Supreme Court decision – reasonably withholding consent

On Wednesday, 30 October 2019 the Supreme Court handed down a decision in Sequent Nominees Ltd (formerly Rotrust Nominees Ltd) v Hautford Ltd overturning the ruling of the High Court and Court of Appeal, deciding that a landlord had acted reasonably in refusing consent to a tenant’s application for consent under its lease.

The case deals with the principles of "unreasonably withholding consent" in property transactions and is an unwelcome result for tenant occupiers. The Supreme Court itself was not unanimous and the decision was split with 3 justices in the majority and 2 justices dissenting.

The facts

Hautford Ltd were tenant of a whole building in Soho under a 100 year lease. The lease permitted the whole property to be used for residential purposes, however, at the time the lease was granted in 1986, only the top two floors were used for residential purposes. In around 2013 the tenant developed the other floors of the building into residential flats and then sought planning permission for the change of use.

The lease contained a provision that the tenant must obtain the landlord’s consent (not to be unreasonably withheld) for any application for planning permission. The tenant sought consent from the landlord, Rotrust Nominees Ltd, which was promptly refused.

The landlord’s grounds for withholding consent were on the basis that by turning the whole building into residential use, the tenant could have a strong claim under statute for enfranchisement (i.e. to compel the landlord to sell the freehold to the tenant).

Court of Appeal

The High Court and the Court of Appeal both ruled that refusing consent based on the risk of enfranchisement was unreasonable when taking into account the lease permitted use of the whole building for residential purposes. The Court reasoned that the ‘boiler plate’ clause requiring consent for planning permission should not be used as a loophole to circumvent the "bespoke" clause permitting use of the whole building for residential purposes.

Supreme Court majority opinion

Lord Briggs JSC delivered the majority opinion and remarked that the case was not one with complex, disputed facts nor did it deal with complicated points of law. Instead, the case centred on the simple question: did the landlord act reasonably or unreasonably?

The Court summarised the established principles that are to be followed when assessing whether a party has acted reasonably:

1. The grounds for withholding consent must be to do with the relationship of landlord and tenant in regard to the subject matter of the lease.
2. Decisions should be based on the specific facts and care must be taken “not to elevate a decision made on the facts of a particular case into a principle of law”.
3. The conduct only has to be reasonable, it does not need to be right or justifiable.

In relation to the first test, Lord Briggs JSC held that the real risk of enfranchisement was central to a landlord and tenant relationship and in relation to the third test, he held that enfranchisement would clearly adversely affect the landlord’s reversionary interest which was a "quintessential type of consideration rendering reasonable the refusal of consent".

Therefore, the decision boiled down to the second part of the test which required analysis of the specific facts. Lord Briggs JSC was not persuaded that the Court should be primarily concerned with the interpretation of the terms of the lease. Instead, he favoured "a down to earth factual analysis of the economic consequences to the landlord of giving or refusing the requested consent".

He warned against "addressing the reasonableness of a refusal by reference to an over-refined construction of the lease" which was a principle established by Lord Denning called "the guise of construing the words".

The open user clause was not treated as trumping the planning clause and instead it was held that, read together, the two clauses permitted the use of the building for residential purposes from time to time as permitted by planning legislation.

Therefore, the user clause was effectively contingent on the planning clause. This permitted the landlord to withhold consent to a planning permission application if it was reasonable to do so. The planning clause "provided a measure of protection against that risk [of enfranchisement and] should [not] be treated as incapable of being used reasonably for that purpose." Therefore, on the basis that enfranchisement was likely to damage the value of the landlord’s reversionary interest, this was a reasonable ground for withholding consent.

Supreme Court minority opinion

Lady Arden JSC and Lord Wilson JSC disagreed with the majority holding and upheld the reasoning of the Court of Appeal and the High Court.

The dissent held that the "the first step is to examine the scope of the power of the lessor to refuse its consent… The most relevant circumstances to take into account are the other provisions of the lease". The user clause was a clear indication of the intention of the parties and it would be re-writing the lease if the user was deemed to be contingent on consent pursuant to the planning clause. Instead, the power to refuse consent was "impliedly limited to other aspects of a planning application".

The point was also made that a third party could obtain planning permission for the change of use and then that third party could take an assignment of the lease and implement the permission. This would not be in breach of the terms of the lease. This logic pointed to the intention of the parties when the lease was granted and suggested that the risk of enfranchisement was not something that the parties deemed to be important when the lease was granted.

The dissent analysed the facts of the case and reasonableness based on the deal made when the lease was granted, which generously included an open user clause, and held that it was unreasonable to withhold consent "if the effect of doing so is to negate the permission for residential use which it granted and for which it received valuable consideration".

Therefore, the dissent held that rather than base the decision on the financial outcome for the landlord, the proper analysis of reasonableness should be based on the deal brokered in the lease.

Conclusion

The decision is a worrying development for tenants whose actions in leases are governed by the "reasonable" decisions of landlords. In this case, despite the clear open user clause, the Court effectively assisted the landlord in finding an opportunity to justify their decision to withhold consent to the tenant’s otherwise legitimate proposals.

This case highlights that parties in dispute should remember that "reasonableness" is always going to be very fact specific and decisions based on similar factual circumstances are not decisive. However, this decision (and other recent decisions) point toward Courts giving landlords an increasingly broad scope for being deemed to act "reasonably" when withholding consent.

For further information, please contact Paul Jagger