England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		8th June 2004

Mr Justice Lewison:

Introduction

1. Mr and Mrs Sargeant own a large area of land at Whittlebury in Northamptonshire, close to the Silverstone Motor Racing Circuit. In the first half of the 1990s the land was developed by the construction of a golf course, clubhouse, bars and restaurants. It was part of the Sargeants' long term plans that the complex should also include a hotel.
2. Following negotiations with Mr Mike Rockall, the managing director of Macepark (Whittlebury) Ltd ("Macepark"), the Sargeants entered into an agreement for lease, and subsequently a lease, with Macepark. Under the terms of the lease Macepark were to construct the hotel, which they did.
3. The lease contains a covenant by Macepark not to make alterations without the landlords' consent, such consent not to be unreasonably withheld or delayed. Macepark applied for consent to construct an extension to the hotel in May 2003. At the end of July 2003 the Sargeants said that they would give consent, but only on certain conditions. Macepark took the view that the conditions were unreasonable, and began the works without consent. This prompted the Sargeants to seek an interim injunction which was initially granted on an application without notice on 20 August 2003 and subsequently continued by consent until trial of a preliminary issue. The preliminary issue directed to be tried was whether the Sargeants had unreasonably withheld or delayed the giving of consent to the extension. Statements of case were served on each side, but in the event the issue was all but compromised.
4. On 24 October 2003 the Sargeants granted Macepark a licence to carry out the work subject to a number of conditions. Somewhat unusually, one of the conditions contained in the licence was not agreed. Clause 7.3 of the licence says:

"In the event that the Court shall determine that it is reasonable for the Landlord to impose as a condition of granting consent to the works a restriction on the use of public rooms in the Extension in the form set out below, the following sub-clause will be added to clause 3 of the Lease:-

"3.34 Restrictions on use of public rooms in the Extension

Not to use any of the meeting or conference rooms or other facilities intended for use otherwise than as bedrooms in the extension constructed pursuant to a Licence and Deed of Variation made the 24th day of October 2003 between the Landlord (1) and the Tenant (2) otherwise than for functions and activities which are directly related or connected to management training conferences held at the Premises""

5. I have been asked to decide whether the imposition of this condition is one which it is reasonable for the Sargeants to impose. I was initially sceptical about whether this was a proper issue for the court to resolve (compare Re Hooker's Settlement [1955] Ch. 55). However, where a case is settled before trial, the court retains a discretion to decide unresolved issues, such as costs (compare Brawley v. Marczynski [2003] 1 WLR 813); although it must exercise that discretion with caution. The issue I am asked to decide was a substantive issue in the case, raised on the pleadings. Accordingly, I consider that it is proper that I should determine the one outstanding issue between the parties.
6. Mr Nicholas Dowding QC appeared for Macepark; and Mr John Male QC appeared for the Sargeants.

Background facts

7. At the date of the lease the Sargeants had been carrying on business for the best part of a decade. In a subsequent arbitration between the Sargeants and Macepark the arbitrator described their business at that time as follows:

"Between 1991 and 1994 Mr & Mrs Sargeant developed the business of a championship golf course and golf and country club facilities which trades under the name of Whittlebury Park. At all material times Whittlebury Park was engaged in the business of managing and operating a golf club, golf days, corporate hospitality, product launches, incentives and promotions, team building, multi-activity days, corporate family days, lunches and dinners, parties and dinner dances, weddings and receptions, 'stag' and 'hen' parties, buffets and barbecues, themed occasions and other golf and country club related activities. In addition during the week of the British Grand Prix and other major race meetings at the adjacent Silverstone Race track, Whittlebury Park engages in the business of letting space for camping and caravanning and car-parking."

8. The arbitrator found that Macepark knew this at the time. The Sargeants also live on the site in a house called West Park House. Macepark was a market leader in the provision of facilities for management training. Among its establishments was Scalford Hall, which Mr Rockall showed the Sargeants during the course of negotiations.

The lease

9. The lease was granted on 29 October 1998 for a term of 122 years from 1 April 1998. The rent payable under the lease consists of two components:

i) The Minimum Rent. This is £100,000 per annum subject to review on 1 April 2003 and every fifth anniversary thereafter. The review is in accordance with Schedule 4, which provides for the rent to be increased in line with increases in the RPI;

ii) The Turnover Rent. This is payable in accordance with Schedule 5. It represents the Turnover Rent Percentage of the Tenant's Gross Annual Receipts for any year of the term. The Turnover Percentage is 5 per cent of the first £2 million, 6 per cent of the next £1 million, and 7 per cent of anything above £3 million. No Minimum Rent is payable if the Turnover Rent exceeds the Minimum Rent.

10. Clause 3.33 is a covenant by the tenant to "use its best endeavours to maximise all income receivable by it whether through its own operations or through those of any licensee concessionaire subtenant or any Associate (as defined in Schedule 5)". In fact the turnover rent has exceeded the minimum rent by a substantial margin. In 2003 it was over £500,000 per annum.
11. The lease required the tenant to construct the works shown on plans attached to the lease. The date on which those works were completed was to be called "the Certificate Date". Clause 3.6.1 provides that after the Certificate Date the tenant must not (among other things) make any alteration to the Premises "except as permitted by the provisions of this clause". Clause 3.6.2 provides:

"After the Certificate Date the Tenant must not make alterations to the Premises unless he first –

3.6.2.1 obtains and complies with all necessary consents of any local or other competent authority and pays the authority's charges for them,

3.6.2.2 makes an application for consent supported by drawings and where appropriate a specification in duplicate prepared by an architect, or a member of some other appropriate profession,

