LORD BRIGGS: (with whom
Lord Carnwath and Lord Hodge agree)
Introduction
1.
This appeal concerns what is sometimes called a “fully qualified
covenant” in a lease of real property. Leases commonly contain a series of
covenants by the tenant not to do things, typically relating to assignment,
sub-letting and the use of the demised premises. By what is called a qualified
covenant, the tenant promises not to do something without the landlord’s
consent. By a fully qualified covenant, the tenant promises not to do something
without the landlord’s consent, not to be unreasonably withheld.
2.
In the present case, the tenant promised not to apply for any planning
permission without the consent of the landlord, not to be unreasonably
withheld. The tenant wished to apply for planning permission for a change of
use of part of the demised premises, from business to residential use, but the
landlord refused consent on the ground that this would substantially increase
the risk that the tenant could compulsorily acquire the freehold reversion
under the Leasehold Reform Act 1967. The tenant claimed that the landlord was
unreasonably withholding consent. Both the judge and the Court of Appeal
agreed. This was in their view because, although the premises were in mixed use
at the time of its grant, the lease permitted the tenant to use the whole of
the premises for residential purposes. Since this inevitably exposed the
landlord to the risk of a compulsory purchase of the freehold
(“enfranchisement”), to refuse permission to the tenant to seek planning
permission for a change of use of part of the premises to residential use was
to seek to obtain an uncovenanted advantage falling outside the purpose of the
fully qualified covenant against seeking planning permission.
3.
The landlord appeals to this court, upon the basis that protection against
an increased risk of enfranchisement is a well-recognised and legitimate reason
for refusing consent under a fully qualified covenant, within the general
purposes of restrictive covenants in leases, namely the protection of the value
of the reversion and, a fortiori, its very existence.
The Facts
4.
The leasehold property in question is a terraced building at 51 Brewer
Street London W1, being part of the appellant’s Soho estate which includes
numbers 39-61 (odd numbers) Brewer Street. No 51 is constructed over six floors
including a basement. The basement and ground floor are, in area, much greater
than any of the upper floors.
5.
By a lease dated 4 April 1986 (“the Lease”) the whole of No 51 was let
by Standard Wharf (No 2) to Burgess & Galer Ltd for a 100 year term from 25
December 1985, for a premium of £200,000 and a peppercorn rent. The respondent
has been the tenant under the Lease since 1998. The appellant is now the
successor in title to the reversion under the Lease, as freeholder of No 51.
The whole of No 51 has since October 1998 been sublet, initially to Cusdens
(Victoria) Ltd and, following an assignment, since 2008 to Romanys Ltd, under
two successive sub-leases, the second of which will expire in September 2023.
6.
The Lease contains the following relevant tenant’s covenants. Clause
3(11) contained a general user covenant in the following terms:
“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 Laws and Regulations
now or from time to time in force be used for the purpose above mentioned.”
7.
By clause 3(15) the Lease contained further specific user covenants
prohibiting, for example, noxious noisy or offensive trades, illegal or immoral
acts, use as a sex shop, use for an auction, for holding of public meetings or
entertainments or use as a betting shop, public house, restaurant, off-license
or wine bar.
8.
By clause 3(19) the tenant covenanted as follows:
“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 …”
This is the fully qualified covenant
in issue on this appeal.
9.
The Lease permitted assignment of the whole (but not part) of the
premises and a sub-letting of the whole or part of the premises otherwise than
during the last seven years of the term, in relation to which there was a fully
qualified covenant.
10.
At the time of the grant of the Lease in 1986, the ground floor and
basement of No 51 were in retail use. The first and second floors were used for
storage and as a staff area in connection with the retail use on the lower
floors. The top two floors were in occasional residential use.
11.
At all material times the permitted use of No 51 in planning terms has
been as follows: for the ground floor and basement it is retail; for the first
and second floors it is office/ancillary; for the top two floors it is
residential.
12.
Between 2013 and 2015 Romanys carried out, and the respondent paid for,
building works on the four upper floors of No 51 by which each floor was
converted into a self-contained flat. Although this was carried out with
knowledge of the landlord, it reserved its rights to refuse an application for
permission to apply for a change of use under clause 3(19) of the Lease, in
respect of the first and second floors. Following the completion of those
works, the top two floors of No 51 have been let to residential tenants but,
pending the obtaining of planning permission for consent to a change of use,
the first and second floors remain vacant.
13.
