House of Lords
|Session 2001- 02
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|Judgments - Ashworth Frazer Limited (Original Respondents and Cross-Appellants) v. Gloucester City Council (Original Appellants and Cross Respondents)
HOUSE OF LORDS
Lord Bingham of Cornhill Lord Browne-Wilkinson Lord Hoffmann Lord Scott of Foscote Lord Rodger of Earlsferry
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT
IN THE CAUSE
ASHWORTH FRAZER LIMITED
(ORIGINAL RESPONDENTS AND CROSS-APPELLANTS)
GLOUCESTER CITY COUNCIL
(ORIGINAL APPELLANTS AND CROSS RESPONDENTS)
ON 8 NOVEMBER 2001
 UKHL 59
LORD BINGHAM OF CORNHILL
1. There are before the House an appeal by the Gloucester City Council ("the landlord") and a cross-appeal by Ashworth Frazer Limited ("the tenant"). On the issues arising in both the appeal and the cross-appeal I am in complete agreement with the opinion of my noble and learned friend Lord Rodger of Earlsferry, whose account of the facts and background I gratefully adopt.
The landlord's appeal
2. The combined effect of clause 2(viii) of the lease and section 1 of the Landlord and Tenant Act 1988 is in my opinion clear. The tenant covenants not to assign the demised land or any part thereof (other than to a subsidiary of the tenant). But the covenant is not absolute. The tenant may assign with the previous consent in writing of the landlord. The landlord's consent is not to be unreasonably withheld in the case of a respectable and responsible assignee being proposed. Where the tenant makes written application for consent the landlord owes the tenant a duty within a reasonable time to give consent, or give consent subject to notified conditions, or refuse consent for notified reasons. If the reasonableness of any condition imposed by the landlord or the reasonableness of the landlord's withholding of consent is questioned, the landlord must show that the condition or the withholding was reasonable.
3. When a difference is to be resolved between landlord and tenant following the imposition of a condition (an event which need not be separately considered) or a withholding of consent, effect must be given to three overriding principles. The first, as expressed by Balcombe LJ in International Drilling Fluids Ltd v Louisville Investments (Uxbridge) Ltd  Ch 513 at 520 is that
The same principle was earlier expressed by Sargant LJ in Houlder Brothers & Co Ltd v Gibbs  Ch 575 at 587:
While difficult borderline questions are bound to arise, the principle to be applied is clear.
4. Secondly, in any case where the requirements of the first principle are met, the question whether the landlord's conduct was reasonable or unreasonable will be one of fact to be decided by the tribunal of fact. There are many reported cases. In some the landlord's withholding of consent has been held to be reasonable (as, for example, in Pimms Ltd v Tallow Chandlers Company  2 QB 547 and Bickel v Duke of Westminster  QB 517), in others unreasonable (as, for example, in Bates v Donaldson  2 QB 241, Houlder Brothers, above, and International Drilling, above). These cases are of illustrative value. But in each the decision rested on the facts of the particular case and care must be taken not to elevate a decision made on the facts of a particular case into a principle of law. The correct approach was very clearly laid down by Lord Denning MR in Bickel v Duke of Westminster, above, at p 524.
5. Thirdly, the landlord's obligation is to show that his conduct was reasonable, not that it was right or justifiable. As Danckwerts LJ held in Pimms Ltd v Tallow Chandlers Company, above, at p 564:
Subject always to the first principle outlined above, I would respectfully endorse the observation of Viscount Dunedin in Viscount Tredegar v Harwood  AC 72 at 78 that one "should read reasonableness in the general sense". There are few expressions more routinely used by British lawyers than "reasonable", and the expression should be given a broad, common sense meaning in this context as in others.
