Sequent Nominees Ltd (formerly Rotrust Nominees Ltd) v Hautford Ltd (a company registered in the British Virgin Islands)

When a landlord’s consent under a fully qualified leasehold covenant must not be unreasonably withheld, three principles govern. The landlord’s reason must relate to the landlord and tenant relationship concerning the leased property. Whether refusal is reasonable is then a fact-sensitive question, assessed when consent is sought. The landlord need only show that the refusal was reasonable, rather than right or justified.

A substantial increase in the risk of statutory enfranchisement, causing real harm to the reversion, may justify refusal. That principle is not confined to leases granted before enfranchisement legislation. Courts should avoid restricting the permissible grounds of refusal through an over-refined reconstruction of the covenant’s original purpose.

The tenant held a 100-year lease of mixed-use premises. The lease permitted specified uses, including residential use, but required compliance with planning law. It also prohibited the tenant from applying for planning permission without the landlord’s prior written consent, which was not to be unreasonably withheld.

The tenant sought consent to apply for permission to convert two further floors to residential use. The landlord refused because the change would substantially increase the tenant’s prospects of acquiring the freehold under the Leasehold Reform Act 1967, thereby harming the reversion.

The trial judge held the refusal unreasonable. The Court of Appeal dismissed the landlord’s appeal in [2018] EWCA Civ 765, reported at [2018] Ch 603. The central issue was whether protection against the increased risk of enfranchisement was a legitimate and reasonable ground for refusing consent under the planning covenant.

1. By a majority of three to two, the appeal was allowed. Lord Briggs delivered the majority judgment, with which Lord Carnwath and Lord Hodge agreed. Lady Arden and Lord Wilson dissented.

2. A landlord refusing consent under a fully qualified covenant must rely on a reason connected with the landlord and tenant relationship concerning the leased property. Once that requirement is satisfied, reasonableness is a question of fact. The circumstances must be assessed when consent is requested. The landlord need establish only that the refusal was reasonable, rather than right or justified. The broad principles in Ashworth Frazer Ltd v Gloucester City Council [2001] 1 WLR 2180 applied equally to consent for a planning application.

3. The reasonableness inquiry should not be confined through an over-refined reconstruction of the covenant’s original purpose. A reason may be legitimate although the relevant risk was not contemplated when the lease was granted. Accordingly, a landlord’s ability reasonably to resist an increased risk of enfranchisement is not confined to leases granted before the Leasehold Reform Act 1967.

4. Clauses 3(11) and 3(19) had to be read together. The lease did not confer an unqualified right to use every part of the premises residentially. Residential use was permitted only where lawful under the planning regime. The tenant could lawfully obtain a new residential use through permission secured with the landlord’s consent, permission obtained by a third party, or a change in planning law.

5. The possibility that a third party could apply for the same planning permission did not make the landlord’s refusal unreasonable. No third party had applied or threatened to apply. At the relevant date, refusal therefore continued to afford real protection against enfranchisement.

6. The proposed permission was likely substantially to increase the risk of enfranchisement and cause real harm to a valuable reversion. Avoiding such damage was closely connected with the landlord and tenant relationship and was a quintessentially legitimate consideration. On a practical assessment of the economic consequences, the refusal was reasonable.

7. Lady Arden and Lord Wilson would have dismissed the appeal. They considered that the lease expressly permitted residential use throughout and that reliance on the planning covenant to prevent that use would improperly cut down or negate the user provision.

1. United Kingdom Supreme Court: By a majority of three to two, allowed the landlord’s appeal and reversed the conclusion that consent had been unreasonably withheld: [2019] UKSC 47.
2. Court of Appeal: Dismissed the landlord’s appeal and upheld the finding that consent had been unreasonably withheld: [2018] EWCA Civ 765; [2018] Ch 603.
3. Trial court: Judge Collender QC held that the landlord had unreasonably withheld consent because its refusal pursued a collateral purpose outside the planning covenant.