At the time of the grant of the Lease in 1986, the freeholder faced no
immediate risk of enfranchisement because the 1967 Act imposed a residence
qualification on a tenant which could not be satisfied by a limited company.
That qualification was however removed by the Commonhold and Leasehold Reform
Act 2002. Nonetheless the proportion of No 51 in residential use did not, for
as long as it was confined to the top two floors, amount to a sufficient
proportion of the whole building to give rise to a real risk of
enfranchisement, because the building could not, in that state of occupation,
be described as a “house … reasonably so called” within the meaning of section
2(1) of the 1967 Act. It is common ground that it was for that reason that,
having served a notice of claim to acquire the freehold under the 1967 Act in
October 2012, the respondent abandoned it in January 2013.
14.
But the judge (Judge Collender QC) found, and it is not now in dispute,
that if (as he thought likely) the respondent were to obtain planning
permission for a change of the use of the first and second floor to
residential, this would, in his words, “substantially enhance” the respondent’s
prospects of obtaining enfranchisement.
15.
On 17 April 2015 the respondent applied under clause 3(19) of the Lease
for permission from the appellant’s predecessor in title (“Tuesday One”) to
apply for planning permission to change the use of the first and second floors
of No 51 to residential, on the basis that residential use of those two floors
was permitted by clause 3(11). In its reply refusing consent dated 30 April
2015, Tuesday One identified the increased risk of a successful claim to
enfranchise under the 1967 Act as its reason for refusal. Without admitting
that an enfranchisement claim would then necessarily succeed, the refusal
letter continued:
“The effect of a successful claim
to enfranchise would not merely damage the reversion; it would deprive our
client of its reversion in the Premises entirely. Furthermore, it would deprive
our client of control for estate management purposes of the block containing
the Premises, which would have an adverse impact on the value of our client’s
investment in the block.”
It is common ground on the pleadings in the litigation
which ensued that one purpose of the respondent’s contemplated planning
application was indeed to improve its prospects of a successful claim for
enfranchisement.
16.
Tuesday One’s refusal of consent under clause 3(19) was the casus
belli for this litigation. The respondent was successful, both at trial and
in the Court of Appeal, in its contention that consent to its intended planning
application had been unreasonably withheld. The respondent’s success turned
upon a perception by both the courts below (although for slightly different
reasons) about what was and was not, as a matter of construction of the Lease,
the purpose of clause 3(19).
17.
In his careful and comprehensive judgment Judge Collender put it this
way:
“I accept that the purpose of the
covenant at clause 3(19) of the lease is to protect the lessor from the
possible effect of an application for planning permission, because as the owner
of the land, it could be subject to enforcement action if there were a breach
of a planning obligation. I accept the argument that it is not to enable the
lessor to restrict or limit the permitted use under clause 3(11). In my
judgment, the lessor’s refusal of consent under clause 3(19) is unreasonable
because thereby they are seeking to achieve a collateral purpose, ie the
imposition of a restriction on use that was not negotiated and is not included
within clause 3(11).”
18.
Giving the leading judgment in the Court of Appeal ([2018] Ch 603) Sir
Terence Etherton MR agreed generally with the judge’s reasoning. In his view,
the key reason why clause 3(19) could not be construed as having been intended
to permit the landlord to refuse to consent to an application for planning
permission for a use authorised by clause 3(11) which increased the risk of
enfranchisement was because any third party, other than the tenant, could apply
for the same planning permission, which the landlord would be powerless to
oppose, and which would give rise to the same increased risk of enfranchisement.
At para 49 he put it this way:
“If Rotrust were correct in its
argument, Hautford would be precluded from applying for planning permission to
enable Hautford to use the first and second floors for residential purposes for
the 70 or so years remaining of the original 100-year term so long as Rotrust
was the landlord or any assignee of the freehold held the same views as
Rotrust. Hautford would be precluded from doing so, 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. Indeed,
that would have been the position from the first day of the 100-year term. It
seems inconceivable that this was the intention of the original parties to the lease.”
19.
Both the courts below regarded the appellant’s additional estate
management reason for refusing consent as insufficient to render that refusal
reasonable. The judge held that the effect of the loss of one freehold within
the terrace upon enfranchisement could largely be remedied by the imposition of
freehold covenants under section 10(4) of the 1967 Act, and the Court of Appeal
upheld that analysis. In this court it was sensibly conceded by the appellant
that, regardless whether section 10 afforded a complete remedy for the loss of
this one freehold within the terrace in estate management terms, this could not
on its own be a sufficient ground for a reasonable refusal of consent.
