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11th November 2019

Use or Misuse – An Enfranchisement Question

By Sarah Finch

Summary

  • The case of Sequent Nominees Ltd (formerly Rotrust Nominees Ltd) (Apellant) v Hautford Ltd (a company registered in the British Virgin Islands) (Respondent) [2019] UKSC 47 concerned whether a landlord was able to refuse consent to a tenant’s application for planning permission on the basis that it would increase the risk of enfranchisement of the freehold.
  • Historically, the basement and ground floors had been used for retail, the first and second for offices or ancillary retail purposes, and the third and fourth floors were residential. This was permitted by a general user covenant contained in the Lease, which required the property only to be used as a retail shop, offices, for residential purposes, for storage or as a studio, but planning permission could be applied for to alter to use within the categories.
  • The lease stated that the landlord’s consent was required before planning permission could be obtained, such permission not to be unreasonably withheld.

Background

The tenant requested the landlord’s consent to apply for planning permission to change the use of the first and second floors to residential. The landlord refused, primarily because the additional residential use would increase the risk of the property being enfranchised under the Leasehold Reform Act 1967, and would decrease the value of the landlord’s reversion.

The tenant issued a claim against the landlord in the High Court and the Court of Appeal on the basis that the Landlord had unreasonably withheld consent to its application. The Tenant was successful in the High Court and on appeal. The landlord then appealed the decisions of the lower courts in the Supreme Court, on the basis that the protection against an increased risk of enfranchisement was a “well-recognised and legitimate reason for refusing consent under a fully qualified covenant, within the general purpose of restrictive covenants in leases…”

Decision

The Court allowed the landlord’s appeal on the following basis:

  • A landlord is not entitled to refuse consent to an assignment on grounds which have nothing to do with the relationship of landlord and tenant in regard to the subject matter of the lease.
  • Where the first principle is established, the next issue is whether the landlord’s conduct was reasonable or unreasonable.
  • The landlord’s obligation is to show that his conduct was reasonable, not that it was right or justifiable.

The Court confirmed that the first principle could be established as “it cannot 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”. In applying the second principle, the Court stated that a “down to earth factual analysis of the economic consequences to the landlord” suggested that the landlord’s refusal was reasonable. The third principle was also established as the court confirmed that the landlord’s refusal was reasonable in the circumstances.

Conclusion

This case is important to both landlord and tenant clients alike as they need to be mindful that a risk of enfranchisement is a legitimate reason for a landlord to refuse consent to a tenant’s application for planning permission, where a lease requires the landlord’s consent to obtaining planning permission. This will be an important factor to consider for commercial investors who acquire properties with a view to changing use and taking advantage of the ability to acquire the freehold. This also offers freehold investors a degree of comfort.

Use or Misuse – An Enfranchisement Question

Have a question? Contact Sarah

Have a question? Contact Sarah

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