6. The Court of Appeal held itself to be precluded by Killick v Second Covent Garden Property Co Ltd  1 WLR 658 from holding on the facts of this case that the belief of the landlord, however reasonable, that the proposed assignee intended to use the demised premises for a purpose which would give rise to a breach of the user covenant was of itself a ground for withholding consent to assignment: see (1999) 80 P & CR 11 at 23, per Chadwick LJ. Lord Rodger has fully analysed that decision. I would myself criticise it on three grounds. First, it purported to treat as a question of law what was in truth a question of fact. Secondly, in holding that the landlord's withholding of consent was unreasonable because the outcome which he wished to avoid was not a necessary consequence of the assignment (which was, it seems clear, based on the landlord's contention: see pp 660, 661) the court accepted much too high a test. A reasonable landlord may seek to avoid not only an undesirable outcome which must occur but also one which he reasonably fears may well occur, not least where that involves the prospect of unwelcome litigation. Thirdly, the decision as expressed gave quite inadequate weight to the user covenant in a lease. The lease is, after all, the contract between landlord and tenant, a contract with special characteristics and subject to special rules but a contract all the same. It records what the parties respectively agree to do and not to do. Unless a term is discharged or consensually varied or revoked, a party is ordinarily bound by what he has agreed, even if (with the benefit of hindsight) he regrets his bargain. The contract is, as civil lawyers put it, the law between the parties, and it would rarely be right to hold that a landlord was unreasonable in withholding consent to an assignment which in his reasonable judgment would or might well lead to a breach of covenant. Killick should no longer be treated as authoritative.
7. The reasoning of the deputy judge was in my view correct on this issue. The Court of Appeal's decision was vitiated by its reliance on Killick. I would restore the decision of the judge.
The tenant's cross-appeal
8. The tenant's cross-appeal turns on a short question of construction: are the words "for uses within Use Classes III IV or X of the Town and Country (Use Classes) Order 1963" in clause 2(iii)(a) of the lease to be understood as restricting the uses to which the building development described by the clause might be put? On this question I have the misfortune to disagree with the majority of the House but the consolation of agreeing with the deputy judge, both members of the Court of Appeal and my noble and learned friend Lord Rodger.
9. By clause 2(iii)(a) the tenant covenants to commence and complete a building development. Such building development must among other things be "in conformity with all licences permissions and consents required by bye-laws regulations planning provisions orders and statutes and in conformity with detailed plans elevations sections and specifications as shall previously be approved by the City Architect." Since the landlord is the local planning authority, it thus has full control over the physical design, size, appearance, layout and location of the development. The use classes in the 1963 order do not describe buildings. They describe uses. There can have been no conceivable purpose in making reference to those use classes other than for the purpose of restricting the permitted user to those classes, expressed as they are in terms which will be as readily intelligible at the end of the lease as at the beginning. It is idle to speculate what use might be made of buildings other than those comprised in the development to which clause 2 (iii)(a) applies in the absence of evidence to suggest that the site will accommodate any significant buildings once the building development described in clause 2(iii)(a) has been completed. The inclusion and terms of clause 2(vi) have been fully explained by the landlord's earlier grant of leases to tenants carrying on the miscellaneous activities there specified and its desire to protect those tenants against competition. Clause 2(xiii) does not in my opinion throw light on the construction of clause 2(iii)(a). If the reference to the use classes in clause 2(iii)(a) does not apply to the user of the building development it is entirely otiose.
10. I would for my part dismiss the tenant's cross-appeal.
11. For the reasons given in the speeches to be delivered by my noble and learned friends, Lord Hoffmann and Lord Scott of Foscote that the cross-appeal should be allowed.
12. As to the appeal, I agree with the speeches of all your Lordships that if, contrary to my view, clause 2(iii)(a) of the lease contains a restriction on user, the city council would not necessarily have acted unreasonably in refusing their consent to a proposed assignment on the grounds that the assignee proposed to commit a breach of such restriction.
13. There are two issues in this appeal. The first is whether the use of the premises for metal recycling would be a breach of covenant. The second question is whether a refusal of consent on that ground would be unreasonable.
14. Since the first question turns entirely upon the construction of the language of the lease and raises no question of general public importance, I can be brief in my reasons. I gratefully adopt the recital of the facts and relevant provisions of the lease set out in the speech of my noble and learned friend Lord Rodger of Earlsferry.
15. The provision relied upon as prohibiting the intended use is a phrase in clause 2(iii)(a):
16. The landlord contends that the words "a building development for uses within Use Classes III IV or X" means not, or not only, that the building must be suitable for such uses but that during the term of the lease it may be used only for such uses. But I find it impossible to construe clause 2(iii)(a) as having any application to the use which may be made of the premises. The purpose of the whole of clause 2(iii) is to describe what the tenant has positively covenanted to do. Sub-paragraph (a) describes the buildings he is to erect, (b) the road and cattle grid he is to build, (c) the materials he is to use (d) the use to be made of the earth, clay, gravel and sand displaced by the construction, (e) the disposal of antiquities he may find and (f) the fences to be built and maintained. The subject matter of the whole clause is altogether different from restrictions on the use of the premises. They are contained in clauses 2(v)(vi) and (xi).