3.6.2.3 pays the reasonable fees of the Landlord or any mortgagee for the preparation of such consent,

3.6.2.4 obtains the consent of the Landlord, whose consent may not be unreasonably withheld or delayed"

12. This is the clause in issue in the present case.
13. Under clause 3.13.2 the tenant must not make any application for planning permission (other than in respect of matters which do not require the landlord's consent under the Lease) after the Certificate Date without the prior consent of the landlords such consent not to be unreasonably withheld or delayed. Under clause 3.13.5 the tenant may not carry out any development until the landlords have acknowledged that any planning permission is acceptable to them.
14. Under clause 3.25 the tenant must not at any time on or after the Certificate Date use the leased premises other than for the Permitted Use. The Permitted Use is defined by the lease as follows:

"The Permitted Use' means Hotel, Conference Centre, Management Training Centre Leisure Fitness and Health complex and any ancillary and additional uses as are compatible or may from time to time be associated therewith or any other use approved by the Landlord from time to time, such approval not to be unreasonably withheld or delayed."

15. Paragraph 7 of Schedule 7 contains the following covenant by the landlords:

"Not at any time to allow any part of West Park to be used for nor to do nor be involved in either alone or with others nor be interested (whether as a partner Director or otherwise) in any activity which would adversely affect the income of the Tenant or the value of the Tenant's investment in the Premises for the Permitted Use save that the provision of food and drink to members or temporary playing members social members and their guests of the Golf Club the holding of conferences in connection with the Golf Club activities or wedding receptions shall not be deemed to be in contravention of this covenant."

16. The expression "Golf Club" is defined in clause 1.10 so as to include a golf and country club business.

Relations between the parties

17. It is clear that the relationship between the parties has not been a happy one. Disputes arose right from the beginning. These disputes have led to a number of arbitrations, in which in excess of 50 issues have been referred to arbitration. Many of the issues have concerned the use to which Macepark has put the property.
18. The hotel opened in June 2000. It is called Whittlebury Hall. As originally constructed, it included a large lounge; a series of meeting and training rooms; a dining room capable of serving 250 covers, and a leisure complex which included a swimming pool, gym and other facilities. By October the Sargeants were complaining that Macepark were holding wedding receptions in the hotel. This was one of the issues referred to arbitration. The Sargeants argument before the arbitrator was that Macepark were in breach of covenant in using the premises "for functions, weddings and private dining". Macepark admitted the uses complained of, but denied that they were in breach of covenant. The arbitrator considered at length the rival arguments, and considered much of the background negotiations for the grant of the lease. The arbitrator held that the activities complained of all fell within the definition of the Permitted Use and that, accordingly, Macepark were not in breach of covenant. However, he found that there had been a collateral agreement made between Mr Rockall and Mr Sargeant the effect of which was to preclude Macepark from allowing wedding ceremonies (as opposed to wedding receptions) to take place on the premises. He expressed his conclusion as follows:

"I HOLD that the carrying out of wedding (ceremonies) is in breach [of] an agreement between the parties and ORDER that Macepark be restrained from further such activity, subject to Landlord's consent in accordance with the terms of the Lease."

19. Running in parallel were a number of applications by Macepark for consent to make alterations. I need only refer to two. On 31 March 2001 Macepark's architect sent the Sargeants plans relating to a proposed lecture theatre and small office extension for their approval. The lecture theatre was to be constructed on the eastern side of the complex and as an "in-fill" between the spa and the dining room. The lecture theatre was required primarily in connection with the conference business and also for the hotel function side of the business. It was intended to overcome the difficulties caused by the previous practice of using the hotel lounge or dining room or a marquee erected in the grounds.
20. The Sargeants replied on 9 April 2001. They said:

"We are prepared to grant consent for the above extensions, subject to the lease being varied in accordance with the attached schedule. … If this is not acceptable you may wish to apply to add item (iii) [i.e. the request to build the lecture theatre] to the existing Arbitration or to commence new proceedings."

21. The schedule attached to the letter contained a large number of variations. I mention a few, just to give a flavour:

i) A doubling of the Minimum Rent to £200,000 per annum;

ii) An undertaking by Macepark to make accommodation available to golf club visitors at discounted rates offered to other third parties;

iii) An undertaking by Macepark "not to compete with the Landlords' established Wedding, Banqueting and Functions businesses", and a written undertaking that the lecture theatre was to be used only for the purpose of management training lectures and conferences, unless prior written consent was obtained from the Sargeants for other specific events, the granting of such consent to be at the sole discretion of the Claimants "to ensure non-competition with the Landlords existing businesses";

iv) An increase in the Turnover Percentage to 8% on all turnover over £5 million.

22. Macepark did not accept these conditions. The arbitrator published his award on 13 November 2001. Within a couple of days, Macepark applied for consent to use the premises for wedding ceremonies. The Sargeants replied on 6 December 2001. They did not reject the application out of hand, but indicated that they were minded to refuse consent, on the ground that they would lose business. However, they invited Macepark's proposals "as to how you consider it may be possible for our two wedding businesses to co-exist." Macepark did not put forward any such proposals.
23. The application for consent to the construction of the lecture hall rumbled on. On 11 July 2002 the Sargeants asked for Macepark's:

"undertaking that this new facility would only be used for specific purposes to be agreed by the parties in advance, such that if approved by the Landlords this extension will not become a Trojan horse to try to prevent the Landlords from undertaking any more of their existing businesses, e.g. we shall require an undertaking that it will not be used for weddings."