The Law
20.
The substantial body of case law which assists the court in determining
whether a particular refusal of consent under a fully qualified covenant is
unreasonable is not, subject only to one matter, significantly in issue on this
appeal. Rather, the outcome turns on whether the courts below were correct in
their identification of the limited purpose behind clause 3(19) of this
particular Lease. It is therefore appropriate to set out the relevant
principles relatively briefly. The only contentious question of principle is
whether the cases (and there are several) which suggest that a landlord may
reasonably refuse consent under a fully qualified covenant to the doing of
something by the tenant which increases the risk of enfranchisement are limited
to covenants in leases granted before the passing of the 1967 Act. Both the
courts below considered that this was so: see para 63 of the judge’s judgment
and para 53 of the judgment of the Master of the Rolls.
21.
The summary of the relevant principles which best combines completeness
with conciseness is to be found in the judgment of Balcombe LJ in International
Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] Ch 513, at 519H-521E. Although the seven principles there set out are directed
to the reasonableness of a refusal of consent to an assignment, the substance
of them is equally applicable to refusal of consent to the making of a planning
application. It is unnecessary to set them out here because, in Ashworth
Frazer Ltd v Gloucester City Council [2001] 1 WLR 2180 they were, without
being disapproved, helpfully condensed by the House of Lords into three
overriding principles. At paras 3 to 5 (on pp 2182-2183) Lord Bingham of
Cornhill said as follows:
“The first (Balcombe LJ’s
second principle) is that ‘a landlord is not entitled to refuse his consent
to an assignment on grounds which have nothing whatever to do with the
relationship of landlord and tenant in regard to the subject matter of the
lease …’”
22.
Secondly (and shorn of Lord Bingham’s reference to authority):
“In any case where the
requirements of the first principle are met, the question whether the
landlord’s conduct was reasonable or unreasonable will be one of fact to be
decided by the tribunal of fact. There are many reported cases. In some the
landlord’s withholding of consent has been held to be reasonable …, in others
unreasonable … These cases are of illustrative value. But in each the decision
rested on the facts of the particular case and care must be taken not to
elevate a decision made on the facts of a particular case into a principle of law.”
23.
Thirdly:
“The landlord’s obligation is to
show that his conduct was reasonable, not that it was right or justifiable. As
Danckwerts LJ held in Pimms Ltd v Tallow Chandlers Co [1964] 2 QB 547,
564: ‘it is not necessary for the landlords to prove that the conclusions which
led them to refuse consent were justified, if they were conclusions which might
be reached by a reasonable man in the circumstances ...’. Subject always to the
first principle outlined above, I would respectfully endorse the observation of
Viscount Dunedin in Viscount Tredegar v Harwood [1929] AC 72, 78 that
one ‘should read reasonableness in the general sense’. There are few
expressions more routinely used by British lawyers than ‘reasonable’ and the
expression should be given a broad, common sense meaning in this context as in
others.”
24.
At para 67, (on p 2201), Lord Rodger of Earlsferry said this:
“The test of reasonableness is to
be found in many areas of the law and the concept has been found useful
precisely because it prevents the law becoming unduly rigid. In effect, it
allows the law to respond appropriately to different situations as they arise.
This has to be remembered when a court is considering whether a landlord has ‘unreasonably
withheld’ consent to the assignment of a lease.”
He continued by endorsing the passage from Tredegar v
Harwood to which Lord Bingham had earlier referred.
25.
Both Lord Bingham and Lord Rodger placed particular emphasis upon the
following dicta of Lord Denning MR in Bickel v Duke of Westminster
[1977] QB 517, at 524:
“The words of the contract are
perfectly clear English words: ‘such licence shall not be unreasonably
withheld’. When those words come to be applied in any particular case, I do not
think the court can, or should, determine by strict rules the grounds on which
a landlord may, or may not, reasonably refuse his consent. He is not limited by
the contract to any particular grounds. Nor should the courts limit him. Not
even under the guise of construing the words.” (Emphasis added)
26.
The Ashworth Frazer case is, again, about refusal of consent to
an assignment. Nonetheless, the general statements of principle which it
contains are equally applicable to a refusal of consent to an application for
planning permission, and need no further refinement or elucidation as general
principles.
27.
