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13 November 2019

Q&A: Grounds for refusal - two bad, one good?

Question

I am the tenant under a 90-year lease of a mixed-use property which was converted from a house many years ago. I applied for the landlord’s consent to assign to a company which intends to use the entirety of the property for residential use. The landlord has refused and given three grounds for doing so. I think that two of the landlord’s grounds are unreasonable. I also consider the landlord’s decision to be unreasonable in that the landlord is seeking, for its own benefit, to restrict a use of my property that is allowed by my lease. Can I successfully challenge it?

Answer

No. In the particular circumstances of your case the landlord’s decision is likely to be held to be reasonable if you sought a declaration from the court. Although two of the grounds for refusal are unreasonable, the other ground is reasonable. The question is whether the decision to refuse consent was reasonable, not whether all the reasons for the decision were reasonable.

Explanation

Your 90-year lease includes a covenant that you will not assign without the landlord’s consent, which is not to be unreasonably withheld. Your lease permits residential use as well as commercial use. Currently, the ground and first floors are in commercial use, the second floor is unoccupied and the top floor is in residential use. You do not anticipate any planning problems with the change of use. You seek consent to assign to a company which intends to use the entirety of the property for residential use. However, unfortunately, the assignee company has failed to file its accounts for the past three years and, although the directors have undertaken to you to do so, they were still in default at the time of the application to the landlord.

Your landlord has given the following reasons for refusal:

1. That such an assignment and change of use would significantly increase the prospect of successful enfranchisement under the Leasehold Reform Act 1967 (the 1967 Act);
2. Such enfranchisement would damage the landlord’s management of its estate, of which your property forms part; and
3. The financial standing of the proposed assignee company is insufficiently strong.

Enfranchisement

With regard to the first reason, it is common ground that the extension of residential use to the whole of the property will mean that the assignee in due course is likely to be able to enfranchise under the 1967 Act. The Court of Appeal in Rotrust Nominees Ltd v Hautford Ltd [2018] EWCA Civ 765; [2018] EGLR 25 confirmed in similar circumstances that the landlord’s consent had been unreasonably withheld on this ground, as the landlord cannot reasonably withhold consent in order to obtain an uncovenanted or collateral advantage. The right to use the property wholly for residential purposes is a right that your assignee can legitimately expect to obtain when it purchases the leasehold interest.

Management considerations

With regard to the second reason for the landlord’s refusal, it is likely that the court would hold that there is no scope for reaching a different conclusion merely because any particular landlord for the time being happens to own the adjoining or neighbouring property in the area. Moreover, the court may point out that wider management considerations are sufficiently met by the provisions of the 1967 Act for the insertion of restrictive covenants in the transfer of the freehold.

Financial standing

With regard to the third reason, the court is likely to hold that it is reasonable for the landlord to refuse on this ground. Although the financial irregularity can be remedied, the landlord is entitled to make its decision as matters stand at the date of the application.

The overall result

Having established that two of the three grounds for refusal are likely to be unreasonable, is there any scope for argument that the good reason is “tainted” by the bad reasons, so as to produce an overall result that the refusal is unreasonable?

In No.1 West India Quay (Residential) Ltd v East Tower Apartments Ltd [2018] EWCA Civ 250; [2018] EGLR 16 the Court of Appeal examined circumstances where a mixture of reasonable and unreasonable grounds were found to have been given by the landlord. It was decided at first instance that it was reasonable for the landlord to require a bank reference and to have the apartment inspected by a surveyor at a cost of £350 plus VAT, but requiring legal fees of £1,250 plus VAT was an unreasonable condition and such fees should have been no more than £350. It was held that the bad reason vitiated the two good ones and the refusal of consent was unreasonable.

The Court of Appeal disagreed. Lord Justice Lewison, having analysed various cases, commented: “The theme running through all these cases is that if the decision would have been the same without reliance on the bad reason, then the decision (looked at overall) is good. In that situation the bad reason will not have vitiated or infected the good one. That approach seems to me to be justified in principle. In addition, I consider that to hold otherwise might lead to considerable practical difficulties… Imagine the case of a rack-rented lease of valuable property where the rent is several hundred thousand pounds a year. The tenant asks for consent to assign. The landlord requires the tenant to pay his costs of, say, £1,000 when a reasonable sum would be £750. However, the landlord also objects on well-reasoned and compelling grounds that the proposed assignee will be unable to pay the rent. It seems to me to be a draconian sanction if the landlord is to be saddled with a tenant of precarious financial means all for the sake of having demanded £250 too much as a fee.”

The question, therefore, is whether the decision to refuse consent was reasonable. Where, as in your case, the reasons were freestanding reasons, each of which had a causative effect, and one of which was reasonable, the court is likely to hold that the decision itself to refuse consent was reasonable.

Since this article was published the Supreme Court has handed down Judgment in Sequent Nominees Limited (formerly Rotrust Nominees Limited) v. Hautford Limited [2019] UKSC 47 holding that it was reasonable for the landlord to withhold consent where there was an increased prospect of a successful enfranchisement.  Therefore, two out of the three reasons in this question are likely to be reasonable.  It remains the position that the Court is likely to hold that the decision itself to refuse consent was reasonable.


This article was written by Robert Highmoreproperty litigation partner at Charles Russell Speechlys LLP and David Holland QC, barrister at Landmark Chambers, and appeared on 3 September 2019 in Estates Gazette. For more information, please contact Robert on +44 (0)20 77203 5201 or at robert.highmore@crsblaw.com.

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