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Appeal court: landlord withholding planning consent was unreasonable

A commercial landlord acted unreasonably by withholding from a tenant its consent to apply for planning permission to change the use of the middle two storeys of a building from commercial to residential, the Court of Appeal has ruled.

The ruling confirms that there is no general principle that a landlord will normally be entitled to refuse consent where the effect of giving consent will be that the tenant will be entitled to enfranchise under the 1967 Leasehold Reform Act (LRA). The landlord in this case had attempted to argue that the tenant's ability to 'buy out' the freehold through the LRA leasehold enfranchisement process would be enhanced if it successfully obtained the planning permission sought.

"Earlier Court of Appeal decisions, which have often been cited as supporting such a proposition, were confirmed by the court as simply being decisions on their own facts which were distinguishable from the present case given that the leases in those other cases pre-dated the enactment or contemplation of the LRA," said property disputes expert Siobhan Cross of Pinsent Masons, the law firm behind Out-Law.com.

"The decision is not surprising given that the user clause in the lease expressly authorised the whole building to be used for residential without any proviso requiring consent to be obtained from the landlord," she said.

The ruling is also important because this is the first reported case in which a court has been asked to consider whether a landlord had unreasonably withheld its consent under a clause restricting the tenant's ability to apply for planning permission, Cross said. The Court of Appeal ruled that, when considering whether the landlord had acted reasonably in refusing consent, the court should apply the same general principles as set out in alienation and alterations cases.

The LRA gives occupiers of premises which can reasonably be called a 'house', including those designed or adapted for living in, the right to buy out the freeholder of the property and convert a long lease to full ownership. Mixed use properties may also qualify for enfranchisement.

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 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, Rotrust, has continued to refuse its consent.

The property at the centre of the dispute is subject to a long lease covering a term of 100 years, of which around 70 years remains. 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.

Rotrust refused its consent to the application for planning permission on the grounds that change of use would make it easier for Hautford to acquire the freehold of the property through the statutory leasehold enfranchisement process. The property forms part of a block of adjoining properties of which Rotrust is the freeholder, and it told the court that it wished to retain control for estate management purposes. Rotrust cited a number of historical cases before the county court and the Court of Appeal in which, it claimed, the courts had held that landlords had reasonably refused consent on the grounds that consent would have made leasehold enfranchisement possible.

In its judgment, the Court of Appeal pointed out that the facts were "critical" in disputes of this nature, and that "even limited differences in the factual context" could lead to a different result. None of the cases cited by Rotrust explicitly dealt with the "inter-relationship between a tenant's user covenant expressly authorising residential use and a tenant's covenant against applying for planning permission without the consent of the landlord", the court said. They also involved leases entered into before the leasehold enfranchisement process came into force.

Master of the Rolls Sir Terrence Etherton said that the "starting point" for the court was "to ascertain the purpose of the covenant intended by the original parties to the lease". In this case, the user covenant expressly authorised the use of the entire property as residential, so the covenant was clearly not designed to "preclud[e] the residential use of the first and second floors in order to prevent enfranchisement of the property pursuant to the LRA".

"[Rotrust's] argument that [the clauses] must be read together ... and that there was no 'hierarchy of covenants' is no more and no less than a re-writing of [the user covenant] so as to make it subject to a proviso that those parts of the property not then or thereafter in residential use could not be put to such use without the landlord's consent," he said.

"That would not only be a re-writing of [the user covenant] rather than a legitimate exercise of interpretation but it would be a manifestly impractical way of limiting the express authorisation of residential use ... If Rotrust were correct in its argument, Hautford would be precluded from applying for planning permission ... even though any third party would be free at any time to make such an application and, if made and successful, Hautford could take advantage of the planning permission," he said.

The effect of any planning permission on the likelihood of success of a subsequent leasehold enfranchisement application by the tenant "makes no difference to the analysis", the judge said.

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