24. The Sargeants made a request in similar terms on 31 July 2002.
25. In August 2002 the Sargeants offered to settle the outstanding issues referred to arbitration on terms. By now Macepark were keen to proceed with the work of constructing the lecture hall, but the Sargeants' objections had not been overcome. Consequently in September 2002 Macepark agreed to enter into an undertaking in the following terms:

"You having given consent to Macepark (Whittlebury) Limited to continue with planning application no. S/2002/1096/P re. a lecture hall extension at Whittlebury Hall and to Macepark (Whittlebury) Limited building the extension. Macepark (Whittlebury) Limited undertakes not to use the extension for functions other than exclusively in connection with management training without the consent in writing of the Landlords (such consent to be entirely at the discretion of the Landlords) unless and until an arbitrator has adjudged that the condition (that the extension should not be used for functions other than exclusively in connection with management training) is unreasonable and/or such a condition constitutes an unreasonable refusal of consent."

26. I read the word "functions" in this undertaking as a synonym for parties. Within a month or so the Sargeants were complaining that Macepark were advertising the lecture theatre for functions with 300 covers, in breach of the undertaking that had just been given. Macepark were also advertising their ability to hold wedding ceremonies, despite the arbitrator's order. Mr Rockall said in evidence that Macepark had taken the view that consent to do this had been unreasonably withheld; although no such allegation was made in contemporaneous correspondence.

The current application

27. On 9 May 2003 Macepark applied to South Northamptonshire Council for planning permission for an extension to be built at the rear of Whittlebury Hall. Three days before that application was submitted Macepark asked the Sargeants for consent to the making of the application pursuant to clause 3.13.2 of the Lease. The extension consists of the following:

• 78 bedrooms

• 10 syndicate rooms

• 2 training rooms

• a large conference hall capable of accommodating 700 people

28. It is clear that the extension is physically capable of being used for a wide variety of purposes, including the holding of wedding receptions, other social functions, balls, business and professional conferences, product launches and so on.
29. Although Macepark had applied for planning permission without the Sargeants' consent, it was agreed that no separate issue would be made about this. Instead the parties concentrated on the need for Macepark to obtain the Sargeants' consent to the alterations under clause 3.6.2.4 of the lease.
30. On 10 May 2003 the Sargeants asked for copies of all information given to the planning authority, and if no such information had been provided "details and evidence to the Landlords of the need for the application". Macepark responded on 14 May 2003 and the following day faxed to the Sargeants a copy of the letter from their planning consultant (Mr Cave) to the planning authority in which the need for the extensions was dealt with. On 23 May 2003 the Sargeants' solicitors (Beachcroft Wansbroughs) wrote asking for more information. This included "The precise use to which it is intended to put the proposed extension and any effect this would have on the use of other parts of Whittlebury Hall. You are aware of our clients' concerns about functions". On 5 June 2003 Macepark replied that the use to which the extension would be put was clear from the plans, supplemented by Mr Cave's letter. The main space shown on the plan was a large space designated "conference room". Mr Cave's letter said:

"The most recent extension to Whittlebury Hall as the conference room has proved to be extremely popular in commercial terms and particularly well used by the motor industry. In this respect there are intensive training courses using the facility bringing in for example motorcars which are the subject of particular sales and training programmes. The nature of the dedicated courses has also required that training delegates occupy the facilities for long periods and use the room also for their own catering for delegates.

As a consequence, this particular niche market has begun to absorb the facility in a way that has not allowed the original conference or large group sessions to be accommodated therein.

This has resulted in an urgent requirement for such dedicated space which it is intended will be provided at the rear of the health and leisure complex."

31. Beachcrofts responded on 13 June 2003 to the effect that the plans did not clearly show the use of each room, and went on to say:

"We made it clear that our client is concerned (as you well know) about functions which compete with their own business. There is an issue about the lecture theatre and weddings. With this in mind, please confirm whether the proposed use of the 'public' (i.e. non bedroom) rooms will be limited to functions and activities directly related to the management training and conference use of the building or if you propose to hold functions (for example wedding ceremonies and receptions or private parties) in the extension."

32. I read the first and third uses of the word "functions" as again being a synonym for parties; but the second use of that word as part of the composite phrase "functions and activities". On 27 June 2003 Macepark's solicitors (then Prettys) replied:

"We are instructed to confirm that the public rooms as you describe them (i.e. non-bedrooms) will be limited to functions and activities directly related to or connected to management training and conference uses"

33. On 4 July 2003 Macepark wrote asking whether, in view of the extremely tight time pressure they were under, the Sargeants would be prepared to agree to allow them to begin some preparatory work before the grant of planning permission. On the same day Beachcrofts wrote (i) making a number of new points regarding services, sewage, site access and the glazed entrance to the extension, and (ii) refusing to allow any works to start before planning permission and the completion of a formal licence. Following further correspondence, the Sargeants came to their decision on 29 July, which was communicated by Beachcrofts' letter of that date. The upshot was that they were prepared to give consent subject to a number of conditions. The conditions included:

"The use of the "public" rooms (i.e. non-bedrooms) in the extension and the recently built lecture theatre will be limited to functions and activities directly related to management training conferences held at Whittlebury Hall"

34. The lecture theatre was not, of course, part of the application; and had already been dealt with by Macepark's undertaking, which was susceptible to review by arbitration. No draft licence was provided with the letter. Macepark was keen to get the work underway. It began preparatory enabling work in early August 2003. That prompted a letter from Beachcrofts on 4 August 2003 threatening an immediate application for an injunction if by 10.30 on the following day they did not receive confirmation that the works had ceased and an undertaking not to recommence works until both planning permission and a formal licence had been granted. Macepark then offered various concessions on 5 August 2003 in return for being allowed to proceed with the work forthwith. They included:

"The "public" rooms (i.e. non-bedrooms) of the new extension will not be used for any functions not directly related to management training"

