Sequent Nominees Ltd v Hautford Ltd [2019] UKSC 47
Supreme Court by majority of 3 to 2 reverses unanimous Court of Appeal decision in Sequent Nominees Ltd v Hautford Ltd and holds that a landlord’s refusal of consent to an application for change of planning use was reasonable.
This case provides important clarification for practitioners as to the interpretation of contracts, and leases in particular. When considering the exercise of a contractual discretion (such as the common provision in a lease that the tenant shall not do a particular act without the landlord’s consent “such consent not to be unreasonably withheld” – known as a “fully qualified covenant”), and when determining what is and is not “reasonable”, the Court should look at the facts as they are at the date of the request for consent. The Court should not consider the reasonableness of a refusal of consent “by reference to an over-refined construction of the lease as at the time of its grant”.
The exercise is not therefore to attempt to identify the original purpose for which the parties might have included the right for one of them to refuse consent. Rather, the correct approach is simply to construe the clause so as to discover what upon its express terms it permits the (non-)consenting party to do. In the context of leases in particular, the question of reasonableness is then resolved by asking whether the refusal of consent serves a purpose that is “sufficiently connected with the landlord and tenant relationship as at the time when consent is requested”.
This would seem to be contrary to the approach taken in cases such as Bates v Donaldson [1896] 2 QB 241 (CA), Houlder v Gibbs [1925] 1 Ch 575 (CA) (per Sargant LJ: “in considering the operation and effect of a clause of this kind, you have to consider what was within the reasonable contemplation of the parties to the lease”; per Warrington J: “What was the danger which the lessor contemplated, and against which the lessee was content to allow the lessor to protect himself? What is to be inferred from what may be treated as being in the contemplation of the parties when the contract was made?”), and West Layton v Ford [1979] 1 QB 593 (CA) (where Roskill LJ stated that the enquiry was to “look first of all at the covenant in order to see what its purpose was when the parties entered into it”). It also seems contrary to the more general observations of Lord Neuberger as to contractual interpretation in Arnold v Britton [2015] AC 1619. [1]
Nonetheless the majority of the Supreme Court (Lords Briggs, Carnwath and Hodge, with Lady Arden and Lord Wilson dissenting) held that the Courts below which had followed that earlier line of authority had adopted an erroneous construction of the lease and had therefore made an error of law which required the Court to consider the matter afresh.
The facts
The case concerned a 100 year lease of a whole building in Soho granted in 1986 for a premium of £200,000 at a peppercorn rent. The current tenant (Hautford) was an assignee of the original term. The current landlord (Sequent formerly known as Rotrust Nominees) was the original landlord by another name. At the date of trial there were just under 70 years remaining of the term. There was no restriction on assignment until the last 7 years of the term. The lease contained the following user covenant (clause 3(11)):
“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…”
By clause 3(19) Hautford covenanted:
“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.”
The building extended over 6 floors, including a basement. At the time of trial the top two floors of the building had planning consent for residential use, the basement and ground floor were authorised for retail use and the first and second floors were authorised for office/ancillary use. Approximately 25% of the building was in residential use. Hautford wished to make a planning application to change the use of the first and second floors of the building to residential use. If that application were successful, approximately 52% of the building would be in residential use.
Sequent refused permission on the ground that giving consent would increase the prospect of a successful claim by Hautford to enfranchise (i.e. compulsorily purchase the freehold) under the Leasehold Reform Act 1967 (LRA 1967). Sequent also stated that it wanted to retain control of the building for estate management purposes as it forms part of a block of adjacent and contiguous properties in Sequent’s freehold ownership.
Sequent alleged that the purpose of the requirement to obtain consent to the making of a planning application is simply to protect the landlord from damage to its reversion. Hence refusal of consent was said to be reasonable because Sequent was protecting its property interests in the face of a potential claim under LRA 1967 which would deprive it entirely of its freehold interest in the building and would also have an adverse impact on the value of its investment in the wider adjacent estate.
Both Courts below found that Sequent’s refusal of consent was unreasonable (essentially) because to hold otherwise would be to re-write the user covenant and prevent the tenant from being able to use the entire demised premises for the permitted residential purposes.
Decision of the Supreme Court
Lord Briggs (with whom Lords Carnwath and Hodge agreed) held that the landlord should succeed in its appeal since seeking to avoid a significant increase in the risk of enfranchisement was the “quintessential type of consideration rendering reasonable the refusal of consent”. On “a down to earth factual analysis of the economic consequences to the landlord of giving or refusing the requested consent” the refusal of consent was reasonable.
For property practitioners 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, and a “boiler plate” 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.