17. The argument that a restriction on user has been embedded in the description of the premises to be constructed is based upon the argument that the lease is badly drafted. But that seems to me to beg the question. It is only badly drafted if one assumes that clause 2(iii)(a) was intended to restrict the use of the premises. To slip a rather ambiguous user clause into the middle of a description of the buildings would indeed be poor drafting. On the other hand, if one assumes that the parties intended in orthodox fashion to describe the buildings to be erected in one clause and the restrictions on the use of the premises in another, there is nothing particularly bad about the drafting. Clause 2(iii)(a) may be somewhat prolix or even contain redundant material. But few leases could escape that reproach.
18. The argument from redundancy is that since clause 2(iii)(a) provides that the plans for the buildings must have been approved by the city architect, there was no reason why it should go on to stipulate that they should be suitable for any particular use. The city architect would in any case have had full control over the kind of buildings which could be erected.
19. Even if this were true, I would be more inclined to accept some degree of redundancy rather than assume that the draftsman had muddled up the question of what the tenant had to build within 5 years (which was part of the consideration for the lease) with the question of what use could be made of the premises during its 114 year term. But I am far from satisfied that it is true. We have very little evidence of the factual background against which the lease was executed. The parties may already have had some mutual understanding about the buildings to be erected but we have no idea of how far this had gone. The city architect could not unreasonably withhold approval of the plans. Perhaps the reference to the Use Classes was intended to pre-empt argument over whether it would be reasonable to object to buildings which were not suitable for those uses. These matters are entirely speculative. So I do not think that the argument from redundancy has enough weight to displace an interpretation based on the conventional structure of the clauses.
20. There are other factors which point against 2(iii)(a) containing a user clause. First, it is common ground that it would apply only to the buildings erected pursuant to the covenant. But those buildings did not cover the entire 14.5 acre site. There was room for new ones and no covenant against new buildings. What would be the commercial purpose of prohibiting a use of the old buildings when a new one erected on vacant land could be used for that purpose? Secondly, it seems odd to define permissible user in a 114 year lease by reference to Use Classes in a 1963 statutory instrument. Such a description of the buildings makes perfectly good sense in a covenant which was intended to be spent within 5 years. But was it contemplated that the parties in 2080 would have to research mid-twentieth century planning law to discover the permissible user? Although it is fair to say that this might be necessary if the premises had to be reinstated after a fire under clause 2(xiii).) Thirdly, the covenant is absolute. The landlord is under no obligation to consent to a change, whether this would be reasonable or not. The tenant's only escape is through the very limited jurisdiction of the court to vary such covenants under section 84 of the Law of Property Act 1925. Would the parties have been likely to intend such restrictions to endure for over a century? Fourthly, the landlord was the planning authority. In that capacity, it could prevent any use which was undesirable on planning grounds. This control was supplemented by clause 2(vi), which contained prohibitions to protect existing tenants against competition, which could probably not have been justified on planning grounds. In combination, planning control and clause 2(vi) constitute a rational system for controlling the use of the premises.
21. For these reasons I would allow the tenant's cross-appeal. I also agree that the appeal should be allowed for the reasons given in the opinions of my noble learned friends Lord Bingham of Cornhill and Lord Rodger of Earlsferry.