The Bickel case was one of those in which it was held reasonable
for a landlord to refuse consent to the doing of something by the tenant which
would cause or increase a risk of enfranchisement. Another, referred to by the
Court of Appeal, is Norfolk Capital Group Ltd v Kitway Ltd [1977] QB
506. In both cases the relevant lease was granted before the passing of the
1967 Act, and the judgments were handed down by differently constituted Courts
of Appeal within ten days of each other in mid-1976.
28.
Taking the (slightly earlier) Kitway case first, the issue was
whether the landlord could reasonably refuse consent to an assignment by a
limited company (which could not enfranchise) to a private individual (who
could after five years’ residence). All three members of the court gave judgments,
and it is impossible to discern in any of them a process of reasoning along the
lines that it was only because the lease was granted prior to the coming into
force of the 1967 Act that it was reasonable for a landlord to have regard to
the risk of enfranchisement in refusing consent. On the contrary, all three
members of the court appeared to have regarded such a reason for refusal as
eminently reasonable, subject only to authorities in Rent Act cases about
“normal” and “abnormal” assignments which, in the event, they held not to be
applicable. At p 511 Megaw LJ said:
“If one were asked, without having
been taken into any legal authorities relating to the matter, whether or not,
in the circumstances which I have outlined, it was unreasonable for the landlords
to refuse their consent when the consequences of giving that consent and of the
assignment being made were likely to be that they would be deprived of their
freehold interest in the property in five years’ time, I find it very difficult
to think that anyone would find it possible to say that the landlords’ refusal
was unreasonable.”
At p 515 Brown LJ said:
“If there were no authorities, I
think, like Megaw LJ, that there could be no doubt that the landlords’ refusal
here was entirely reasonable.”
Geoffrey Lane LJ added, at p 516:
“Now, what are the facts here? Mr
Barnes concedes that the value of the landlords’ reversion is less if there is
a possibility of any of the mews houses being enfranchised. There is clearly
such a possibility, and accordingly the value of the landlords’ reversion is
less. That being so, it would be a strange landlord indeed who gave his consent
to the proposed assignments. The refusal of the landlords in the present
circumstances was eminently reasonable …”
29.
In the Bickel case the tenants, a friendly society not in
occupation, requested consent to assign the lease to their sub-tenant, who was.
This gave rise to the likelihood that, five years later, the assignee would be
entitled to enfranchise. In a later part of the passage approved by Lord
Bingham and Lord Rodger in the Ashworth Frazer case (quoted above), Lord
Denning continued, at [1977] QB 517, 524D:
“The landlord has to exercise his
judgment in all sorts of circumstances. It is impossible for him, or for the
court, to envisage them all. When this lease was granted in 1947 no one could
have foreseen that 20 years later Parliament would give a tenant a right to buy
up the freehold. Seeing that the circumstances are infinitely various, it is
impossible to formulate strict rules as to how a landlord should exercise his
power of refusal.”
30.
This passage from Lord Denning’s judgment is not to be read as meaning
that it was only because the lease was granted prior to the coming into force
of the 1967 Act that the landlord could reasonably refuse consent to an
assignment, on the grounds of an increased risk of enfranchisement. On the
contrary, Lord Denning was simply saying that the landlord could do so in spite
of the fact that such a risk could not have been within the contemplation of
the parties at the time of the grant of the lease, so that it could not have
been a purpose for which the covenant against assignment had originally been
sought and given. He used the risk of enfranchisement as an example of the
infinitely variable circumstances in which the landlord has a choice to consent
or refuse consent, illustrative of the need to address the reasonableness of a
refusal by reference to the facts as they are at the date of the tenant’s
request. It was a warning against addressing the reasonableness of a refusal by
reference to an over-refined construction of the lease as at the time of its
grant, something which Lord Denning called “the guise of construing the words”.
31.
The thinking that a fully qualified covenant may not entitle a landlord
to refuse consent because of an increased risk of enfranchisement where the
covenant is contained in a lease granted after the passing of the 1967 Act may
be based upon the notion that, if the lease itself gives rise to such a risk,
then the landlord (who must be taken to be cognisant of the 1967 Act) must be
assumed to have undertaken that risk by granting the lease, so that to seek to
fend off that risk by the refusal of consent would be to obtain a collateral or
uncovenanted advantage. The lease in the present case was granted after the
passing of the 1967 Act, but to a limited company tenant which could not (then)
enfranchise. But, as the judge observed, there was no sufficient restriction
upon an assignment to a private individual, and that would increase the risk.
