Leaseholder fails to overturn Freeholder's refusal of consent to Change of Use to Residential for enfranchisement risk
The landlord in this case (Sequent Nominees Limited (formerly Rotrust Nominees Limited) v Hautford Limited  UKSC47) has succeeded before the Supreme Court where it had lost at every level below that.
The leaseholder wanted to change the use of part of the property to residential. This is likely to have enabled it to acquire the freehold via compulsory purchase powers under the enfranchisement legislation on the basis that it then fell within the definition of a “house”.
The property in question comprised six floors, four of which have been used for non-residential purposes. The leaseholder wanted to change the use of the first and second floors to residential leaving only the ground and basement in non-residential use.
Its landlord sought to prevent that by refusing consent to the leaseholder’s application for permission to make the necessary planning application in circumstances where this consent could not be withheld unreasonably and the lease provision concerning the use to which the property could be put expressly permitted residential use.
At first instance and before the court of appeal the leaseholder won on the basis that the clause in the lease that dealt with the use to which the premises could be put allowed residential use. If the landlord were allowed to refuse consent under the planning application restriction elsewhere in the lease that would enable one of the permitted types of use to be enjoyed then this would operate to cut down the freedom of use that had been negotiated for and so give the landlord a collateral advantage.
In addition the parties would have been represented when taking the lease. The user restriction was bespoke and agreed against a background where the landlord should have known that the ability to put the premises for residential use might trigger entitlement to enfranchisement; at that time you needed to satisfy a residence requirement too. The court at first instance found a distinct purpose behind the planning restriction other than giving the landlord a second chance at restricting use; the landlord should be entitled to say “no” to a planning application or related agreement that would impose onerous obligations upon it. Further anyone could make a planning application and so surely the parties would not have been concerned to exclude the tenant from being able to do so.
The Supreme Court decision was by a majority of 3 to 2 with a strong dissenting decision led by Lady Arden. Lord Briggs giving the majority judgment set out the three principles that applied to judging the reasonableness of the landlord’s decision from Ashworth Fraser Limited v Gloucester City Council  1WLR2180:
- firstly the landlord’s decision has to be based on grounds connected with the landlord and tenant relationship;
- secondly it is a question of fact; and
- thirdly the landlord’s obligation is to show that its conduct was reasonable, not that it was right or justifiable.
The risk of the landlord’s interest being acquired by enfranchisement was found to be associated with the landlord and tenant relationship and so could be relied upon in this regard.
Some support was taken from the two previous cases where a landlord had been found reasonable in refusing consent (in that case to an assignment) on the grounds of the enfranchisement risk. They involved leases granted prior to the enfranchisement legislation coming into force. Enfranchisement risk was not the only grounds on which the landlord based its decision in those cases.
He found the decisions below were based on faulty reasoning; he criticised the judge at first instance for deciding that the planning consent clause was aimed at mischief other than minimising the risk of enfranchisement of the freehold, such that this was not a ground that could be relied upon by the landlord. He did not accept the Court of Appeal’s position that you shouldn’t attribute control of enfranchisement risk as a purpose to the planning consent restriction when a third party could apply for planning consent without input from either of the parties to the lease. The argument made by the leaseholder’s QC that allowing the landlord to refuse consent based on enfranchisement risk grounds would amount to sanctioning a derogation from grant was rejected.
They were described collectively as an “over-refined attempt to identify a limited original purpose behind [the planning restriction] clause” which he determined to be contrary to the dictum of Lord Denning in Bickel v Duke of Westminster  QB517 where he stated that the court shouldn’t determine by strict clause the grounds on which the landlord might refuse consent as the contract didn’t specify any particular grounds. “Nor should the courts limit him. Not even under the guise of considering the words” (paragraph 524) and so in this case the court shouldn’t attempt to construe the planning restriction clause to say that perhaps it was limited to planning considerations only in view of the express consent within the user restriction for residential purposes.
The unusually relaxed user restriction permitting residential use had to be read in conjunction with the planning restriction clause in question, “read together the effect of those two clauses was to permit the tenant to use for residents only such parts of [the property] as were from time to time permitted by the planning regime to be used for residential purposes”. In short the landlord’s permission to use the premises for residential use was subject to it in future permitting the leaseholder to apply for planning permission to allow such use.
It was wrong to look for a single purpose of the relevant restriction, in this case the planning clause and then say there could not be others. In this case the judge at first instance found that it was to enable the landlord to avoid liability under the conditions that might come with a given planning permission or related planning obligation agreement. There could be other purposes for the clause being drawn as it was or for the landlord’s refusal of consent in that regard; so in this case consideration of enfrachisement risk. Rather than looking for a single purpose you have to establish on express terms what it allows the landlord to do and then assess reasonableness following the above three principles.
So landlords benefiting from a lease provision that requires the tenant to apply for consent to make a planning application can rest easy. That said the court did not rule as to whether the tenant would be in breach of the lease if it encouraged a third party to make the planning application.
Tenants wishing to create the right to enfranchise in this way will be disappointed that this avenue has been potentially closed off subject to the above point.