The Supreme Court overturns Court of Appeal judgment in Sequent Nominees Ltd (formerly Rotrust Nominees Ltd) v Hautford Ltd [2019] UKSC 47

The Supreme Court has held that a landlord was reasonable to withhold consent to a tenant's planning application. This Supreme Court decision overturns the earlier Court of Appeal and High Court decisions. Click here to read the full Supreme Court judgment.

What is the background?

The property was a six storey terraced building (the Property). The basement and ground floor were historically used for retail, floors one and two were used for offices or ancillary retail uses to the lower levels and the third and fourth floors used for residential purposes.

Sequent Nominees Ltd (the Landlord) owned the freehold of the Property and Hautford Ltd (the Tenant) was the tenant of the Property pursuant to a long lease. The Landlord was also the freehold owner of the other properties in the block of which the Property was part. The user clause in the Tenant's lease permitted the whole or any part of the Property to be used for a variety of purposes, including residential use.

The Tenant requested the Landlord's consent to apply for planning permission to change the use of the first and second floors of the Property to residential. The Landlord refused on the basis that the residential use would expose the Landlord to the risk of a compulsory purchase of the freehold (enfranchisement under the Leasehold Reform Act 1967). The effect of enfranchisement would remove the Landlord's reversionary interest in the Property (potentially at a below market premium) and, in the Landlord's view, deprive it of control of the block containing the Property and therefore reduce the investment value of the block.

The Court of Appeal previously held there is no general principle that a landlord will usually be entitled to refuse consent where the grant of such consent will enable a tenant to enfranchise under the Leasehold Reform Act 1967. However, the Supreme Court reversed the earlier decisions of both the Court of Appeal and the High Court, finding for the Landlord - it was reasonable in refusing consent on the grounds of an increased enfranchisement risk.

The judgment

The user clause in the lease (clause 3(11)) permitted the whole of the Property to be used for residential purposes among other uses but gave no warranty that the Property benefitted from the relevant planning requirements to enable the Property to be used for residential purposes. Clause 3(19) of the lease contained a covenant by the Tenant not to apply for planning permission without the Landlord's prior written consent, such consent not to be unreasonably withheld.

There were compelling arguments from both the Landlord and the Tenant as to the interpretation of these clauses and the relationship between them. This was illustrated by the judgment hanging on a bare majority of three to two.

The Supreme Court judgment held that the Court of Appeal and High Court had both made an error in law on the basis that clauses 3(11) and 3(19) of the lease should in fact be read together. The Supreme Court used the principles established in Ashworth Frazer v Gloucestershire City Council [2001] 1 WLR 2180: the Landlord's refusal of consent was reasonable, particularly given the risk of diminution in value to the Property. The result of the clauses being read together was that residential use was only permitted in the Property to the extent that it was permitted by planning law.

What is the impact of this judgment on landlords?

The judgment will likely be embraced by landlords as it provides a way to reduce the risk of enfranchisement even where a lease permits residential use.

What is the impact of this judgment on tenants?

The judgment means that even where there is a flexible user clause in the lease, a tenant may still be restricted on use where the landlord's consent is required before a planning application can be made.

Tenants will be frustrated that the effect of this decision is to curtail their ability to exploit the potential of an open user clause and that their hands may be unexpectedly tied against residential use when it comes to re-purposing space they no longer need.

The lessons

Landlords can now confidently apply the principles of this Supreme Court decision and those set out in Ashworth Frazer v Gloucestershire City Council  and withhold consent to their tenants making a planning permission for a change of use to residential when that change would put their building at risk of an enfranchisement claim. They can do so safe in the knowledge that the courts will find that they have acted reasonably