Furthermore, the permission to the tenant under clause 3(11) to use the whole
of the premises for residential purposes might be thought to invite it.
32.
It is over-simplistic, and contrary to the principles as laid down in
the Ashworth Frazer case, to approach this question in any rigid or
doctrinaire way, still less solely by reference to original purposes of the
covenant in clause 3(19) which may have been within the contemplation of the
parties when the lease was granted. It will in every case be a question of fact
and degree measured as at the date upon which the relevant consent is sought by
the tenant. There will no doubt be some leases granted after the passing of the
1967 Act which render the risk of enfranchisement so great and so obvious that
the risk is not materially increased by the tenant doing that for which he
seeks the landlord’s consent. There will be other cases where the alteration in
the risk attributable to the giving of consent is substantial. Likewise there
will be cases where the landlord’s reversion is of only nominal value (such as
the reversion on a 999 year lease) and others where, notwithstanding reforms to
the enfranchisement legislation, the landlord nonetheless reasonably
anticipates a real diminution in the value of his reversion occasioned by the
increase in the risk of enfranchisement, which a statutory right to
compensation will not sufficiently eradicate. In the present case, it is not in
dispute either that the risk of enfranchisement would be substantially
increased by the grant of the proposed planning permission, or that the
appellant’s reversionary interest is of real value which would be adversely
affected by enfranchisement, notwithstanding a statutory right to compensation.
Analysis
33.
This appeal does not turn upon any refined analysis of the general
principles relating to the reasonableness or otherwise of the refusal of
consent under a fully qualified covenant. Indeed, the reasoning in the Ashworth
Frazer case is antipathetic to the carrying out of any such process of
refinement. Nor is there any real dispute about the relevant facts, applicable
as at the date when the respondent requested consent to apply for planning
permission. The real issue is whether the courts below were correct in
construing the Lease in such a way as to exclude resisting an increased risk of
enfranchisement as a legitimate purpose of the right to refuse consent under
clause 3(19).
34.
Three reasons have been advanced in support of that conclusion. The
first, (reached by the judge) was that clause 3(19) had another, different,
purpose which necessarily excluded minimising the risk of enfranchisement as a
purpose. The second (adopted by the Court of Appeal) was that it made no sense
to attribute such a purpose to clause 3(19) if third parties could apply for
the same planning permission free of any such restraint and with the same
adverse consequences to the landlord. The third, advanced by Miss Tiffany Scott
QC for the respondent, was that to treat clause 3(19) as permitting the landlord
to refuse consent to an application for planning permission for a change of use
to any of the uses permitted by clause 3(11) would amount to sanctioning a
derogation from grant.
35.
In my opinion none of those three strands of reasoning supports the conclusion
reached by the courts below. All of them seek to address the question whether
the landlord’s consent was unreasonably withheld by reference to an
over-refined attempt to identify a limited original purpose behind clause
3(19), contrary to Lord Denning’s dictum in the Bickel case, approved in
the Ashworth Frazer case, that it is wrong in principle to address the
question “under the guise of construing the words”.
36.
Mr Philip Rainey QC for the appellant submitted that nothing in clause 3
and in particular clause 3(11) of the Lease could be treated as a grant because
they were all parts of a comprehensive series of interlocking covenants
restrictive of use. That may be formally correct, but it misses the substance
of Miss Scott’s point. Nonetheless, looking at the question as a matter of
substance, it cannot be said that the Lease, read as a whole, conferred an
unqualified right on the tenant to use the whole, or any particular part, of No
51 for residential purposes. Clause 3(11) must be read with clause 3(19), which
required the tenant to perform and observe all the provisions and requirements
of the planning legislation. Read together, the effect of those two clauses was
to permit the tenant to use for residential purposes only such parts of No 51
as were from time to time permitted by the planning regime to be used for
residential purposes. This might be either because of an established use when
the Lease was granted, or because the tenant obtained, with the landlord’s
consent, permission for residential use, or because such permission was
obtained by a third party or, by some change in the legislation, residential
use became lawful without the need for planning permission. At the time of the
grant of the Lease, the tenant could not without breach of covenant use the
first and second floors for residential purposes. At the time when it sought
consent to apply for planning permission for that purpose, residential use of
those two floors was still prohibited by the planning legislation, and
therefore by clause 3(19).
37.
