Rotrust Nominees Ltd v Hautford Ltd

The appellant, Rotrust Nominees Limited (“Rotrust”) is the freehold owner of a terraced building at 51 Brewer Street, London W1 (“the Property”). The Property is part of a block of contiguous properties, including 39-61 (odd numbers) Brewer Street, also owned by Rotrust (“the Soho Estate”).

The Property is subject to a lease made on 4 April 1986 for a term of 100 years from 25 December 1985 (“the Lease”). Clause 3(19) of the Lease contains a tenant’s covenant not to apply for planning permission without the prior written consent of the landlord, such consent not to be unreasonably withheld. The respondent, Hautford Limited (“Hautford”), is the current tenant under the Lease.

Rotrust’s predecessor in title to the Property refused consent for Hautford to apply for planning permission to change the use of the first and second floors of the Property from office use, or use ancillary to retail use of the ground floor, to residential use. Rotrust has continued to refuse consent. They have done so on the grounds that such change of use would increase the prospect of successful enfranchisement under the Leasehold Reform Act 1967 (“the LRA”) and, in addition, such enfranchisement would damage Rotrust’s management of the Soho Estate. The issue in these proceedings is whether that refusal was unreasonable.

Rotrust appeals the order dated 11 August 2016 of His Honour Judge Collender QC, sitting in the County Court at Central London, declaring that Rotrust has unreasonably withheld consent and that Hautford is entitled, notwithstanding such refusal, to make the planning application.

The Judge’s judgment contains a comprehensive statement of the facts. For the purposes of this appeal, the following account of the background is sufficient.

The Lease was granted for a premium of £200,000 and reserved a peppercorn rent. At the date of the trial it had just under 70 years remaining.

Hautford has been the tenant since 1998.

Clause 3(11) of the Lease contains the following tenant’s user covenant:

“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 Law and Regulations now or from time to time in force be used for the purposes above mentioned.”

Clause 3(19) of the Lease contains the following tenant’s planning covenant, so far as relevant:

“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 ...”

The Property, including a basement, extends over six floors. It comprises a retail unit on the ground floor with four storeys above. The ground floor and basement are, in area, much greater than any of the upper floors.

The present authorised planning uses of the Property are: for the basement and ground floor, retail; for the first and second floors, office/ancillary; and for the top two floors, residential.

There is an underlease of the Property, under which the tenant is currently Romanys Limited (“Romanys”). The underlease is for a term ending on 30 September 2023. Romanys trades as ironmongers from the basement and ground floors. The first and second floors were previously used by Romanys for storage and as a staff room. Romanys’ underlease is a business tenancy.

The third and fourth floors have been used from time to time for residential purposes since the commencement of the lease, although they have been vacant for substantial periods since 1998.

At present, approximately 25% of the Property is residential. If the first and second floors were to be used for residential purposes, the proportion would rise to approximately 52%.

On 4 October 2012 Hautford served on Tuesday One, an unlimited company, which was then the freeholder of the Property, a notice to acquire the freehold of the Property pursuant to the LRA. In response, Tuesday One’s solicitors contended that the Property was not a “house, reasonably so called” within the meaning of section 2(1) of the LRA.

Hautford’s solicitors responded by withdrawing the notice.

Between 2013 and 2015 Romanys refurbished the four upper floors of the Property. Romany’s did not need Tuesday One’s consent to do so since there were no structural alterations and there is no tenant’s covenant in the Lease requiring the landlord’s consent to non-structural improvements. All the upper floors have now been fitted out for residential use.

On 17 April 2015, pursuant to clause 3(19) of the Lease, Hautford applied to Tuesday One for consent to apply to the planning authority for change of use of the first and second floors to residential. That request was refused by letter dated 30 April 2015 on the grounds that change of use might facilitate a claim by Hautford to acquire the freehold of the Property pursuant to the LRA and enfranchisement would damage the reversion and also undermine management control of the Soho Estate.

The claim form was issued in these proceedings by Hautford against Tuesday One on 15 June 2015 in the County Court at Central London seeking a declaration that Tuesday One was unreasonably refusing consent to the making of the planning application.

In its Reply in these proceedings Hautford admitted that one purpose of the application for consent to submit the planning application was to improve the prospects of making a future claim to acquire the freehold.

By the date of the trial the freehold of the Property and the Soho Estate had been transferred to Rotrust, for corporate restructuring reasons unconnected with the claim. Rotrust was substituted as defendant by consent.

In a clear, careful and comprehensive judgment given on 11 August 2016 in the Mayor’s and City of London Court the Judge concluded that the landlord’s consent had been unreasonably withheld and granted a declaration to that effect.