35. I say in passing that I read the word "functions" as being a synonym for parties. Thus this form of words would not have prevented the use of the extension for business conferences, product launches and so on. However, this form of words was not acceptable to the Sargeants. On 7 August 2003 the Beachcrofts sent a draft licence which included in clause 7.3 a restriction in the following terms:

"Not to use any of the meeting or conference rooms or other facilities intended for use otherwise than as bedrooms in the extension constructed pursuant to a Licence and Deed of Variation made the day of 2003 between the Landlord (1) and the Tenant (2) otherwise than for functions and activities which are directly related or connected to management training conferences held at the Premises"

The proceedings

36. On 15 August 2003 Beachcrofts informed Macepark's solicitors that unless Macepark undertook that no works would be commenced before 21 August 2003, an application would be made without notice for an injunction on 18 August 2003 to prevent the works being commenced. On 18 August 2003 Macepark wrote saying that (i) it regarded consent as having been unreasonably withheld or delayed, and (ii) in the circumstances it was not prepared to wait any longer because further delay would lead to substantial losses as a result of lost contracts.
37. Despite warnings of an application for an injunction Macepark did not stop work; and on 19 and 20 August 2003 the Sargeants sought and obtained an injunction. On that occasion the Judge (Etherton J.) indicated that the issue of unreasonable withholding of consent was best dealt with separately and at an early stage. The injunction was continued on 2 September 2003 by Rimer J. On that occasion a preliminary issue was defined and directions given which led to a hearing being fixed for November 2003. Subsequently the parties met; in September and October 2003 they managed to agree the terms of a licence which left one issue for consideration, namely whether or not the Sargeants were entitled to impose the restriction on the use of the public rooms of the extension set out in clause 7.3 of that licence which provides as follows:

"7.3 In the event that the Court shall determine that it is reasonable for the Landlord to impose as a condition of granting consent to the works a restriction on the use of public rooms in the Extension in the form set out below, the following sub-clause will be added to clause 3 of the Lease:-

3.34 Restrictions on use of public rooms in the Extension

Not to use any of the meeting or conference rooms or other facilities intended for use otherwise than as bedrooms in the extension constructed pursuant to a Licence and Deed of Variation made the 24th day of October 2003 between the Landlord (1) and the Tenant (2) otherwise than for functions and activities which are directly related or connected to management training conferences held at the Premises"."

38. That is the issue now before me.

Legal principles

39. The question whether consent to alterations has been unreasonably withheld must be considered under two heads: the common law and s. 19 (2) of the Landlord and Tenant Act 1927.
40. The law on reasonableness has been most extensively developed in relation to covenants against alienation. In International Drilling Fluids Ltd v. Lousiville Investments (Uxbridge) Ltd [1986] Ch 513 the Court of Appeal distilled a number of principles from the authorities. Of these principles, Lord Bingham of Cornhill selected three as worthy of special emphasis in Ashworth Frazer v. Gloucester City Council [2001] 1 WLR 2180 at 2182:

"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 [1986] Ch 513, 520 is that

"a landlord is not entitled to refuse his consent to an assignment on grounds which have nothing whatever to do with the relationship of landlord and tenant in regard to the subject matter of the lease ..."

The same principle was earlier expressed by Sargant LJ in Houlder Bros & Co Ltd v Gibbs [1925] Ch 575, 587:

"in a case of this kind the reason must be something affecting the subject matter of the contract which forms the relationship between the landlord and the tenant, and ... it must not be something wholly extraneous and completely dissociated from the subject matter of the contract."

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 [1964] 2 QB 547 and Bickel v Duke of Westminster [1977] QB 517), in others unreasonable (as, for example, in Bates v Donaldson [1896] 2 QB 241, Houlder Bros [1925] Ch 575 and International Drilling [1986] Ch 513). 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 [1977] QB 517, 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 [1964] 2 QB 547, 564: "it is not necessary for the landlords to prove that the conclusions which led them to refuse consent were justified, if they were conclusions which might be reached by a reasonable man in the circumstances ..." Subject always to the first principle outlined above, I would respectfully endorse the observation of Viscount Dunedin in Viscount Tredegar v Harwood [1929] AC 72, 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."

41. The principles that Balcombe L.J. distilled in International Drilling Fluids were adapted by Peter Gibson L.J. (with whom Longmore L.J. agreed) for the purposes of a covenant against alterations in Iqbal v. Thakrar [2004] EWCA Civ 592 as follows:

"(1) The purpose of the [covenant] is to protect the landlord from the tenant effecting alterations and additions which damage the property interests of the landlord.

(2) A landlord is not entitled to refuse consent on grounds which have nothing to do with his property interests.

(3) It is for the tenant to show that the landlord has unreasonably withheld his consent to the proposals which the tenant has put forward. Implicit in that is the necessity for the tenant to make sufficiently clear what his proposals are, so that the landlord knows whether he should refuse or give consent to the alterations or additions.

(4) It is not necessary for the landlord to prove that the conclusions which led him to refuse consent were justified, if they were conclusions which might be reached by a reasonable landlord in the particular circumstances.

(5) It may be reasonable for the landlord to refuse consent to an alteration or addition to be made, for the purpose of converting the premises to a proposed use even if not forbidden by the lease. But whether such refusal is reasonable or unreasonable depends on all the circumstances. For example, it may be unreasonable if the proposed use was a permitted use and the intention of the tenant in acquiring the premises to use them for that purpose was known to the freeholder when the freeholder acquired the freehold.

(6) While a landlord need usually only consider his own interests, there may be cases where it would be disproportionate for a landlord to refuse consent having regard to the effects on himself and on the tenant respectively.