As to the judge’s reasoning, it may well be that one purpose of clause
3(19) was to protect the landlord from liability for compliance with conditions
upon which a planning permission requested by the tenant might be granted. But
the identification of that specific purpose by no means excludes other purposes
for the existence of clause 3(19), or for the use of the landlord’s right (not
unreasonably) to refuse consent. Nothing in the language of clause 3(19)
supports the judge’s identification of a single purpose for its existence
within the Lease, and it is simply a non sequitur to say that, because
one specific purpose can be identified, no other purpose is permissible. On the
contrary the correct approach is to construe clause 3(19) so as to discover
what, upon its express terms, it permits the landlord to do and then to decide
the question of unreasonableness by asking whether the landlord’s refusal
serves a purpose sufficiently connected with the landlord and tenant
relationship, as at the time when consent is requested, in accordance with the
first of Lord Bingham’s three principles in the Ashworth Frazer case,
set out above.
38.
Turning finally to the Court of Appeal’s reasoning, it is undoubtedly
true that the combination of clause 3(11) and the ability of a third party to
seek planning permission for the residential use of the first and second floors
of No 51 together created a vulnerability of the freehold to enfranchisement
which would not have existed if clause 3(11) had itself contained provision
requiring the tenant to seek the landlord’s consent for an increased level of
residential use within the building. But the fact that the Lease by its terms
rendered the freehold vulnerable to enfranchisement does not mean that a clause
like 3(19), which provided a measure of protection against that risk, should be
treated as incapable of being used reasonably for that purpose. The fact is
that, by the time when the respondent sought consent under clause 3(19), no
third party had applied for planning permission for a change of the use of the
first and second floors to residential and, so far as this court is aware, no
such third party application has been made to date. The result is that, looking
at the matter as a question of fact as at the time when the respondent sought
consent, the landlord’s ability to refuse that consent continued to afford a
real measure of protection against enfranchisement of the freehold.
39.
It follows that the courts below treated the question whether consent
had been unreasonably refused as effectively determined by an erroneous
construction of the Lease, contrary to Lord Denning’s guidance in the Bickel
case. They therefore made an error of law which requires this court to consider
the matter afresh, upon the same undisputed facts.
40.
By April 2015 (when consent was sought) it remained unlawful in planning
terms for the first and second floors of No 51 to be used for residential
purposes. There was, as at that date, no real risk of enfranchisement. On the
judge’s findings, planning permission, if requested, was likely to be granted,
and the consequence would significantly increase the risk of enfranchisement
which would, in turn, have a real rather than purely theoretical adverse
consequence in terms of the value of the freehold reversion to the appellant.
No third party had applied, or was threatening to apply, for similar planning
permission for change of use.
41.
Applying Lord Bingham’s first principle in the Ashworth Frazer
case, it cannot possibly be said that seeking to avoid a significant increase
in the risk of enfranchisement, with consequential damage to the reversion, was
something extraneous to or dissociated with the landlord and tenant
relationship created by the Lease. On the contrary, damage to the reversion is
the quintessential type of consideration rendering reasonable the refusal of
consent, as is illustrated in particular by the dicta (quoted above) in the Kitway
case.
42.
Applying the second principle, a down to earth factual analysis of the
economic consequences to the landlord of giving or refusing the requested
consent in the present case plainly suggests that a refusal is reasonable.
Applying the third principle, the appellant did not need to show that a refusal
was right or justifiable, but merely that it was reasonable. In my opinion it
clearly was.
43.
For those reasons I would allow this appeal.
LADY ARDEN:
(dissenting)
44.
I have come to the conclusion that this appeal should be dismissed
effectively for the reasons given by the Court of Appeal and the judge. The
first step is to examine the scope of the power of the lessor to refuse its
consent to a planning application and this can only be done by interpreting
clause 3(19) in the context of the lease in the usual way. The most relevant
circumstances to take into account are the other provisions of the lease,
including the lessee’s unrestricted right to use the whole of the premises if
he wishes to do so for residential purposes. I do not agree that this
sub-clause must be read subject to the lessee first obtaining the lessor’s
consent to a planning application for a change of use (where that is required)
or that, as Lord Briggs has concluded, the right to use the premises for
residential purposes was limited to those parts for which planning consent had
already been obtained. That would involve writing words into the user clause as
opposed to treating the lessor’s power reasonably to refuse its consent in
clause 3(19) as impliedly limited to other aspects of a planning application.