In a pithy dissenting judgment Lord Wilson concluded that clause 3(11) was a bespoke clause “of singular generosity to the leaseholder” the effect of which was specifically to permit residential use of every part of the demised premises, unqualified by any requirement to secure the freeholder’s prior consent. He held (alluding to Hautford’s argument based on the principle of non-derogation from grant) that if the landlord could withhold consent to an application for planning permission to make residential use of the premises (or part of them) then the user clause would be deprived of substantial effect.
Practical points
This is a very helpful decision for landlords. However as Lord Wilson pointed out in his judgment (again alluding to Hautford’s argument to this effect) 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. Property practitioners will now wish to consider with their lay clients – both landlords and tenants – whether the decision of the majority in this case affects the valuation of their clients’ assets. Many leases will contain the same “boiler plate” 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.
Tiffany Scott QC and Charlotte Black acted for the Respondent tenant, instructed by Mark Steggles of Thomson Snell & Passmore.
You can read the full judgment here.
[1] All these cases were cited before the Supreme Court but none is addressed in their Lordships’ judgments.
Great Dunmow Estates Limited v Crest Nicholson Operations Ltd & Ors [2019] EWCA Civ 1683
The Court of Appeal has, in Great Dunmow Estates Limited v Crest Nicholson Operations Ltd & Ors [2019] EWCA Civ 1683: (1) held that matters ‘agreed’ in the course of the expert determination could not have contractual effect where the underlying contract contained anti-informal variation clauses which the later ‘agreement’ did not meet; and (2) confirmed that absent indications in the contract to the contrary, the court retains jurisdiction to construe the contract which defines the expert’s role.
The expert in this case was appointed under a conditional contract for the sale of land to value the land at the “Valuation Date”. That date was defined as “the Challenge Expiry Date or (if later) the date of the valuation”. The Challenge Expiry Date had passed, so on a literal reading the Valuation Date appeared therefore to be the date of the valuation.
The parties’ surveyors, in accordance with the expert’s directions, prepared a “Statement of Agreed Facts” which recorded (amongst other things) that the Valuation Date was to be the date of the valuation.
The expert thereafter instructed leading counsel to advise upon a different issue. In providing that advice, counsel noted that the literal reading of clause 6.2 was wrong, and that on a proper construction the Valuation Date should be the (earlier) “Challenge Expiry Date”.
It was found at first instance (and not challenged on appeal) that the expert’s counsel was correct as a matter of construction: the valuation date under the contract should have been the “Challenge Expiry Date”.
Notwithstanding, HHJ Kramer held that the expert should prepare the valuation using the later date, i.e. the date of his valuation, because the Statement of Agreed Facts amounted to a binding contract to that effect. In so holding, HHJ Kramer also held that the Court had jurisdiction to determine these issues; and that the identification of the correct “Valuation Date” was not a matter which the parties has agreed to be within the sole remit of the expert under the conditional sale contract.
Between the trial at first instance and the Court of Appeal’s decision, the Supreme Court decided MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2018] UKSC 24. That confirmed that parties could agree to bind themselves to require certain formalities to vary contracts. The conditional sale contract contained such formalities, that the Statement of Agreed Facts did not meet.
The Court of Appeal therefore held that the Statement of Agreed Facts could not have had contractual effect (the question as to whether it might be given effect by an estoppel has been remitted to the Chancery Division). Whilst not a surprising result following MWB, it is potentially far-reaching. Parties will often seek to ‘agree’ all manner of things with varying degrees of formality in the course of the expert determination process itself. Regard will need to be had to any anti-variation clauses in the governing agreements to be guaranteed of the efficacy of such agreements.
The Court of Appeal continued to consider (obiter) the jurisdiction question. There was some tension between earlier Court of Appeal authorities on the extent of the court’s jurisdiction to address issues of construction which arose in the course of an expert determination (Norwich Union Life Insurance Society v P&O Property Holdings Ltd [1993] 1 EGLR 164 and National Grid Co plc v M25 Corp Ltd [1999] 1 EGLR 164).
It has now been held (judgment of Patten LJ at [43]) that, “[t]he balance of authority is… now firmly in favour of preserving access to the courts to determine this legal issue going to jurisdiction”. Unless there is something in the contract defining the expert’s task that “can be read or implied as making him the sole arbiter” of issues about the extent of his role, the courts will have jurisdiction to determine such questions.
This may open the door to more challenges to expert determinations, and clear words will be required to exclude the court’s jurisdiction if the parties intend the expert to have exclusive jurisdiction to construe the agreement which defines their role.
