Published: 16/12/2019In the recent case of Sequent Nominees Ltd v Hautford LTD (2019), it centred on the permitted use of a property and whether the landlord could reasonably refuse the tenant's request to apply for planning permission to convert the existing business use to residential use. In this case, the landlord could reasonably refuse such consent as it was found that, if planning permission was granted, it would likely allow the tenant to acquire the freehold.
The lease was for a six-storey building where the user clause permitted the use of the building for retail shops, offices and residential purposes. The property was being used for these purposes with retail use on the ground floor and basement, offices on the first and second floors, together with residential on the top two floors. Approximately 25% of the building was used for residential purposes.
The lease granted a term of 100 years for a whole building in Soho that was granted in 1986 with a premium paid of £200,000 with a peppercorn rent. At the time of the trial, there were just under 70 years remaining of the term.
The tenant wished to apply for planning permission to change the use of the first and second floors to residential and under the terms of the lease, the tenant was responsible for observing all regulations relating to Town & 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.
This phrase is very common in many leases, particularly in relation to the use of the property and such wording is important in a wider context including in the rent review provisions where any restriction can have an impact on the rent achievable, as invariably a tenant will argue for a rent reduction to reflect any restrictive lease clauses.
In this case, on the judge’s findings, planning permission, if requested, was likely to be granted and the consequence would significantly increase the risk of enfranchisement which would, in turn, have a real, adverse consequence in terms of the freehold reversion to the landlord.
Applying a third principle, the landlord had not needed to show that refusal was right or justifiable, but merely that it was reasonable.
This is a particularly important decision as it is the first case concerning the inter-relationship between a bespoke, individually-negotiated user covenant which expressly authorises as between landlord and tenant a particular use of the demised premises, together with a covenant to perform and observe all the provisions and requirements of planning legislation and not to apply to the local authority for permission to change the planning use of the premises without the landlord’s consent.
The Supreme Court held that in such a situation the user clause does not, in fact, confer an unqualified right on the tenant to use the premises for the purpose ostensibly permitted by the lease; rather the user clause must be read together with (and in effect subject to) the separate planning clause with the result that the tenant is only permitted to use such parts of the premises as are from time to time permitted by the planning regime to be used for those purposes.
This is a very helpful decision for landlords. However as the judge pointed out, the generosity or otherwise of the user clause in a particular lease will be reflected in the premium paid to the freeholder by the initial leaseholder, and in the subsequent premiums paid for later assignments of both the freehold and leasehold interests in the premises.
This is an important factor for both landlords and tenants to consider where the decision, in this case, affects the value of their assets. Many leases will contain some overlapping planning provisions alongside bespoke user clauses (or alterations clauses, for example) and these clauses must now be construed together, with the result that a particular use that was thought by the parties to be permitted by the landlord may not, in fact, be permitted at all.
This blog was taken from our latest Briefing Notes: Issue 94, if you would like to read more commercial and residential briefing notes then click here.