Landlord wins Supreme Court enfranchisement case
The Supreme Court has held that a landlord acted reasonably in refusing a tenant’s application for consent to apply for planning permission for residential use on the basis that consent would increase the risk of the premises being enfranchised.
This case relates to a terraced property in Brewer Street, London with retail use of the ground floor and basement, offices/ancillary use of the first and second floors and residential use of the top two floors. The tenant wished to convert the first and second floors from office to residential use. Such change of use would, it was agreed by all parties to the proceedings, substantially enhance the tenant’s prospects of enfranchisement under the Leasehold Reform Act 1967, by making it much more likely that the building would qualify as a house.
The tenant’s lease contained an unusually wide user covenant allowing the tenant to use all or any part of the building for a number of purposes including residential use. However, the lease also included a quite separate planning covenant requiring the tenant to obtain the landlord’s consent before applying for planning permission for a change of use, such consent not to be unreasonably withheld. The tenant applied for consent under the planning covenant, the landlord refused consent and the tenant applied for a declaration that consent had been unreasonably withheld.
The County Court and Court of Appeal held in favour of the tenant that the landlord had acted unreasonably in refusing consent. The lower courts reached this decision on the basis that residential use was permissible and within the contemplation of the lease. This inevitably exposed the landlord to the risk of enfranchisement and to refuse to consent to the change of use under the planning covenant was to seek to obtain an uncovenanted advantage that fell outside of the purpose of the planning covenant.
The Supreme Court did not share this view, and held in favour of the landlord, albeit by a majority of three to two, with dissenting judgments from both Lady Arden and Lord Wilson. The majority held that the landlord had acted reasonably in refusing consent and that the lease should not be construed in such a way as to exclude the increased risk of enfranchisement as a legitimate purpose of the right to refuse consent under the planning covenant. Lord Briggs concluding his judgment stating:
- Damage to the reversion is the quintessential type of consideration rendering reasonable the refusal of consent.
- A down to earth factual analysis of the economic consequences to the landlord of giving or refusing the requested consent plainly suggests that a refusal is reasonable.
- The landlord did not need to show that a refusal was right or justifiable, but merely that it was reasonable.
Whilst it has generally been thought reasonable for landlords to refuse consent, in particular to an assignment, where to do so would increase the risk of enfranchisement with consequential damage to the reversion, this case is significant in that it concerns two quite separate tenant covenants both of which must be read together.
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