The following is a brief summary of the Judge’s reasoning, which, with no disrespect to his full and careful judgment, is sufficient for the purposes of my decision.

The Judge said (at [32]) that a planning application for change of use to residential would probably be successful; the prospects of success in an enfranchisement application would be substantially enhanced by the proposed increase in residential floor area; and the relative changes in value of the parties’ assets related to the lease upon a marriage of the leasehold and freehold interests could fairly be characterised as sums of some real worth.

The Judge noted, as a preliminary matter, that the onus of proof lies on the tenant seeking a declaration that a landlord has acted unreasonably. He said that the test of reasonableness is an objective one, and in that connection he referred to Woodfall’s Law of Landlord and Tenant. He said that the general principles were conveniently set out in Iqbal v Thakrar [2004] EWCA Civ 592, [2004] 36 EG 122. He quoted the summary of Peter Gibson LJ in that case of the relevant principles, which Peter Gibson LJ had adapted from cases of consent to assignments and sub-lettings to cases concerning the reasonableness of a landlord’s refusal to consent to proposed structural alterations or additions.

The Judge referred to Norfolk Capital Group Ltd v Kitway Ltd [1977] 1 QB 506 (CA) and Bickel v Duke of Westminster [1977] 1 QB 517 as authority, in the context of covenants against assignment or sub-letting, supporting the proposition that it is reasonable to withhold consent to a proposed alienation if the proposed assignee or sub-tenant would be able to qualify for enfranchisement but the assignor or tenant could not. He said that they were an application of the general principle that it is reasonable for a landlord to refuse consent to such an alienation under a lease if it is reasonable to contemplate that there would be damage to the reversion as a result.

The Judge then referred to Mount Eden Land Ltd v Bolsover Investments Ltd [2014] EWHC 3523 (Ch), a case in which some 900 years remained of the term of the lease.

The Judge then referred to Bromley Park Garden Estates Ltd v Moss [1982] 1 WLR 1019, Anglia Building Society v Sheffield City Council (1983) 1 EGLR 57 and Berenyi v Watford Borough Council (1980) 2 EGLR 38 for the propositions that it is necessary, firstly, to consider what was in the reasonable contemplation of the parties to the lease as the purpose of the covenant, and that a landlord cannot withhold consent in order to obtain an uncovenanted or collateral advantage.

The Judge accepted (at [61]) the contention of Hautford that the purpose of the planning covenant in clause 3(19) of the Lease was not to enable the landlord to restrict or limit the permitted use under clause 3(11) and that, in refusing consent, Tuesday One and Rotrust were seeking to achieve the collateral purpose of imposing a restriction on use that was not included within clause 3(11). He said (at [62]) that the right to use the Property for residential purposes was a right that an assignee legitimately expected to obtain when it purchased the leasehold interest. He said (at [63]-[65]) that the cases on which Rotrust relied were properly to be explained by the fact that the leases in those cases were entered into before the LRA was passed; and that, if preventing enfranchisement had really been contemplated when the Lease was granted, the landlord should have imposed a restriction on assignment to a qualifying tenant who could, in reliance upon clause 3(11), have converted the entire Property to a residence.

So far as concerns the impact of enfranchisement on the Soho Estate, the Judge held that Rotrust’s management interests should be capable of being sufficiently preserved by the inclusion in the transfer of the freehold of appropriate restrictive covenants under section 10(4) of the LRA.

In clear and elegant submissions Mr Philip Rainey QC advanced a range of criticisms of the Judge’s analysis and conclusions.

His overarching point was that the requirement in clause 3(19) of the Lease for the tenant to obtain the landlord’s consent to the making by the tenant of a planning application, like the requirement in many leases for the tenant to obtain the landlord’s consent to change of use, to assignment or sub-letting and to the making of alterations, is to protect the landlord from damage to the reversion. His argument was that, once it is accepted (as it is) that one purpose of the proposed planning application is to improve Hautford’s chances of making a successful enfranchisement claim to acquire the freehold of the Property pursuant to the LRA, it is simply impossible properly to conclude that Tuesday One’s and Rotrust’s refusal of consent was outside the range of decisions which a reasonable landlord might have reached. As Mr Rainey graphically put it, enfranchisement would not merely damage the reversion: it would entirely extinguish it and would terminate for all time the relationship of landlord and tenant. In his skeleton argument Mr Rainey submitted that, save possibly where the reversion is very remote and obviously valueless, such as in the case of a 999 year lease at a peppercorn rent, risk of enfranchisement is a paradigm example of damage to the reversion.

