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

JurisdictionEngland & Wales
JudgeLord Hodge,Lord Wilson,Lady Arden,Lord Briggs,Lord Carnwath
Judgment Date30 October 2019
Neutral Citation[2019] UKSC 47
Date30 October 2019
CourtSupreme Court
Sequent Nominees Ltd (formerly Rotrust Nominees Ltd)
(Appellant)
and
Hautford Ltd (a company registered in the British Virgin Islands)
(Respondent)

[2019] UKSC 47

before

Lord Wilson

Lord Carnwath

Lord Hodge

Lord Briggs

Lady Arden

Supreme Court

Michaelmas Term

On appeal from: [2018] EWCA Civ 765

Appellant

Philip Rainey QC

Ellodie Gibbons

(Instructed by Trowers & Hamlins LLP)

Respondent

Tiffany Scott QC

Charlotte Black

(Instructed by Thomson Snell & Passmore LLP (Tunbridge Wells))

Heard on 14 May 2019

Lord Briggs

( with whom Lord Carnwath and Lord Hodge agree)

Introduction
1

This appeal concerns what is sometimes called a “fully qualified covenant” in a lease of real property. Leases commonly contain a series of covenants by the tenant not to do things, typically relating to assignment, sub-letting and the use of the demised premises. By what is called a qualified covenant, the tenant promises not to do something without the landlord's consent. By a fully qualified covenant, the tenant promises not to do something without the landlord's consent, not to be unreasonably withheld.

2

In the present case, the tenant promised not to apply for any planning permission without the consent of the landlord, not to be unreasonably withheld. The tenant wished to apply for planning permission for a change of use of part of the demised premises, from business to residential use, but the landlord refused consent on the ground that this would substantially increase the risk that the tenant could compulsorily acquire the freehold reversion under the Leasehold Reform Act 1967. The tenant claimed that the landlord was unreasonably withholding consent. Both the judge and the Court of Appeal agreed. This was in their view because, although the premises were in mixed use at the time of its grant, the lease permitted the tenant to use the whole of the premises for residential purposes. Since this inevitably exposed the landlord to the risk of a compulsory purchase of the freehold (“enfranchisement”), to refuse permission to the tenant to seek planning permission for a change of use of part of the premises to residential use was to seek to obtain an uncovenanted advantage falling outside the purpose of the fully qualified covenant against seeking planning permission.

3

The landlord appeals to this court, upon the basis that protection against an increased risk of enfranchisement is a well-recognised and legitimate reason for refusing consent under a fully qualified covenant, within the general purposes of restrictive covenants in leases, namely the protection of the value of the reversion and, a fortiori, its very existence.

The Facts
4

The leasehold property in question is a terraced building at 51 Brewer Street London W1, being part of the appellant's Soho estate which includes numbers 39–61 (odd numbers) Brewer Street. No 51 is constructed over six floors including a basement. The basement and ground floor are, in area, much greater than any of the upper floors.

5

By a lease dated 4 April 1986 (“the Lease”) the whole of No 51 was let by Standard Wharf (No 2) to Burgess & Galer Ltd for a 100 year term from 25 December 1985, for a premium of £200,000 and a peppercorn rent. The respondent has been the tenant under the Lease since 1998. The appellant is now the successor in title to the reversion under the Lease, as freeholder of No 51. The whole of No 51 has since October 1998 been sublet, initially to Cusdens (Victoria) Ltd and, following an assignment, since 2008 to Romanys Ltd, under two successive sub-leases, the second of which will expire in September 2023.

6

The Lease contains the following relevant tenant's covenants. Clause 3(11) contained a general user covenant in the following terms:

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

7

By clause 3(15) the Lease contained further specific user covenants prohibiting, for example, noxious noisy or offensive trades, illegal or immoral acts, use as a sex shop, use for an auction, for holding of public meetings or entertainments or use as a betting shop, public house, restaurant, off-license or wine bar.

8

By clause 3(19) the tenant covenanted as follows:

“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 …”

This is the fully qualified covenant in issue on this appeal.

