Ashworth Frazer Limited v. Gloucester City Council

The House considered two principal issues: (1) the construction of clause 2(iii)(a) of a 1969 development lease which referred to "uses within Use Classes III IV or X of the Town and Country (Use Classes) Order 1963", and (2) whether a landlord may, consistently with the obligation not to unreasonably withhold consent to assignment in clause 2(viii) and section 1 of the Landlord and Tenant Act 1988, refuse consent where the landlord reasonably believes the proposed assignee intends to use the premises in breach of a user covenant. The House held (by majority on the construction point) that clause 2(iii)(a) did not impose a continuing negative covenant restricting all future uses of the premises to those Use Classes. On the reasonableness point the House unanimously rejected the narrow reading of Killick v Second Covent Garden Property Co Ltd and held that a landlord may, in proper circumstances, withhold consent if he reasonably believes the assignee will probably use the premises in breach of covenant; whether conduct was reasonable is a question of fact for the tribunal of fact and the landlord bears the burden of showing reasonableness under section 1 of the 1988 Act.

This was an appeal by Gloucester City Council and a cross-appeal by Ashworth Frazer Limited arising from a 114 year development lease granted in 1969. The lease required the lessee to undertake a building development "for uses within Use Classes III IV or X" and contained an assignment clause providing that consent to assignment should not be unreasonably withheld. The parcel in question had been sub-demised and was later to be assigned to Mountstar Metal Corporation, who sought to use the site for metal recycling. The council refused consent on the ground that Mountstar's proposed use would breach the covenant in clause 2(iii)(a).

The deputy judge held that clause 2(iii)(a) did impose a continuing restriction on use and made a declaration that a landlord could properly withhold consent where the proposed assignee would necessarily breach a user covenant. The Court of Appeal accepted the deputy judge's construction of clause 2(iii)(a) but, relying on Killick v Second Covent Garden Property Co Ltd, held that a landlord could not withhold consent merely because he reasonably believed the assignee might use the premises in breach of covenant; the Court of Appeal therefore declared refusal of consent unreasonable in those circumstances.

The House addressed two issues: (i) construction of clause 2(iii)(a) and (ii) the proper legal test for whether withholding consent to assignment is "unreasonable" where a landlord fears a breach of covenant. On construction the majority (Lords Hoffmann, Scott and Browne-Wilkinson) concluded clause 2(iii)(a) was a positive covenant to build premises fit for the specified Use Classes and did not operate as a continuing negative covenant restricting all future use; hence the proposed recycling use would not necessarily breach the lease. On the reasonableness point the House rejected the formulation in Killick as an inflexible legal rule: the correct approach is factual and the landlord may reasonably refuse consent where he reasonably believes the assignee will probably, not merely necessarily, cause a breach. The landlord must show that withholding consent was reasonable, in accordance with section 1 of the Landlord and Tenant Act 1988. The factual question whether the council had unreasonably withheld consent in all the circumstances was remitted for further consideration.

Appeal allowed; cross-appeal allowed. The House held that (i) a landlord may, depending on the facts, withhold consent to an assignment where he reasonably believes the proposed assignee will probably use the premises in breach of a user covenant (Killick disapproved), and (ii) by a majority clause 2(iii)(a) did not impose a continuing negative covenant restricting the use of the buildings to Use Classes III, IV or X. The factual question whether consent was unreasonably withheld was remitted for determination.

First instance: Deputy Judge (Donaldson QC) (Chancery Division). Court of Appeal: Ashworth Frazer Ltd v Gloucester City Council (2000) 80 P & CR 11 (Waller and Chadwick LJJ). House of Lords: [2001] UKHL 59.