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Landlord’s consent for change of use – the reasonableness test

Reasons to choose Wilson Browne

There is a difficult balance to strike in the drafting of any commercial lease when it comes to the matter of the permitted use of the commercial property. On the one hand, the landlord will wish to protect their interest by limiting what the tenant can do with the property; and on the other, the tenant will wish to ensure that the permitted use is wide enough for both their purpose and also the purpose of any potential assignee or undertenant in the future.

Often the lease will be drafted in such a way that it restricts the tenant to a certain use of the property (for example, use as an office) and establishes that any proposed change of use will require the landlord’s consent, with such consent not to be unreasonably withheld. A proposed change of use, either by the tenant or any subsequent tenant/lessee, can become an area of contention and the question of what is ‘reasonable’ in each case is inevitably subjective and depends on the particular facts pertaining to the same.

The recent case of Rotrust Nominees Limited v Hautford Limited [2018] EWCA Civ 765 (“Rotrust”) placed an interesting spin on this as it is the first reported case where the court considered the reasonableness of a landlord refusing consent to apply for planning permission (usually the landlord can prevent the tenant from using the property for a certain purpose, but this does not preclude them from applying for planning permission).

The question of reasonableness here centred around whether the landlord was able to refuse a change of use from office to residential (both of which were permitted uses within the lease) on the basis that allowing the property to become residential could allow the tenant to acquire the freehold of the property by enfranchisement under the Leasehold Reform Act 1967; the argument being that this would damage the landlord’s reversionary interest and would be contrary to good management of the estate (the property comprised two floors of a six floor building, all owned by the landlord). It was held that the landlord had unreasonably refused consent as the purpose of the use clause was not to restrict enfranchisement and that fear of enfranchisement in itself is not a reason for refusing consent.

The argument of ‘good management of the estate’ as being reasonable grounds for refusal is one that was raised in Rotrust, but has also been deliberated in cases previously. In support of this argument is the case of Crown Estate Commissioners v Signet Group plc and another – [1996] 2 EGLR 200 whereby it was held that it was reasonable for the landlord to refuse consent for a change of use on the basis of estate management considerations; here they were able to demonstrate clear objectives for the strategic improvement of the estate (which was Regent Street, a retail area of historic importance) and showed that the change of use would contravene those objectives. Conversely, in Footwear Corp Ltd v Amplight Properties Ltd – [1998] 3 All ER 52 (“Footwear Corp”) the landlord was not able to demonstrate that their refusal was necessary on the grounds of good estate management as the problems they identified (the noise of a proposed pet shop adversely affecting a residential flat above) could be sufficiently addressed through other means (i.e. a cause of action for breach of covenant against nuisance) and therefore this in itself was not sufficient reason to refuse consent for change of use.

Much of the discussion in Footwear Corp focused on the suitability of the property for the intended use, and this can indeed be a reasonable argument for refusing consent. In Warren and another v Marketing Exchange for Africa Ltd – [1998] 2 EGLR 247 it was held that it was reasonable to refuse consent on the basis that the premises were unsuitable for the proposed use. Here, the property was a doctor’s surgery with no street frontage and this made the proposal to change use to a retail unit unsuitable and the landlord had genuine concerns that it would make the property unmarketable in the future if they were not able to revert it back to office use. Therefore, their refusal for consent was not unreasonable.

Additionally, the courts have been willing to take a common sense approach in certain circumstances. In particular, it was held in Killick and another v Second Covent Garden Property Co Ltd [1973] 1 WLR 658 at 659 that it was unreasonable for the landlord to refuse to the change of use as the way the clause was drafted within the lease was not sufficiently clear. That being the case, the judges were unwilling to rely on that clause to find in favour of the landlord; the effect of which would be that the lease would prevent the property from being used for any purpose other than a printing business for the remainder of the term (being 42 years). There was evidence to show that the use of the property as a printing business was not financially viable and the proposal to change use to an office seemed reasonable in light of the other restrictions in the lease, as it did not contravene them.

As you will see, each case is different and even with careful drafting it is practically impossible to account for every possible eventuality. It is important to seek out quality legal advice at all stages of a transaction; and particularly as a landlord where looking to grant a lease or provide/refuse consent in relation to a change of use, or as a tenant where you will be taking a lease or looking to change the use of a property. Our specialist teams……

Adam Willson

Posted:

Adam Willson

Solicitor

Adam began his training with the firm in 2017 and qualified as a Solicitor in November 2020, he works within the Commercial Property team at our Corby office.