Jonathan Seitler QC and Tom Roscoe (instructed by Gateley) acted for the successful appellants.
You can read the full judgment here.
The FA v Millwall FC: due diligence in practice
David Phillips QC has chaired a FA Regulatory Commission which heard charges against Millwall FC alleging that the club had failed to ensure that its spectators had conducted themselves properly. The specific complaint was of racist chanting at the Everton FC match that took place on 26 January 2019. Millwall admitted the charge (which was an offence of strict liability) but sought to mitigate the penalty by arguing that the elements of the due diligence defence provide by FA Rule E20 applied. The Written Reasons contain an analysis of the correct approach to the application of the due diligence defence, following on from the decision of the Regulatory Commission in the West Ham case, which David also chaired. The decision itself is unusual because the Commission was not unanimous. The decision that Millwall was unable to establish the elements of the due diligence defence was made 2-1. Millwall was fined £10,000 and ordered to comply with the terms of an Action Plan devised by the Regulatory Commission.
The Written Reasons can be read here.
National Joint Stock Company Naftogaz of Ukraine v Public Joint Stock Company Gazprom [2019] EWHC 658 (Comm)
Alan Gourgey QC and Bobby Friedman successfully appeared for the respondent in National Joint Stock Company Naftogaz of Ukraine v Public Joint Stock Company Gazprom [2019] 2 Lloyd’s Rep. 20, resisting an application in the Commercial Court for immediate enforcement of an arbitral award of almost $3 billion, pending a challenge to the arbitral award before the supervising court (Sweden). Sir Michael Burton reviewed the authorities on the principles guiding the exercise of the Court’s discretion under s.103(5) Arbitration Act 1996. He decided that immediate enforcement should be refused even though the Swedish court had refused an application for a stay of execution.
Ingenious Games LLP and others v HMRC [2019] UKUT 0226 (TCC)
Jonathan Davey QC has received judgment from the Upper Tribunal in the long running, high profile and high value Ingenious litigation. The Upper Tribunal (Mrs Justice Falk, Judge Herrington) dismissed the LLPs’ grounds of appeal in their entirety and accepted HMRC’s grounds of appeal in relation to aspects of the decision of the First-tier Tribunal (Judge Charles Hellier, Julian Stafford) ([2016] UKFTT 521 (TC)). The case concerns whether limited liability partnerships involved in the film and games industries were trading with a view to a profit, whether millions of pounds of expenditure was incurred wholly and exclusively for the purposes of the partnerships’ trade, and whether the partnerships’ accounts were drawn up in accordance with generally accepted accounting principles. The loss claims in dispute (including in respect of follower partnerships) amount to over £1.6 billion.
Jonathan is acting for HMRC with Malcolm Gammie QC (One Essex Court), Catherine Addy QC (Maitland Chambers), Michael Jones (Gray’s Inn Tax Chambers), Imran Afzal (Field Court Tax Chambers), Ruth Hughes (5 Stone Buildings), Sam Chandler (5 Stone Buildings), Nicholas Macklam (Radcliffe Chambers) and Oscar Schonfeld (One Essex Court). The Appellant LLPs are represented by Pushpinder Saini QC (Blackstone Chambers), David Milne QC (Pump Court Tax Chambers), Richard Vallat QC (Pump Court Tax Chambers), James Rivett QC (Pump Court Tax Chambers), Edward Waldegrave (Pump Court Tax Chambers) and George Molyneaux (Blackstone Chambers).
Read the full judgment here.
Cuadrilla v Persons Unknown
Tom Roscoe (of Wilberforce Chambers) and Julie Dilcock (assisted by Shona Jenkins) of Eversheds Sutherland (International) LLP have successfully acted for long-standing client Cuadrilla Bowland Limited (and others) on an application to commit three respondents for their breach of a High Court injunction preventing unlawful forms of protest at Cuadrilla’s hydraulic fracturing site at the Preston New Road in Lancashire.
Tom and Julie previously acted for Cuadrilla on the grant of the injunction in July 2018 against “persons unknown” preventing trespass, obstruction of vehicular access to the site and conspiracy to injure Cuadrilla by unlawful interference with its supply chain ([2018] 7 WLUK 223).
Following a two-day hearing, HHJ Pelling QC (sitting as a Judge of the High Court) on 28 June 2019 found each of the three respondents in contempt of court for every incident alleged, including a multi-hour “lock-on” on the highway at the entrance to the site and an unlawful means conspiracy to stop vehicles on the highway making deliveries to the site.