45.
The lessor would have been ill-advised to rely on his power to withhold
his consent to a planning application as a means of preventing the lessee from
improving his chances of obtaining leasehold enfranchisement because a third
party, such as a developer, could obtain that consent free from the restrictions
in the lease.
46.
It is not a point which is ultimately in the lessor’s favour that at the
date of the lease the lessee could not apply for leasehold enfranchisement
though he could have done if he had been an individual. It was only possible
for a company to apply as a result of a subsequent amendment. The lessee was,
however, from the date of the lease free under clause 3(13) to assign the whole
of the premises to an individual who would have been free to apply for
leasehold enfranchisement when he met the conditions as from the date of the
lease. The lessor must be taken to have been aware of this.
47.
The key point in Lord Briggs’ judgment is that the lessor was entitled
to protect the value of his reversion against a substantial increase in the
chances of the lessee achieving leasehold enfranchisement and thus destroying
the lessor’s interest in the reversion. I have no doubt that the lessor can
seek to protect his own interests when exercising power to refuse consent in
this way, but only when that is within the purposes for which the lease permits
him to use the power to refuse consent. On my interpretation of the lease, the
power to refuse consent to a planning application was not granted to enable the
landlord to cut down the user clause.
48.
Lord Briggs considers that in Bickel v Duke of Westminster [1977]
QB 517, 524 (which was approved by the House of Lords in Ashworth Frazer)
Lord Denning MR held that the landlord could reasonably refuse consent to an
assignment on the grounds that it gave rise to an increased risk of
enfranchisement “in spite of the fact that such a risk could not have been
within the contemplation of the parties at the time of the grant of the lease”.
I do not agree that that is the way to read Lord Denning MR’s judgment. In my judgment,
it is clear that Lord Denning MR attached considerable weight to the fact that
the parties had not known about the possibility of enfranchisement when they
entered into the lease. Enfranchisement was something of a windfall for the
tenant. Lord Denning MR held, at pp 524-525:
“I have studied all the previous
cases and find little guidance in any of them to solve our present problems.
The reason is simply because it is a new situation, consequent on the Leasehold
Reform Act 1967, which was never envisaged before. I would test it by
considering first the position of the landlords - the Grosvenor Estate. They
hold a large estate which they desire to keep in their hands so as to develop
it in the best possible way. This would be much impeded if one house after
another is bought up by sitting tenants. Further, if they are compelled to sell
under the Leasehold Reform Act, they will suffer much financial loss, because
the price is much less than the value of the house. Test it next by considering
the position of the tenants - the Foresters. They hold the premises as an
investment and want to sell it. It matters not to them whether they sell to the
landlord or to sub-tenants, so long as they receive a fair price for it. The
landlords say they are willing to negotiate a fair price for it. They will give
the Foresters a sum equivalent to that offered by the sub-tenants. Test it next
by considering the position of the sub-tenant herself. When she took her
sub-lease, she had no possible claim to enfranchisement. It was at a high rent,
outside the Act of 1967. She is quite well protected by the Rent Acts so far as
her own occupation is concerned. She will not be evicted at the end of her
term. The only result on her of a refusal will be that she will not be able to buy
up the freehold for a very low figure.”
49.
Lord Denning MR’s insight was that it was not appropriate to decide the
unreasonableness of consent to assignment, as Orr and Waller LJJ did, by
reference to whether the circumstances of the proposed assignment were
abnormal. They based their conclusion on the availability of enfranchisement
following assignment, when that was not available at the date of the lease.
Lord Denning MR considered that the court should make an assessment of all the
relevant considerations to determine whether the consent was unreasonably
refused. In Ashworth Frazer v Gloucester City Council [2001] 1 WLR 2180
at p 2183, Lord Bingham held that Lord Denning MR’s approach was the correct
one. The other members of the House of Lords agreed with Lord Bingham or, in
the case of Lord Rodger of Earlsferry, that Lord Denning MR was correct to hold
that the question whether the refusal of consent was reasonable was one of the
circumstances of the case, and not of law (see para 74 of Lord Rodger’s speech).
50.