LORD SCOTT OF FOSCOTE
22. I have had the advantage of reading in draft the opinion of my noble and learned friend, Lord Rodger of Earlsferry and gratefully adopt his recital of the relevant facts. As is made plain in his opinion there are two issues which arise on this appeal. One is a short issue of construction of one of the lessee's covenants in the lease dated 28 April 1969 under which Gloucester City Council demised a site consisting of 14.5 acres of industrial development land to a developer for a term of 114 years from 25 December 1968. Clause 2(iii)(a) of the lease is expressed as a positive covenant requiring the lessee within five years to commence and complete the development of the site by erecting industrial buildings in conformity with plans to be approved by the city architect. The sub-clause describes the required development as "a building development for uses within Use Classes III IV or X of the Town and Country (Use Classes) Order 1963 . . . ". Class III in the 1963 Order was "use as a light industrial building . . . ", Class IV was "use as a general industrial building" and Class X was "use as a wholesale warehouse or repository". The issue of construction is whether clause 2(iii)(a), although in form a positive covenant requiring the lessee to construct a particular type of building development, contains also, by implication, a negative covenant by the lessee not to use the buildings for any use other than a use falling within one or other of the three specified Use Classes. At first instance the deputy judge, Mr Donaldson QC and, on appeal, the Court of Appeal decided that clause 2(iii)(a) did impose this negative user covenant. Had that been the only issue in the case I am sure that leave to appeal to this House would not have been granted. But the second issue raises an important point of general principle.
23. In Killick v Second Covent Garden Property Co Ltd  1 WLR 658, the Court of Appeal agreed that "a landlord may reasonably refuse consent to an assignment if the assignment would necessarily involve a breach of covenant" (Stamp LJ at p 661) but did not agree that, if the proposed assignment went ahead, "there would as a necessary consequence be a breach of the user covenant" and held that, in the circumstances, the landlord had unreasonably withheld consent to the assignment.
24. In the Court of Appeal in the present case Chadwick LJ said, (1999) 80 P&CR 11, 23:
25. The second issue, therefore, is whether, if that is indeed what Killick decided, Killick was rightly decided and, if it was not, whether the council had unreasonably refused its consent to the proposed assignment by Ashworth Frazer Ltd to Mountstar Metal Corporation Ltd. It was this issue that led to leave to appeal to this House being granted.
The second issue
26. On this issue I am in respectful and complete agreement with what Lord Rodger has said in paragraphs 29 to 43 of his opinion. I concur in his conclusions, expressed in paragraph 41, and in his reasons for reaching them. I agree also with the reasons given by my noble and learned friend, Lord Bingham of Cornhill, for reaching the same conclusions. Those conclusions would lead to this appeal being allowed if, but not unless, the first issue, the issue of construction, had been correctly decided in the council's favour. To that issue I now turn.
The construction issue
27. The issue is a short one. It does not involve any point of principle and is not assisted by reference to any authorities. The lease was a building development lease for a term of 114 years. It was a lease which, over the first five years, was going to involve the lessee in the expenditure of a considerable capital sum in carrying out the proposed development. The rent for the first 7 years of the term was nil, a peppercorn; for the period from 1970 to 1989 the yearly rent was £9,425 and thereafter it was to be either the £9, 425 or 8 per cent of the rackrents receivable by the lessee from the developed site, whichever were higher. The relevance of these rental provisions is that they demonstrate that both parties had a commercial interest in the lessee being able to develop the site and sub-let, or assign, the developed plots to the best financial advantage. User restrictions would naturally be important in that they would restrict the types of business that could be carried on on the various plots forming part of the development.
28. It is obvious, and hardly worth saying, that the ability of the lessee to exploit the developed site, or of any sub-lessee or assignee to exploit any of the individual plots, to its best commercial advantage would depend not only on the user covenants in the lease but also on the user permitted under the applicable planning law. It is very usual to find in a lease a tenant's covenant not to use the property in a manner in breach of planning law. In a development lease granted by a private lessor it would be very surprising not to find such a covenant. In this lease, however, there is no such covenant. But this is not surprising. The council, the lessor, was the planning authority. It was able, wearing its planning authority hat, to exercise control over the use to which the various plots on the site could be put. In clause 2(vi), the lease imposed specific user restraints on the lessee. These restraints had nothing to do with planning law but were imposed in order, it seems fairly clear, to protect from competition existing businesses located in the vicinity of the 14.5 acres. In my opinion, a development lessee, taking a 114 year lease in the form of the lease with which your Lordships are concerned, would be entitled to suppose that, provided the user restrictions in clause 2(vi) were observed, the industrial buildings he erected could be used for any use from time to time permitted under the planning law.