The judgment (a transcript of which is awaited) will be of interest as it relates to the enforcement of injunctions against “persons unknown”, and the Court’s conclusion that references to parties’ intentions in such orders does not render them too uncertain to be enforced via committal proceedings – thereby helping to clarify the effect of Boyd v Ineos Upstream [2019] EWCA Civ 515.
A further hearing is due to take place in September 2019 to determine sentencing and the respondents’ and Friends of the Earth’s application to vary the terms of the injunction.
The FA v Arsenal FC
David Phillips QC has chaired another FA Regulatory Commission considering the proper application of FA Rules E20 and 21. The incident in question occurred during Arsenal’s home match against Manchester United when a supporter ran onto the pitch, came into contact with a Manchester United player, and joined in the Arsenal players’ celebration the vicinity of the Manchester United goalmouth. The Commission gave guidance for the proper application of the first limb of the Rule E21 due diligence defence. The Commission found that Arsenal was able to establish the due diligence defence and dismissed the charge. The Written Reasons can be read here.
The Libyan Investment Authority v JP Morgan and others [2019] EWHC 1452 (Comm)
Judgment has been handed down by Bryan J this week in The Libyan Investment Authority v JP Morgan and others setting aside service on two defendants out of the jurisdiction. Alan Gourgey QC and Anna Littler, together with Adam Kramer of 3VB (instructed by PCB Litigation LLP) acted for one of the successful defendants in his jurisdiction challenge – a Libyan businessman against whom a claim had been brought by the Libyan Investment Authority alleging fraud and corruption in relation to transactions that it had entered into with Bear Stearns bank in 2007.
Permission to serve the defendants outside the jurisdiction had been granted by the High Court ex parte in June 2018. However, on the application by those defendants to set aside service out of the jurisdiction, heard in May 2019, the Court found that the Libyan Investment Authority’s claim against them in fact had no real prospect of success because it was time-barred and did not therefore meet the required threshold to serve them out of the jurisdiction. Further, the judge found that there had been breaches by the Libyan Investment Authority of the duty of full and frank disclosure in their ex parte application, including in relation to the limitation position which in itself justified setting aside service.
Read the full judgment here.
London Luton Hotel BPRA Fund LLP v HMRC [2019] UKFTT 212 (TC)
Jonathan Davey QC has received judgment from the First-tier Tribunal (“FTT”) in an appeal concerning the Business Premises Renovation Allowances (“BPRA”) regime under Part 3A of the Capital Allowances Act 2001. The case concerns a hotel in the vicinity of Luton airport. The key issue in the dispute is that of the proper characterisation of a multi-million pound payment known as the “development sum” made by the Appellant LLP under a contract known as the “development agreement”, and, in particular, whether or not the LLP’s entitlement to BPRA extends to the full amount of the development sum. The FTT (Judge Brooks and Nicholas Dee) found that the Appellant’s entitlement does not so extend. The FTT therefore found for the Respondents on the point. As to the component parts of the development sum, the FTT found in favour of the Respondents in respect of some and in favour of the Appellant in respect of others. Jonathan Davey QC acts for the Respondents (HMRC) with John Brimsmead-Stockham (11 New Square), Ruth Hughes (5 Stone Buildings), Sam Chandler (5 Stone Buildings), Nicholas Macklam (Radcliffe) and Hugh Cumber (5 Stone Buildings). Malcolm Gammie QC (One Essex Court) and Jonathan Bremner QC (Pump Court Tax) act for the Appellant. Both parties have sought permission to appeal.
Read the full judgment here.
Re Qunar Cayman Islands Limited
On 13th May 2019, the Grand Court of the Cayman Islands handed down judgment in the case of Re Qunar Cayman Islands Limited. Qunar is one of China’s largest online travel companies, with headquarters in Beijing. The company was taken private in 2017 by way of a merger under Part XVI of the Companies Law. There were eight dissenting shareholders who contended that the Merger Consideration and valuation which was subsequently arrived at by the Company and its experts in these proceedings significantly undervalue the company. Consideration was also given to undervaluation of Chinese companies taking place on US exchanges.
The Court accepted that the company’s trading price on NASDAQ was reflective of fair value at the relevant time. In its ruling, the Court adopted the approach used by the company’s expert of a blended approach of market trading valuation of the shares prior to the merger and discounted cash flow (DCF) methodology to reach a just and equitable outcome which determined fair value for the dissenters. You can download the full judgment here.
This is only the third consideration of the fair value of a Cayman Islands company’s shares under section 238 of the Companies Law, following Re Integra and Re Shanda Games. The case has attracted widespread media attention, including in The Lawyer here.
Tom Lowe QC successfully acted for Qunar and was instructed by Jessica Williams and Paul Madden of Harneys.