(7) Consent cannot be refused on grounds of pecuniary loss alone. The proper course for the landlord to adopt in such circumstances is to ask for a compensatory payment.

(8) In each case it is a question of fact depending on all the circumstances whether the landlord, having regard to the actual reasons which impelled him to refuse consent, acted unreasonably."

42. I have placed the word "covenant" in square brackets, because the text of the transcript reads "consent"; but that seems to me to be a misprint. Proposition (7) is a new one. It does not feature among the principles enunciated by Balcombe L.J. in International Drilling Fluids. Although Peter Gibson L.J. does not expressly say so, it echoes the effect of section 19 (2) of the Landlord and Tenant Act 1927. The Court of Appeal considered the effect of that sub-section in Lambert v. F.W. Woolworth & Co Ltd [1938] Ch. 883. Section 19 (2) provides:

"In all leases whether made before or after the commencement of this Act containing a covenant condition or agreement against the making of improvements without licence or consent, such covenant condition or agreement shall be deemed, notwithstanding any express provision to the contrary, to be subject to a proviso that such licence or consent is not to be unreasonably withheld; but this proviso does not preclude the right to require as a condition of such licence or consent the payment of a reasonable sum in respect of any damage to or diminution in the value of the premises or any neighbouring premises belonging to the landlord, and of any legal or other expenses properly incurred in connection with such licence or consent nor, in the case of an improvement which does not add to the letting value of the holding, does it preclude the right to require as a condition of such licence or consent, where such a requirement would be reasonable, an undertaking on the part of the tenant to reinstate the premises in the condition in which they were before the improvement was executed."

43. Slesser L.J. said at 906:

"However this may be, in the present case, as I have said, the landlords have unconditionally withheld their consent and made no condition as to payment of any compensation in respect of damage to or diminution in the value of the premises. Having so failed, they have abstained from claiming the benefit of sub-s. 2, which expressly preserves this right to them, nor in my view can they now be heard to say, as evidence of reasonableness, that the premises have suffered damage or any diminution in value and the tenant has not offered to compensate them. Prima facie, the proviso says that they shall not unreasonably withhold their licence or consent, but gives to them expressly a right to claim the payment of a reasonable sum in respect of damage or diminution in value. This they have not claimed; and I think therefore that they must seek for some other grounds of reasonableness for their refusal than those of damage or diminution in value to meet the case of the tenant against them."

44. McKinnon L.J. said at 910:

"Leaving aside the statute for the moment, if there is a covenant in a lease "not to make structural alterations without consent, such consent not to be unreasonably withheld," and the tenant asks for consent to do certain works, the landlord might justify his refusal to consent on various grounds. (1.) He might object on æsthetic, artistic, or sentimental grounds. (2.) He might object that the alterations would damage the demised premises or diminish their value. (3.) He might, perhaps, object that the alteration would damage his neighbouring premises, or diminish their value. I say "perhaps," as to this, having in mind the possible effect of the principle of Houlder v. Gibbs. (4.) He might object that, as the alteration would not add to the letting value of the premises, he would have to undo it and reinstate the old conditions at the end of the term.

Of these (1.) I believe and hope remains unaffected by anything in the Act of 1927. No Court, as I hope and believe, will ever hold that under s. 19, sub-s. 2, a landlord must consent to the hideous degradation of the front of his building by a sheet of plate glass, and be satisfied by a money payment for the loss of graceful eighteenth century windows. But a glance at the photograph of these premises shows that no æsthetic considerations can be involved in this case. If we had no photograph, that might be inferred from the address – "Nos. 18 and 20, Commercial Road, Bournemouth."

As regards the other grounds (2.) to (4.), the section makes express provision. The landlord must not unreasonably withhold his consent, "but this proviso does not preclude the right to require as a condition of such consent the payment of a reasonable sum in respect of any damage to or diminution in the value of the premises or any neighbouring premises belonging to the landlord, and of any legal or other expenses properly incurred in connection with such consent, nor, in the case of an improvement which does not add to the letting value of the holding, does it preclude the right to require .... an undertaking on the part of the tenant to reinstate the premises in the condition in which they were before the improvement was executed.""

45. It is clear from these passages that in a case governed by section 19 (2) a landlord cannot refuse consent on the ground of pecuniary damage to his interest in the leased property or neighbouring property which belongs to him. His only right is to ask for compensation as a condition of giving consent. In the light of Peter Gibson L.J.'s formulation of the common law principles, this seems to be part of the common law as well. In most cases it will not matter, because the covenant and the sub-section will work in tandem.
46. However, Mr Male submitted that section 19 (2) only applies to a lease containing a covenant against making improvements without consent. It operates by attaching to such a covenant a proviso that consent will not be unreasonably withheld. If the lease already contains such a proviso, then there is no need for the statutory proviso, so it does not apply. But in my judgment Mr Dowding was right to submit that if the statutory scheme, taken as a whole, is more favourable to the tenant than the contractual provisions of the lease, the lease must yield to the statute.
47. In addition to the propositions I have quoted, the Court of Appeal formulated two further propositions in Mount Eden Land Ltd v. Straudley Investments Ltd (1996) 74 P. & C.R. 306. They are:

"(1) It will normally be reasonable for a landlord to refuse consent or impose a condition if this is necessary to prevent his contractual rights under the [lease] from being prejudiced by the proposed assignment or sublease.

(2) It will not normally be reasonable for a landlord to seek to impose a condition which is designed to increase or enhance the rights that he enjoys under the [lease]."