In addition to that general point Mr Rainey submitted that the Judge had made a number of particular errors. He submitted that the Judge had wrongly distinguished Bickel and Kitway, in which it had been held that the landlord was reasonable in refusing consent to an assignment from a tenant who could not enfranchise under the LRA to one who would be able to do so.

Mr Rainey submitted that the Judge was wrong to approach the question of the reasonableness of the landlord’s refusal of consent by considering whether prevention of enfranchisement by the tenant was within the purposes of clause 3(19) and, by finding that it was not, reaching the conclusion that Tuesday One and Rotrust were seeking to achieve a collateral advantage. He submitted that the Judge was wrong to conclude that the purpose of the covenant was a narrow one of protecting the landlord from potential subjection to enforcement action if there was a breach of a planning obligation imposed as a result of a planning application by the tenant. Mr Rainey submitted that the purpose of the requirement for the landlord’s consent under clause 3(19) was quite simply the protection of the landlord’s reversion and general property interests, including its wider estate.

Mr Rainey further submitted that the Judge wrongly placed weight on the absence of any restriction on residential use in clause 3(11). Mr Rainey’s over-arching point on this aspect of the Judge’s reasoning was that, as he put it, there is no “hierarchy of covenants”, and that the tenant’s covenants as to user, making planning applications and making alterations have equal status. In his skeleton argument he made the point that, in Peter Gibson LJ’s summary of principles in Iqbal it was expressly acknowledged that it might be reasonable for the landlord to refuse consent to an alteration or addition to be made for the purpose of converting the premises for a proposed use even if that use was not forbidden by the lease. Mr Rainey emphasised that there were many cases in which the court had held that the landlord had reasonably withheld consent even where there was existing residential use or residential use was not forbidden, or residential use was even expressly authorised, under the tenant’s user covenant, such as Welch v Birrane (1975) 29 P&CR 102, Kitway, Bickel, West Layton Ltd v Ford [1979] 1 QB 593 Henley v Cohen [2013] EWCA Civ 480; [2013] 2 P&CR 10 and the unreported decision of HHJ Cowell at first instance in Henley v Cohen.

Mr Rainey submitted that the Judge was wrong to be so dismissive of the potential harm posed by enfranchisement of the Property to the wider property interests of Rotrust in the management of the Soho Estate. He submitted that it was insufficient and wrong of the Judge to dismiss the point in a single sentence (in [66]) with the statement that “those interests should be capable of being sufficiently preserved under section 10 of the [LRA]”. Mr Rainey submitted that there is no “equivalence” (as he put it) between freehold covenants and covenants between landlord and tenant. The latter, he observed, could be enforced in a simple, straightforward and direct manner by, if necessary, forfeiture for non-compliance. By contrast, he said, freehold covenants are relatively difficult to enforce. He criticised the Judge for failing to specify which of the tenant’s covenants could be carried across on a transfer of the freehold. He submitted that, at best, some of the covenants could be replicated in a modified form but not all of them, including, for example, insurance covenants.

There were other criticisms of the Judge’s judgment, particularly in Mr Rainey’s skeleton argument, but they were either not developed in his oral argument or it is not necessary in any event to refer to them.

It is right to record Mr Rainey’s express reservation that Rotrust does not accept that, even if there was a change of permitted use of the first and second floors to residential, Hautford will be able to enfranchise. He was willing to accept, but accept no more than, the Judge’s finding (at [32]) that the prospects of success in an enfranchisement application would be substantially enhanced by the proposed increase in residential floor area.

Despite Mr Rainey’s attractive advocacy, I consider that this is a clear case for dismissing the appeal, essentially for the reasons given by the Judge.

There appears to have been no reported case concerning the reasonableness of a landlord’s refusal of consent pursuant to a tenant’s covenant not to apply for planning permission without the landlord’s consent, such consent not to be unreasonably withheld. The applicable general principles are not, however, in dispute. It is common ground that they are the same general principles as apply in the case of a tenant’s covenant not to assign or sublet without the landlord’s permission, such consent not to be unreasonably withheld. Those principles have been set out in a number of cases including, in particular, by the Court of Appeal in Bromley Park Garden Estates and International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd [1986] Ch 513. They were also set out by Peter Gibson LJ in Iqbal as adapted for a tenant’s covenant not to make structural alterations without the landlord’s consent, such consent not to be unreasonably withheld. It is not necessary to set them out here yet again.

