Consent for change of use: What is reasonable?

Rotrust Nominees Limited v Hautford Limited [2018] EWCA Civ 765

Summary

A well-drafted commercial lease should protect a landlord's interest in the premises by limiting various rights the tenant would otherwise enjoy. It is therefore common to find leases that qualify a tenant's rights by imposing a proviso to obtain landlord consent. However, in most cases, landlords are prevented from withholding their consent unreasonably.

It is not always clear whether a decision to refuse consent is unreasonable and each case is dependent on the individual circumstances. In this case, the Court of Appeal held that it was unreasonable for a landlord to refuse consent for its tenant to apply for planning permission for change of use. Such permission would have increased the tenant's prospects of successful enfranchisement but the landlord was not entitled to restrict this.

The facts

The Appellant, Rostrust Nominees Limited, was the owner of 51 Brewer Street, London W1 (the "Property") which forms part of a block of buildings also owned by the Appellant (the "Estate"). The use of the Property is comprised as below:

The Respondent, Hautford Limited, was the tenant of the Property under a lease for 100 years from 25 December 1985 (the "Lease"). The Lease contained two relevant clauses (emphasis added):

"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 PROVIDED however that nothing herein contained shall imply or be deemed to be a warranty that the Demised Premises may in accordance with all Town Planning Law and Regulations now or from time to time in force be used for the purposes above mentioned."; and
"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 Respondent applied to the Appellant's predecessor in title for consent to apply for planning permission to change the use of the first and second floors from office to residential. The application was rejected on the basis that the change of use might enable the Respondent to acquire the freehold of the Property by enfranchisement under the Leasehold Reform Act 1967 (the "Act"). It was alleged that this would damage the landlord's reversion and be contrary to the Appellant's interests in management of the Estate. The Appellant became the owner of the Property after the Respondent had issued proceedings seeking a declaration that the decision to refuse consent was unreasonable.

The County Court decision

In brief, the County Court decided in favour of the Respondent and held that the Appellant had unreasonably withheld consent because:

the Appellant would achieve a collateral advantage if it could refuse consent. It would have the effect of imposing a further restriction on the use of the Property above and beyond the user clause in the Lease; and
the Appellant could protect its interests in the management of the Estate by including restrictive covenants, pursuant to section 10(4) of the Act, in any transfer of the Property by enfranchisement. Broadly speaking, this means that any transfer would be subject to existing enforceable restrictive covenants affecting the Property and an indemnity must be provided in respect of those covenants.

The arguments before the Court of Appeal

The Appellant appealed the decision and made the following submissions:

The purpose of a requirement for landlord consent is to protect the landlord from damage to the reversion and its general property interests. Enfranchisement would extinguish the relationship of landlord and tenant and would be a prime example of damage to the reversion.
There is no hierarchy of covenants; tenant's covenants as to user, making planning applications and making alterations all have equal status.
The freehold covenants under section 10(4) of the Act were not equivalent to covenants between landlord and tenant due to the differences in ability to enforce.

The Court of Appeal decision

The Court of Appeal dismissed the appeal and made the following comments:

The same general principles apply in cases concerning a tenant's covenant not to assign or sublet without landlord's consent, and to a tenant's covenant not to apply for planning permission without landlord's consent, where consent is not to be unreasonably withheld.
Whether a decision to refuse consent is unreasonable will depend on individual circumstances and facts are critical. This case should therefore not be relied on as being authority for the proposition that it is always unreasonable to refuse consent where granting consent would increase a tenant's prospects of successful enfranchisement.
What is reasonable is judged at the time of the application for consent and will depend on the circumstances at that moment in time.
Residential use of the Property was permitted without the requirement to obtain landlord consent. As anyone can apply for planning permission to change the use of the Property and the Respondent could rely on that permission, it would be impractical to restrict the use of the Property in this way by ignoring the user clause and relying on the Appellant's ability to refuse consent.
The fact that the Appellant owned the Estate was irrelevant to the decision that the refusal of consent was unreasonable and the argument relating to freehold covenants under section 10(4) of the Act was rejected.

Our comment

This case provides a helpful analysis of how the Court interprets the relationship between covenants in a lease and illustrates the difficulty in striking a balance between protecting the interests of landlords and allowing tenants reasonable flexibility. Landlords will no doubt be frustrated by the outcome of this case but the Appellant has been refused permission to appeal to the Supreme Court.