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You can go Rotrust way...but it won't be successful

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Summary: In the recent case of Rotrust Nominees Ltd v Hautford Limited [2018] EWCA Civ 765, the Court of Appeal considered whether a landlord could reasonably refuse a tenant’s application to apply for planning permission to change the use of its commercial premises, in circumstances where the tenant’s proposed change of use could seriously impact the landlord’s reversionary interest and the investment value of its wider estate.

Facts

Rotrust was the freehold owner of a terraced building in Soho, which formed part of an estate that included a number of other similar properties in the vicinity, also in Rotrust’s freehold ownership.  Hautford held a 100 year lease of the whole of the building, which still had approximately 70 years left to run.  As is often the case with these types of Soho properties, the ground floor and basement were used as retail, with office and residential floors above. 

The lease contained the following notable provisions:

  • The user covenant permitted (1) retail, (2) offices or uses ancillary to retail and, (3) most importantly in the context of this case, residential, with the usual wording confirming that the landlord could not provide a warranty that such uses would be permitted by planning; and
  • The tenant could not apply for planning permission (including for a change of use) without landlord consent, which could not be unreasonably refused.

The tenant wished to use the two floors reserved for office use for residential purposes instead, and therefore requested the landlord’s consent to apply for a change of planning use in relation to these floors. These diagrams show the effect  of the proposed change in use:

Original layout

original layout

Proposed new layout

proposed layout

The crucial consequence of the tenant’s proposed change of use of the building was that it would increase the tenant’s overall residential use of the building to 52%.  This meant that it would qualify to apply to enfranchise (acquire the freehold of the building from the landlord).

The landlord argued that this was not acceptable because losing the freehold would eliminate its reversionary interest in the building, and would adversely impact the investment value of its overall Soho estate.

The landlord therefore refused the tenant’s application for consent to apply for planning permission to change the user of the office floors to residential, which the tenant considered unreasonable.  It therefore sought a declaration from the court to this effect. At first instance the Judge determined that the landlord’s consent had been unreasonably withheld and the landlord appealed.

Appeal

The landlord did not deviate significantly from the arguments it made at first instance (set out above) and the Court of Appeal upheld the first instance decision.  The guidance the Court of Appeal gave can be summarised as: 

  • Clauses restricting a tenant’s ability to deal with a property (alienation, alterations, user etc) are designed to protect the landlord’s property interest from harm;
  • When a tenant makes an application for landlord’s consent which would vary/expand etc that restriction,  the landlord cannot use the application as an opportunity to obtain a collateral advantage (in this case, prevent the tenant from enfranchising); and
  • Case law can assist in determining whether a refusal would be reasonable but the facts and circumstances of each case are critical and can distinguish one case from another based on those differences.

In this case it was clear that the user covenant in Hautford’s lease permitted residential use of the whole or part of the building.  The proviso in the user covenant that the landlord couldn’t warrant the planning position was just that; the lease permitted residential use but the tenant would need to clear any changes to planning use with the local authority.

The landlord did not have the ability to refuse consent to a planning application in relation to something that had been authorised by the lease. If this were the case, the tenant would have been prevented from applying for a change in use - that was expressly permitted by the lease - for the entire duration of the lease, which could not have been the intention of the parties.  If it had been the landlord’s intention to avoid the possibility of the tenant enfranchising at the outset of the lease, this should have been expressly reflected in the lease.

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