29. It is argued that unless the reference in clause 2(iii)(a) is construed so as to impose a negative user covenant, additional to that in clause 2(vi) and restricting the permitted user to user within Use Classes III IV or X, no sensible purpose could be attributed to the reference in the sub-clause to those Use Classes. I am in respectful disagreement both with the premise to this argument and with the conclusion. The Use Classes describe the type of building development that the lessee is to commence and complete within the 5 years. The requirement that the city architect's approval to the lessee's building plans is not to be unreasonably withheld is thereby given a degree of definition that would otherwise be lacking. His refusal to approve plans that did not relate to a development consistent with those uses could not be challenged on unreasonableness grounds. If the references to the three Use Classes had not been included the lessee might have proposed a more profitable development involving uses outside the three Use Classes and then sought to categorise as unreasonable the city architect's refusal to approve the plans. So there is, in my opinion, no cogency in the premise that there was no sensible commercial purpose in the reference to the three Use Classes other than the imposition of an unexpressed negative user covenant. But even if, contrary to my view, the premise had been sound, the conclusion that a negative user covenant should be implied does not, in my opinion, follow. The implied negative covenant is not necessary to give business efficacy to the sub-clause. If the sub-clause is accorded its literal meaning and read simply as a positive covenant to build, it lacks nothing in efficacy. Nor is the proposed implied term one that can be justified by the "Oh of course the parties must have intended it" test. I would, for my part, find it easier to give an "Oh of course" answer if asked whether the parties intended the user restrictions to be confined to those found in sub-clause (vi).
30. In my opinion, however, the strongest argument against the proposed implied term is that to imply into the lease an unexpressed user covenant would be thoroughly unfair to Ashworth Frazer Ltd, the assignee of a part of the developed site, who can reasonably have supposed that the sub-clauses in clause 2 meant what they said, that the building obligations in sub-clause (iii) were spent (unless re-building after a fire became necessary) and that the user restrictions were to be found in sub-clause (vi). If the council wanted additional contractual user restrictions to bolster the planning control that they could anyway exercise they should, in my opinion, have included the restrictions in their lease. They did not do so expressly and, in my opinion, cannot cure their failure by contending for an implied user restriction.
31. In my opinion, for the reasons I have given, the user proposed by Mountstar would not have been in breach of any covenant contained in the lease. Nor would it have been in breach of the planning law. Whether in the circumstances the council's refusal of leave to assign was unreasonable or whether the council can excuse their refusal on the ground that they were proceeding on a genuine and reasonable, although mistaken, view as to the effect of clause 2(iii)(a) is an issue of fact which has yet to be decided.
32. I would allow the council's appeal on the Killick point, allow Ashworth Frazer Ltd's cross-appeal on the construction point and set aside the declarations made by the first instance judge and by the Court of Appeal. I would make a declaration that clause 2(iii)(a) of the lease does not constitute a covenant by the lessee not to use the premises for any use other than those set out in Class III IV and X of the 1963 Order and remit to the Chancery Division the question whether in all the circumstances the council's refusal to consent to the assignment to Mountstar was unreasonable and, if so, what, if any consequences as to damages should follow.
LORD RODGER OF EARLSFERRY
33. By a lease dated 28 April 1969 the Mayor, Aldermen and Citizens of the City of Gloucester, the predecessors of the appellants, Gloucester City Council ("the council"), demised to Mackenzie Hill Ltd 14.5 acres of land at the Cattle Market, St Oswald's Road, Gloucester. The lease was to run for 114 years from 25 December 1968. No premium was payable and until 28 April 1970 the lessee was to pay only a peppercorn rent. From then until 25 December 1989 the lessee was to pay a yearly rent of £9,425, after which the rent was to be determined in accordance with the rent review provisions in clause 4. As the absence of a premium and the low level of the initial rent suggest, the lease was a development lease under which, in terms of sub-clause 2(iii)(a), the lessee required to begin erecting a building development on the demised land within a year and to complete the development within five years. Although it was apparently envisaged that the lessee would sublet the development to various subtenants, this did not happen. Rather, the development was severed. In particular, in 1973 Mackenzie Hill Ltd transferred 0.45 hectares of the property in the lease ("the premises") to Kentron Plastics Ltd. Part of the premises is occupied by a building erected in terms of the lessee's obligation under sub-clause 2(iii)(a). On 24 March 1993 Kentron Plastics transferred the premises to Ashworth Frazer Ltd ("the respondents").