48. When considering the reasonableness of conditions, it seems to me that if the landlord would have been entitled to refuse consent on some particular ground, a condition neutralising the landlord's concern will ordinarily be reasonable. The most common example would be a case in which the landlord would be entitled to refuse consent to an assignment to a financially weak assignee, but in fact grants consent on condition that the assignee's obligations are guaranteed or that the assignee puts up a rent deposit. In considering the reasonableness of a condition imposed to allay a particular concern of a landlord, Peter Gibson L.J.'s principle (6) in Iqbal is also relevant ("While a landlord need usually only consider his own interests, there may be cases where it would be disproportionate for a landlord to refuse consent having regard to the effects on himself and on the tenant respectively").
49. One question of principle that arises in this case is whether a landlord is entitled to refuse consent to the making of alterations on the ground that the alterations would damage his trading interests; or to impose a condition aimed at protecting his trading interests. Peter Gibson L.J.'s formulation of the principles in Iqbal, and in particular principles (1) and (2), would suggest that the answer to that question is "no". It is only if damage to the landlord's trading interests would affect his property interests that his trading interests become a potentially relevant consideration. On the other hand, in Lambert Slesser L.J. said at 907:

"I agree with Mr. Radcliffe that many considerations, æsthetic, historic or even personal, may be relied upon as yielding reasonable grounds for refusing consent, which I do not think it necessary or possible here to catalogue. The wider the connotation given to the idea of improvement, the more necessary it may be that the landlord should have his protection."

50. Peter Gibson L.J. said in Iqbal that no case had been drawn to the court's attention dealing with the grant or refusal of consent to alterations. So it appears that the court did not have the benefit of the judgments in Lambert or, perhaps, Ashworth Frazer. In addition, a refusal of consent based on a fear of competition has been upheld as reasonable in relation to covenants against alienation and change of use. In Whiteminster Estates Ltd v. Hodges Menswear Ltd [1974] E.G.D. 324 the landlords carried on business as men's outfitters. They also owned the shop next door which had been let as a café. The tenant applied for consent to assign the lease to another men's outfitter, and the landlord refused on the ground that the proposed assignee would be a direct competitor. In a shortly reported (but reserved) judgment Pennycuick V-C held that the landlords fear of an adverse effect on their trade was one that could reasonably be held. He continued:

"Once it was accepted, as now it must be, that a landlord was entitled to take into account his own interests as well as his interests as a landlord, that was really an end of the matter. It was sufficient that the landlord could reasonably anticipate that the opening of the new shop would prejudice his trade."

51. Mr Dowding submitted that the proposition as expressed by Pennycuick V-C, namely that the landlord could take into account his own interests "as well as" his interests as a landlord, was too widely stated. He referred to International Drilling Fluids in which Balcombe L.J. said:

"To the opposite effect are the dicta, obiter but nevertheless weighty, of Viscount Dunedin and Lord Phillimore in Viscount Tredegar v. Harwood [1929] A.C. 72, 78, 82. There are numerous other dicta to the effect that a landlord need consider only his own interests: see, e.g., West Layton Ltd. v. Ford [1979] QB 593, 605, and Bromley Park Garden Estates Ltd. v. Moss [1982] 1 W.L.R. 1019, 1027. Those dicta must be qualified, since a landlord's interests, collateral to the purposes of the lease, are in any event ineligible for consideration: see proposition (2) above."

52. Thus, he submitted that the landlord's interests at large are not necessarily eligible for consideration. In my judgment there is force in this submission. Balcombe L.J.'s proposition (2) was the first of the three principles that Lord Bingham selected for special emphasis in Ashworth Frazer. Lord Bingham also said that wide statements to the effect that the question of reasonableness was at large needed to be qualified in the light of that principle. However, that still leaves the question whether the landlord's interests as the occupier of adjoining property must be left out of account.
53. In Sportoffer Ltd v. Erewash Borough Council [1999] 3 E.G.L.R. 136 the landlords were the local authority, and operated a municipal leisure centre. The tenants were the tenants of a squash club and applied for consent to a change of use to use as a leisure centre. The landlords objected on the ground that the proposed change would damage the viability of their municipal leisure centre; and their refusal was upheld as reasonable by Lloyd J. He was referred both to Whiteminster Estates and to International Drilling Fluids. He concluded:

"I would find it surprising if a landlord could not reasonably take into account the circumstances of other property of his own, whether let or in hand, when considering an application for a consent to change of use under a lease. A shopping centre is an obvious example, but not the only case, where estate management considerations may suggest that one type of use be allowed under a lease but others not, because of the circumstances of other adjoining property.

I find nothing in Balcombe L.J.'s judgment, nor in the case cited by him in relation to the proposition which I have mentioned, which suggests that this is not legitimate or that Sir John Pennycuick's decision in Whiteminster Estates Ltd is wrong. I therefore hold that, following Sir John's decision, a landlord can legitimately take into account considerations relating to adjoining property of his own, whether let or not."