Here the parties cannot have intended that the lessor should be able to
protect itself against the increased risk of leasehold enfranchisement,
resulting from an increased use of the premises for residential purposes, by
using the power to refuse consent to a planning application when the lessee
could assign to an individual who, even at the date of the lease, would have
the right to apply for enfranchisement, and when any necessary planning
permission for a change of user could be obtained by the prospective assignee
without any involvement of the lessee. This would be so even if the
circumstances at the date of the application were that the risk stood to be
substantially increased and the lessor might lose his right to the reversion
completely. In those particular circumstances, I consider that the judge and
the Court of Appeal were entitled to conclude, and right to conclude, that it
would be unreasonable for the lessor to use clause 3(19) for such purpose.
51.
I would therefore dismiss the appeal essentially for the reasons given
by the Court of Appeal and the judge.
LORD WILSON:
(dissenting)
52.
Like Lady Arden, I would have dismissed this appeal.
53.
Clause 3(11) of the Lease is crucial.
54.
In the letter dated 17 April 2015 by which, through its solicitors, the
leaseholder sought the freeholder’s consent under clause 3(19), it suggested
that clause 3(11) was crucial. So did the trial judge and the Court of Appeal.
The subclause bears recital again. It is a covenant by the leaseholder
“(11) 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 Laws and Regulations
now or from time to time in force be used for the purpose above mentioned.”
55.
Clause 3(11) is not a common form, or boilerplate, subclause. It is a
bespoke subclause of singular generosity to the leaseholder. One result of it
is that the Lease goes further than to omit to prohibit the use of any part of
the premises for residential use. Its effect is specifically to permit
residential use of every part of them. Indeed the permission is unqualified by
any requirement to secure the freeholder’s prior consent to the proposed use.
The proviso which excludes any warranty on the part of the freeholder about
accordance with planning laws in no way detracts from the width of its
permission.
56.
The trial judge was right to note another subclause which, albeit of
some triviality, addresses the prospect of residential use of the premises, not
limited to the third and fourth floors. It is part of clause 3(15)(c), by which
the leaseholder covenanted not
“to permit animals of any kind to
be kept [on the demised premises] except that (1) domestic animals may be kept
with the consent of the Lessor and (2) this provision regarding animals shall
not apply to the existing residential sub-tenants of the upper floors of the premises.”
57.
The generosity of clause 3(11) to the leaseholder was no doubt a feature
of the Lease which was reflected in the premium paid to the freeholder by the
initial leaseholder for it and in the premiums paid for the later assignments
of the lease and of the freehold reversion respectively.
58.
In Soho, unlike in many parts of England and Wales, a change in the use
of premises from “office use or use ancillary to retail” to “residential use”
represents unlawful development unless it has been the subject of planning
permission.
59.
Unlike clause 3(11), clause 3(19) is a boilerplate clause. The
leaseholder’s usual covenant “not to apply for any planning permission without
the prior written consent of the Landlord such consent not to be unreasonably
withheld” generates this litigation.
60.
I agree with Lord Briggs that the meaning of the leaseholder’s covenant
in clause 3(19) is clear and generates no issue of construction. I also
acknowledge that, within their overarching inquiry into the reasonableness of
the freeholder’s withholding of consent, the judges in the lower courts found
it helpful to consider the purpose of the covenant. For my part, I find that
perspective less helpful than they did. I prefer to go straight to that one
word: “unreasonably”.
61.
Were it reasonable for the freeholder not to consent to an application
by the leaseholder to apply for permission to make residential use of the first
and second floors, the provisions of clause 3(11) would be deprived of
substantial effect. Instead of the unqualified permission for residential use
there given, the permission, in so far as it relates to the first and second
floors, would become a fully qualified permission. I agree with Sir Terence
Etherton MR, at para 47, that, to that extent, any permissible withholding of
consent in such circumstances would in effect rewrite clause 3(11).
62.
Like the courts below, I cannot accept that an express grant of
permission for residential use can - reasonably - be overridden by the
freeholder’s deployment of an entirely unfocussed provision in relation to
applications for planning permission. However legitimate its concern about the
prospect of enfranchisement, the freeholder cannot - reasonably - withhold its
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.
63.
Our duty is to appraise the trial judge’s determination that the
leaseholder had established that the freeholder was unreasonably withholding its
consent to the application. I happen to agree with the judge’s determination.
But, more importantly, I see no significant flaw in the manner in which he
approached it. The Court of Appeal was in my view right to conclude that his
determination ought to be upheld. In my respectful view the contrary conclusion
of the majority falls foul of the second overriding principle articulated by
Lord Bingham in the Ashworth Frazer case, set out in para 22 of the
judgment of Lord Briggs.