As the Judge recognised, it is for Hautford to satisfy the court that Tuesday One and Rotrust were unreasonable in refusing consent for Hautford’s proposed planning application. As the Judge also recognised, the test of reasonableness is an objective one. Tuesday One and Rotrust will not have been unreasonable in refusing consent if their decision was one which a reasonable landlord might have reached in the circumstances, even though other landlords might have decided otherwise.

It is often the case, in proceedings such as these, that the parties present the court with a number of decided authorities and seek to argue that that the facts of those cases and of the instant case are sufficiently similar that the decided cases are for all practical purposes decisive of the issue of reasonableness. That was indeed the approach here, with particular reliance being placed by Mr Rainey on Welch, Kitway, Bickel, West Layton and Henley.

It must always be remembered, however, that in this type of dispute the facts are critical. Even limited differences in the factual context may be critical.

In applying clause 3(19) of the Lease to the facts of the present case, the starting point is to ascertain the purpose of the covenant intended by the original parties to the lease. That is clear from West Layton and Bromley Park Estates. It is, of course, trite and obvious to say, as does Rotrust, that the purpose was to protect the property interests of the landlord. It is also obvious that, in the context of a tenant’s covenant not to do something without the consent of the landlord, such consent not to be unreasonably withheld, what is reasonable will depend upon the precise circumstances at a particular moment in time, and so the matter of reasonableness must be judged at the time of the application.

It is, nevertheless, correct to begin the analysis in the present case by considering whether, on the proper interpretation of clause 3(19) in the context of the Lease as a whole and the relevant factual circumstances in which it was made, its purpose included precluding the residential use of the first and second floors in order to prevent enfranchisement of the Property pursuant to the LRA. I consider that it is plain that it was not.

The tenant’s user covenant in clause 3(11) of the Lease expressly authorised the use of the entire Property as residential. That was subject to a proviso that nothing in the Lease implied or was a warranty that the Property could, in accordance with planning laws and regulations then or from time to time in force, be used for that or the other expressly authorised purposes. There was no proviso that residential use for the whole or any part of the Property was subject to the landlord’s consent.

Mr Rainey’s argument that clause 3(11) must be read together with, and subject to, clause 3(19) and that there was no “hierarchy of covenants” is no more and no less than a re-writing of clause 3(11) so as to make it subject to a proviso that those parts of the Property not then or thereafter in residential use could not be put to such use without the landlord’s consent.

That would not only be a re-writing of clause 3(11) rather than a legitimate exercise of interpretation but it would be a manifestly impractical way of limiting the express authorisation of residential use in clause 3(11). That is because any person can apply for planning permission to change the use of the Property. The right to do so is not limited to the tenant for the time being or anyone else who has or will have or may in the future have an interest in the property: Sweet & Maxwell’s Encyclopedia of Planning Law (Vol 2) P65.05

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.

The fact that planning permission to change of use of the first and second floors would substantially enhance the prospects of success in an enfranchisement application by Hautford because of the increase in the residential floor area makes no difference to the analysis. The Lease was granted against the legislative background of the LRA but clause 3(11) expressly authorised use of the entire Property for residential purposes.

None of the authorities cited and relied upon by Mr Rainey are similar to the facts of the present case or are otherwise such as to preclude the Judge’s conclusion that the refusal of consent by Rotrust in the present case was unreasonable. They did not concern the inter-relationship between a tenant’s user covenant expressly authorising residential use and a tenant’s covenant against applying for planning permission without the consent of the landlord, such consent not to be unreasonably withheld. General observations, therefore, in textbooks such as Woodfall (2017) at para. 11.152 that the landlord will normally be entitled to refuse consent where the effect of the assignment will be that the tenant will be entitled to enfranchise under the LRA are of no real assistance.

There are other points of difference in the cases relied upon by Mr Rainey.

Kitway and Bickel were both cases in which the court held that the landlord had not been unreasonable in refusing consent to an assignment to a person who would be entitled to enfranchise under the LRA, which was something the existing tenant was not in a position to do. In those cases, however, as highlighted by Lord Denning MR in Bickel (at p. 524E), the leases were granted before enactment of the LRA and at a time when no one could have foreseen that Parliament would many years later give a tenant a right to buy the freehold.

Welch v Birrane was a similar case. Furthermore, in that case Lawson J adopted the language of “abnormality of the transaction”. That description was derived from the distinction formerly made between “normal” and “abnormal” assignments in cases where the landlord of a dwelling subject to the Rent Acts was asked to give consent to an assignment: an assignment during the contractual term being a “normal” assignment, for which consent could not be refused, and an assignment of the “fag end” of the contractual term, which would give the assignee the benefit of the Acts, being an “abnormal” assignment, for which consent could reasonably be refused. That language and approach has, however, been disapproved: eg Kitway at 513B, 515F, 516C, Bickel at 524C-G, 526G; West Layton at 604H-605B, 606D.

