Sequent Nominees Ltd (formerly Rotrust Nominees Ltd) v Hautford Ltd [2019] UKSC 47

A landlord refused consent for a tenant's planning application to change part-use to residential, fearing increased risk of leasehold enfranchisement. The Supreme Court, by majority, held the refusal was reasonable, as protecting the reversion is a legitimate landlord concern.

Facts

The case concerned 51 Brewer Street, Soho, a six-storey terraced building forming part of the appellant landlord’s Soho estate. By a lease dated 4 April 1986, the property was let for a 100-year term at a peppercorn rent, with a £200,000 premium. The respondent became tenant in 1998.

Clause 3(11) permitted use of the demised premises for retail shop, offices, residential purposes, storage, or studio use. Clause 3(19) required the tenant to observe planning legislation and not to apply for planning permission without the landlord’s written consent, such consent not to be unreasonably withheld.

At the grant of the Lease, the ground floor and basement were in retail use, the first and second floors in storage/ancillary use, and the top two floors in occasional residential use. Planning permission authorised residential use only for the top two floors. Between 2013 and 2015, the sub-tenant converted the four upper floors into self-contained flats. The tenant sought consent under clause 3(19) to apply for planning permission to change the first and second floors to residential use. The landlord refused, citing a substantially enhanced risk of the tenant acquiring the freehold through enfranchisement under the Leasehold Reform Act 1967, following the removal in 2002 of the residence qualification that had previously excluded corporate tenants.

Issues

The central issue was whether the landlord had unreasonably withheld consent under clause 3(19) when its reason for refusal was to avoid a substantial increase in the risk of enfranchisement, given that clause 3(11) permitted residential use of the whole premises. A subsidiary question was whether authorities permitting refusal on enfranchisement grounds applied only to leases granted before the 1967 Act.

Arguments

The appellant landlord argued that protecting against an increased risk of enfranchisement is a well-recognised and legitimate reason for refusing consent, falling within the general purposes of restrictive covenants in leases, namely protection of the reversion’s value and existence.

The respondent tenant argued that the purpose of clause 3(19) was to protect the landlord from planning enforcement consequences, not to restrict the permitted uses under clause 3(11); that refusal was a collateral or uncovenanted advantage; that any third party could apply for identical planning permission unimpeded; and that permitting refusal would amount to a derogation from grant.

Judgment

The Supreme Court allowed the appeal by a 3-2 majority (Lord Briggs, with whom Lord Carnwath and Lord Hodge agreed; Lady Arden and Lord Wilson dissenting).

Majority reasoning (Lord Briggs)

Lord Briggs identified the governing principles from International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] Ch 513 as condensed in Ashworth Frazer Ltd v Gloucester City Council [2001] 1 WLR 2180: (i) refusal must not be on grounds unconnected to the landlord-tenant relationship in respect of the subject matter of the lease; (ii) reasonableness is a question of fact; (iii) the landlord need only show reasonableness, not that the refusal was right or justifiable.

He emphasised Lord Denning MR’s warning in Bickel v Duke of Westminster [1977] QB 517 against determining reasonableness through over-refined construction of the lease, stating this must not be done

“under the guise of construing the words”

.

The majority rejected the lower courts’ three strands of reasoning: (i) the judge’s identification of a single protective purpose behind clause 3(19) was a non sequitur, since one identified purpose does not exclude others; (ii) the Court of Appeal’s reliance on the possibility of third-party planning applications was misplaced, since no such application had been made and the clause continued to afford real protection; (iii) the derogation from grant argument failed because clause 3(11) must be read with clause 3(19), permitting residential use only of parts lawfully permitted under planning law.

Applying the three Ashworth Frazer principles to the facts: preventing damage to the reversion from increased enfranchisement risk is the quintessential reason connected with the landlord-tenant relationship; the economic analysis favoured refusal; and the landlord needed only to show reasonableness, which was established.

Dissenting judgments

Lady Arden considered that clause 3(19) should be interpreted as impliedly limited so as not to cut down the broad user permission in clause 3(11). The landlord’s power to refuse consent to planning applications was not granted to enable it to restrict the agreed uses, particularly where a third-party assignee could obtain planning permission independently.

Lord Wilson emphasised clause 3(11) as a bespoke subclause of “singular generosity” that specifically permitted residential use of every part of the premises without requiring landlord consent. He considered that permitting refusal under clause 3(19) to negate this permission would effectively rewrite clause 3(11), and that the landlord could not reasonably withhold consent where the effect was to negate a permission for which valuable consideration had been received.

Implications

The decision confirms that, even for leases granted after the Leasehold Reform Act 1967, a landlord may reasonably refuse consent under a fully qualified covenant where doing so protects against a substantial increase in the risk of enfranchisement and consequent damage to the reversion. The majority expressly rejected a rigid distinction between pre- and post-1967 Act leases.

The judgment reinforces that reasonableness under a fully qualified covenant is a fact-sensitive question to be assessed at the date consent is sought, not determined by an over-refined analysis of the covenant’s original purpose. Damage to the reversion remains, in the majority’s words, the “quintessential type of consideration” rendering refusal reasonable.

The decision matters particularly to landlords of mixed-use buildings on estates where enfranchisement risk affects reversionary value, and to tenants seeking to change use in ways that may enhance enfranchisement prospects. However, the strong dissents, emphasising the tension between a broad user clause and a qualified planning covenant, indicate the boundaries of the principle remain contestable, particularly where a lease expressly permits the very use for which planning permission is sought. The case also illustrates the Court’s preference for addressing reasonableness as a matter of factual evaluation rather than narrow contractual construction.

Verdict: Appeal allowed. The Supreme Court held, by a 3-2 majority, that the landlord’s refusal of consent under clause 3(19) of the Lease was not unreasonable, as protecting the reversion against a substantial increase in the risk of enfranchisement was a legitimate reason sufficiently connected to the landlord and tenant relationship.

Source: Sequent Nominees Ltd (formerly Rotrust Nominees Ltd) v Hautford Ltd [2019] UKSC 47