54. On the facts he held that the landlords' concern for their own trading interests was a reasonable concern, and that consequently, the refusal of consent was justified. In the analogous field of restrictive covenants affecting freehold land, a covenant taken for the protection of a business carried on on land owned by the covenantee has been held to be a covenant taken for the benefit of land; in other words a property interest: Newton Abbot Co-Operative Society Ltd v. Williamson and Treadgold Ltd [1952] Ch. 286.
55. In my judgment there is no rule of law which precludes a landlord from relying under any circumstances on perceived damage to his trading interests in adjoining or neighbouring property as a ground for refusing consent to an assignment or change of use. Whether the particular perception is reasonable and whether, if reasonable, it justifies a refusal of consent or the imposition of a condition, is a question of fact in each case.
56. Mr Dowding submitted in the alternative that a different principle applies in cases concerning alterations. In such a case, he submitted, the landlord's objection must relate to the works alone, and not to the use to be made of them. However, Peter Gibson L.J.'s proposition (5) in Iqbal says in terms that the use of the property following alterations may be a reasonable ground of objection, depending on the particular facts. In addition, as Slesser L.J. pointed out in Lambert, a landlord may rely on "personal" reasons as a ground for refusal. Suppose that the operator of a petrol filling station lets an adjoining piece of land to a supermarket. Suppose that the supermarket then applies for consent to erect its own petrol filling station on the leased land. On the face of it, it seems to me to be reasonable for the landlord to object on the ground that he would be damaged by the erection of a competing filling station next door. I do not accept Mr Dowding's submission. Mr Dowding submits as a fall-back position that the circumstances in which a landlord is entitled to object to an alteration on the grounds of its use are confined to a conversion of the premises to a proposed use, and not as here, an alteration to extend property for the same use as that currently carried on. He bases this submission on the way that Peter Gibson L.J. formulated proposition (5) in Iqbal. But in my judgment, as Mr Male submitted, Peter Gibson L.J.'s use of the phrase "converting the premises to a proposed use" is explicable because that was the proposal he was considering. I conclude that, in an appropriate case, a landlord is entitled to object to alterations on the ground that he has a reasonable objection to the use that the tenant proposes to make of the altered property, whether that use is the same as or different from the use carried on in the remainder of the property.
57. To hold otherwise would be to fall into the trap identified by Lord Denning M.R. in Bickel v. Duke of Westminster [1977] Q.B. 571 (and approved in Ashworth Frazer at 2183 and 2201):

"The words of the contract are perfectly clear English words: "such licence shall not be unreasonably withheld." When those words come to be applied in any particular case, I do not think the court can, or should, determine by strict rules the grounds on which a landlord may, or may not, reasonably refuse his consent. He is not limited by the contract to any particular grounds. Nor should the courts limit him. Not even under the guise of construing the words."

58. In addition the lease in the present case refers expressly to the Sargeants' business. Paragraph 7 of Schedule 7 prohibits them from competing with Macepark's business, but goes on to permit them, without breach of covenant, to provide food and drink to golfers, to hold conferences relating to the golf club, and to hold wedding receptions. That aspect of their business, at least, is part of the subject-matter of the contract.
59. It seems to me, therefore, that the approach I should adopt in the present case is to identify the Sargeants' real and legitimate concerns; and then to ask whether the proposed condition amounts to reasonable protection of those concerns. Mr Male reminds me, and I accept, that the Sargeants do not have to show that the conclusions which led them to seek to impose the condition are right or justifiable but simply that they are conclusions which might be reached by a reasonable person in the circumstances. On the contrary, the burden of proof lies on Macepark to demonstrate unreasonableness.

The Sargeants' business

60. I have already quoted the arbitrator's finding about the range of the Sargeants' activities at the date of the lease. As Mr Dowding points out, that was simply a list, without any weighting being given to the various activities. In her witness statement Mrs Sargeant says that the "wedding and function business" is a very large part of what she does on a day to day basis. The Sargeants have a number of venues capable of accommodating wedding receptions and functions. At the moment they can accommodate up to 750 covers with the use of marquees, and once the new building, currently under construction, is complete, they will have an additional venue capable of accommodating up to 800 covers. Mrs Sargeant says, and I accept, that between May 2003 and May 2004 they have held 180 functions, of which 140 were weddings, generating a turnover of £750,000. Mr Sargeant confirmed these statistics in his witness statement. Both Mr and Mrs Sargeant confirmed in cross-examination that they did not hold business or professional conferences of the sort that Macepark do. They have, however, from time to time held "corporate days", which are primarily social or sporting events; although they may be preceded by a business meeting. Mr Sargeant also said that they had held an exhibition for an artist friend; and had hosted a farmers' discussion group.
61. The Sargeants are, as I have mentioned, in the course of constructing a new building, called the Atrium. It is a two storey building, with a bar and dining facilities on the ground floor; and a large function room on the first floor. The building is being erected pursuant to a planning permission containing a condition in the following terms:

"THE PREMISES SHALL ONLY BE USED FOR GOLF AND COUNTRY CLUB, WEDDING AND ASSOCIATED FUNCTIONS AND FOR NO OTHER PURPOSE WHATSOEVER INCLUDING ANY OTHER PURPOSE IN USE CLASS D2 OF THE SCHEDULE TO THE TOWN AND COUNTRY PLANNING (USE CLASSES) ORDER 1987"

62. This condition would in my judgment preclude the new building from being used to accommodate business or professional conferences. (I do not think that this is affected by permission given for temporary use by general development order, since that only applies to land that is unbuilt on).

Macepark's business

63. Mr Rockall described Macepark's business in terms that were unchallenged. The largest component (50 per cent of turnover) consists of management training. Groups of delegates, averaging 16 people attend a residential course. The course is typically 3 to 5 days. The usual format involves a combination of sessions involving all the delegates and exercises involving smaller groups. The full group session will take place in a training room, and the smaller sessions in syndicate (or "break-out") rooms.
64. Another large component of Macepark's business (40 per cent of turnover) consists of providing conference facilities. These could involve a seminar, a lecture, an annual general meeting, a product launch or an exhibition. In 2003 there were approximately 90 conferences of this kind.
65. The remaining 10 per cent of turnover is generated from "ordinary" hotel activities and the accommodation of functions, such as wedding receptions. Mr Rockall was unable to break down this component into its constituent parts in terms of turnover; but he said that a "large proportion" of this 10 per cent came from the members of the leisure club who use the swimming pool and other health facilities. It must follow that the turnover relating to weddings and other functions is of the order of 5 per cent or less. Even so, on Macepark's turnover for 2003, that represents a turnover of the order of £400,000 per annum.

