenant, would have the right to apply for the same planning permission, which the landlord would be powerless to oppose and which would give rise to the same increased risk of enfranchisement.

Supreme Court judges Lady Arden and Lord Wilson, in dissenting judgments, agreed with the Court of Appeal's reasoning. However, Lord Briggs in the lead judgment said that this conclusion was based on "an error of law".

"[T]he fact that the lease by its terms rendered the freehold vulnerable to enfranchisement does not mean that a clause like 3(19) [the landlord consent clause], which provided a measure of protection against that risk, should be treated as incapable of being used reasonably for that purpose," Lord Briggs said.

"The fact is that, by the time when [Hautford] sought consent under clause 3(19), no third party had applied for planning permission for a change of the use of the first and second floors to residential and, so far as this court is aware, no such third party application has been made to date. The result is that, looking at the matter as a question of fact as at the time when [Hautford] sought consent, the landlord's ability to refuse that consent continued to afford a real measure of protection against enfranchisement of the freehold," he said.