Landlord entitled to prevent enfranchisement
On 30 October 2019, the Supreme Court (by a majority of only 3 to 2) surprisingly overturned the decisions of both the Trial Judge and Court of Appeal by deciding that it was reasonable for a landlord to refuse consent for a tenant to apply for planning permission to convert the first and second floors of a 6 storey building to residential, which would result in approximately 52% of the building being in residential use.
Consent had been refused because the value of the landlord’s reversion would be substantially devalued due to significant increase in the leaseholder's prospect of being able to enfranchise under the Leasehold Reform Act 1967. The landlord also wanted to retain control of the building for estate management purposes.
The case is called Sequent Nominees Ltd-V- Hautford Limited and it relates to 51 Brewer Street, London, W1 which was let in 1986 for a term of 100 years for a premium of £200,000 and at a peppercorn rent. The Lease permits retail, office, or residential use but only the 2 top floors had planning permission for residential use and were so used. The tenant can, however, only obtain planning permission under the Lease to convert the remainder of the building after first obtaining the landlord’s consent, such consent not to be unreasonably withheld. Residential use of the whole building is permissible under the User Clause so no consent for change of use is needed.
The outcome of the case ultimately depended on whether the User Clause held sway or was subject to the ability of the landlord to effectively prevent residential use of the majority of the building by refusing permission to the tenant to apply for planning permission for such use? It is to be noted that, at the time of the Lease, there was no ability to enfranchise the building under the then legislation as the residence test prevented enfranchisement by a Company.
The Supreme Court was clearly divided over this with the 2 dissenting Judges delivering powerful Judgments as to why the User Clause should be given priority. However the majority was of the view that the User Clause did not fetter the landlord’s ability to refuse consent for planning permission where, as was the case here, this would substantially prejudice the value of the landlord’s reversion (as it could then be bought out by the tenant under the enfranchisement legislation for much less than it was otherwise worth).
As a result of this decision at the highest level, the law has now changed substantially in favour of landlords although, in fact, 6 out of the 9 Judges involved throughout the legal process favoured the tenant. However, the Judgment highlights that each case depends on its particular facts and that the position may well be different with longer leases (and less damage to the reversion) or where the risk of enfranchisement was appreciated at the time of the letting.
Jonathan is a partner in our Property Litigation team.