The decision in Iqbal turned on its own particular facts, namely that the landlord had reasonably refused consent to proposed alterations by the tenant which could or would give rise to structural problems.

In Henley v Cohen it was held that the landlord had reasonably refused consent to alteration of the first floor of the leased property into a flat, which would have entitled the tenant to enfranchise under the LRA. In that case, as in Kitway and Bickel, the lease had been granted long before the LRA was enacted. As HHJ Cowell stated (at [57]), the landlord was entitled to say:

“I do not consent to a particular alteration of the plan of the property which enables the defendant to obtain something which was never thought of at the grant of the lease, namely the right to enfranchise or the right to a further lease under the 1993 Act.”

West Layton was a Rent Act case, in which it was held that the landlord was reasonable in refusing consent to a subletting of living accommodation on a furnished tenancy, which would have attracted the protection of the Rent Act 1974 (giving protection to tenants of furnished premises). The user covenant expressly authorised a fully furnished sub tenancy, subject to the prior consent in writing of the landlord, such consent not to be unreasonably withheld. Once again, it was material that the lease was entered into before the Rent Act 1974 was enacted. Roskill LJ said (at p. 601E) that it was clear, therefore, that the drafter of the lease thought that, if there were a letting of the type contemplated by the user covenant, when the term of the lease ran out there would be no difficulty in the landlord regaining possession. He observed (at p.605D) that one of the matters which had caused a change of circumstance was the passing of the Rent Act 1974, just as, in cases of leases entered into before 1967, the passing of the LRA altered the background. The effect of the tenant’s request was to invite the landlord to agree to alter the nature of the demised property from commercial property, namely, a butcher’s shop with residential accommodation above, to a property let on a separate tenancy of the shop and a separate sub tenancy upstairs of the residential accommodation, which would attract Rent Act protection.

I turn, finally, to Rotrust’s argument that it was reasonable to refuse consent because enfranchisement of the Property would adversely affect the proper management of the Soho Estate. Mr Rainey accepted, in his oral submissions, that this did not provide a wholly independent ground justifying the refusal of consent. He submitted that it added weight to the general argument of Rotrust that planning permission for change of use would facilitate enfranchisement by Hautford, which would damage Rotrust’s property interests. In Kitway Browne LJ noted (at p. 515A-B) the adverse effect of enfranchisement on the potential future development of the landlord’s block of properties of which the demised premises formed part. Similar concern over future management of the landlord’s property holdings was expressed by Lord Denning MR and Waller LJ in Bickel (at pp. 524H-525A and p. 527E).

It is clear that in both Kitway and Bickel the court would have held that the landlord had been reasonable in refusing consent to the proposed assignment irrespective of any impact on the landlord’s wider property interests. In the present case, having reached the conclusion that, on the proper interpretation of clause 3(19), its purpose did not include precluding the residential use of the first and second floors in order to prevent enfranchisement of the Property pursuant to the LRA, there is no scope for reaching a different conclusion merely because any particular landlord for the time being happens to own the adjoining or neighbouring property in the area.

In any event, if and insofar as management of the Soho Estate might be relevant to the question of the reasonableness of Rotrust’s refusal of consent, the Judge was both entitled and right to say that such wider management considerations are sufficiently met by the provisions in section 10(4) of the LRA for the insertion of restrictive covenants in the transfer of the freehold. As those provisions show, Parliament was conscious that enfranchisement of a particular property might have an impact on other property of the landlord and laid down a legislative regime balancing the rights of the tenant and enduring rights of the landlord in such a situation. I see no reason to hold that the Judge made an error of principle or reached a conclusion that was plainly wrong in finding, on the facts of the present case, that the Parliamentary scheme would not so seriously fail to protect the landlord’s wider property interests of Rotrust in the Soho Estate as to justify the refusal of consent to the proposed application for change of use.

For the reasons I have given I would dismiss this appeal.

As a short postscript to this judgment, I consider it would have been better if the Judge had refused the respondent permission to refer to the Mount Eden case. That was a decision given on an application for permission to appeal. It did not satisfy the requirements of the Practice Direction (Citation of Authorities) [2001] 1 WLR 1001. Judges should take a strict position to refuse the citation of judgments on applications for permission to appeal that do not satisfy those requirements.

I agree.

I also agree.