9

The Lease permitted assignment of the whole (but not part) of the premises and a sub-letting of the whole or part of the premises otherwise than during the last seven years of the term, in relation to which there was a fully qualified covenant.

10

At the time of the grant of the Lease in 1986, the ground floor and basement of No 51 were in retail use. The first and second floors were used for storage and as a staff area in connection with the retail use on the lower floors. The top two floors were in occasional residential use.

11

At all material times the permitted use of No 51 in planning terms has been as follows: for the ground floor and basement it is retail; for the first and second floors it is office/ancillary; for the top two floors it is residential.

12

Between 2013 and 2015 Romanys carried out, and the respondent paid for, building works on the four upper floors of No 51 by which each floor was converted into a self-contained flat. Although this was carried out with knowledge of the landlord, it reserved its rights to refuse an application for permission to apply for a change of use under clause 3(19) of the Lease, in respect of the first and second floors. Following the completion of those works, the top two floors of No 51 have been let to residential tenants but, pending the obtaining of planning permission for consent to a change of use, the first and second floors remain vacant.

13

At the time of the grant of the Lease in 1986, the freeholder faced no immediate risk of enfranchisement because the 1967 Act imposed a residence qualification on a tenant which could not be satisfied by a limited company. That qualification was however removed by the Commonhold and Leasehold Reform Act 2002. Nonetheless the proportion of No 51 in residential use did not, for as long as it was confined to the top two floors, amount to a sufficient proportion of the whole building to give rise to a real risk of enfranchisement, because the building could not, in that state of occupation, be described as a “house … reasonably so called” within the meaning of section 2(1) of the 1967 Act. It is common ground that it was for that reason that, having served a notice of claim to acquire the freehold under the 1967 Act in October 2012, the respondent abandoned it in January 2013.

14

But the judge (Judge Collender QC) found, and it is not now in dispute, that if (as he thought likely) the respondent were to obtain planning permission for a change of the use of the first and second floor to residential, this would, in his words, “substantially enhance” the respondent's prospects of obtaining enfranchisement.

15

On 17 April 2015 the respondent applied under clause 3(19) of the Lease for permission from the appellant's predecessor in title (“Tuesday One”) to apply for planning permission to change the use of the first and second floors of No 51 to residential, on the basis that residential use of those two floors was permitted by clause 3(11). In its reply refusing consent dated 30 April 2015, Tuesday One identified the increased risk of a successful claim to enfranchise under the 1967 Act as its reason for refusal. Without admitting that an enfranchisement claim would then necessarily succeed, the refusal letter continued:

“The effect of a successful claim to enfranchise would not merely damage the reversion; it would deprive our client of its reversion in the Premises entirely. Furthermore, it would deprive our client of control for estate management purposes of the block containing the Premises, which would have an adverse impact on the value of our client's investment in the block.”

It is common ground on the pleadings in the litigation which ensued that one purpose of the respondent's contemplated planning application was indeed to improve its prospects of a successful claim for enfranchisement.

16

Tuesday One's refusal of consent under clause 3(19) was the casus belli for this litigation. The respondent was successful, both at trial and in the Court of Appeal, in its contention that consent to its intended planning application had been unreasonably withheld. The respondent's success turned upon a perception by both the courts below (although for slightly different reasons) about what was and was not, as a matter of construction of the Lease, the purpose of clause 3(19).

17

In his careful and comprehensive judgment Judge Collender put it this way:

“I accept that the purpose of the covenant at clause 3(19) of the lease is to protect the lessor from the possible effect of an application for planning permission, because as the owner of the land, it could be subject to enforcement action if there were a breach of a planning obligation. I accept the argument that it is not to enable the lessor to restrict or limit the permitted use under clause 3(11). In my judgment, the lessor's refusal of consent under clause 3(19) is unreasonable because thereby they are seeking to achieve a collateral purpose, ie the imposition of a restriction on...

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1 firm's commentaries
  • Real Estate Tip Of The Week: Reasonably Withholding Consent
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