The Sargents' concerns

66. Mr Male put the Sargeants' concerns under two heads. First, he said, that since taking the lease Macepark has changed the direction of its business and is now trying to attract the sort of business which the Sargeants have carried out for some years and which they are continuing to carry out. Wedding ceremonies and receptions are one example of this trend. In these circumstances, the Sargeants are right to be concerned about the threat which such activities by Macepark may pose to their own businesses. The Sargeants reasonably apprehend that Macepark's use of the "public" rooms will adversely affect their own interests. In these circumstances, it is hardly surprising that the Sargeants should impose the sort of condition which they did. A reasonable person in their position would have sought to impose that, or a similar, condition. It cannot be said that the imposition of a condition such as that, or in similar terms, is unreasonable.
67. The supposed change in direction of Macepark's business is based on what the Sargeants say they were told by Mr Rockall about Macepark's business before the lease was granted. Mr Male rightly accepted that what they were told can have no bearing on the question of the interpretation of the lease, but he said that when reasonableness was concerned everything was "up for grabs". I do not agree. The starting point must be the terms of the lease as granted, absent any claim based on the existence of a collateral contract or estoppel. I do not consider that in the exercise of a right to withhold consent on reasonable grounds, the landlord can attempt to claw back parts of a bargain that, with hindsight, he regrets.
68. Second, he said, the Sargeants are also concerned about the effect of paragraph 7 of Schedule 7 to the lease. The Sargeants can hold functions so long as the holding of those functions does not adversely affect the income of the tenant or value of the tenant's investment in the Premises. Wedding receptions and various activities related to the Golf Club are specifically exempted. If Macepark is now allowed to use the extension for particular activities which the Sargeants also carry out then, at a later stage, Macepark could seek to rely upon paragraph 7 of Schedule 7 to try to prevent the Sargeants from carrying out those activities. This might happen even though the Sargeants had been carrying on those activities for many years prior to the grant of the lease.
69. If Macepark is now allowed to use the new non-bedroom or "public" accommodation for activities which the Sargeants presently carry on then to do so could lead to the Sargeants later being prevented from carrying on those activities under paragraph 7 of Schedule 7. If a condition is imposed limiting the activities which can be carried out by Macepark in the "public" rooms then Macepark cannot carry out the prohibited activities and there is no risk then of a claim against the Sargeants under paragraph 7 of Schedule 7.
70. Mr Male accepted, however, that it would not be legitimate for the Sargeants to rely on activities which already are a breach of paragraph 7 of Schedule 7; since to do so would be attempting to rely on their own wrong. It follows from this, in my judgment, that the Sargeants are not entitled to rely on any competitive concerns that they might have as regards the provision of management training or conferences (using the latter expression in the broad sense in which Mr Rockall used it); since those are all part of Macepark's existing business, which is protected by paragraph 7 of Schedule 7, and are not within the specific exemptions from that protection. Moreover, the Sargeants did not carry on those businesses at the date of the lease.
71. In addition the covenant in paragraph 7 of Schedule 7 refers to Macepark's investment in the premises "for the Permitted Use"; in other words all of it, and not just what Mr Male called Macepark's "core business" of providing management training. Paragraph 7 is specifically designed to protect Macepark; and I agree with Mr Dowding that it would turn paragraph 7 on its head if it could be used by the Sargeants as a reason to restrict Macepark's activities within the "Permitted Use" as defined. Some weight must also be given to Macepark's obligation to maximise turnover; and to the Sargeants' direct interest (through the turnover rent) in that maximisation. In addition the Sargeants themselves described Macepark's core business in Further Information given in the action as "management training and conferences".
72. On the other hand, in my judgment the Sargeants are entitled to rely on competitive concerns as regards the businesses that are within the specific exemptions in paragraph 7; namely:

"the provision of food and drink to members or temporary playing members social members and their guests of the Golf Club the holding of conferences in connection with the Golf Club activities or wedding receptions"

73. I accept Mr Male's submission that, on the evidence, the Sargeants can justifiably take the view that, if allowed to, Macepark will attempt to compete with the Sargeants for wedding business (including the holding of wedding ceremonies). I accept also that these concerns are relevant concerns for the purposes of the covenant against alterations. I do not overlook the fact that there is already competition between Macepark and the Sargeants for wedding business, and that that competition will continue whatever the outcome of this case. But the Sargeants are, in my judgment, entitled to take the view that to allow Macepark to use the new extension for weddings will enable Macepark to compete with the Sargeants for much larger weddings which, apart from the new extension, Macepark cannot physically accommodate (except by using a marquee).

Do these concerns justify the condition?

74. Mr Dowding submitted that in effect the Sargeants' concerns were concerns about possible damage to the profitability of their business. As such, they were concerns based on the possibility of pecuniary loss. Thus either at common law (according to Peter Gibson L.J.'s proposition (7) in Iqbal) or under the proviso to section 19 (2) of the Landlord and Tenant Act 1927, the proper course for the Sargeants to have taken would have been to have asked for a compensatory payment. He submitted that the policy of the 1927 Act was that if there was nothing intrinsically wrong with the alterations simply viewed as works, the tenant should be allowed to carry them out; and any other kind of loss to the landlord should be dealt with by way of a compensatory payment under the proviso. Thus, he submitted, the concerns on which the Sargeants are entitled to rely could justify neither a refusal of consent, nor a condition limiting the use to which the extension may be put.
75. In answer to Mr Male's point that the complaint was not a complaint about the diminution in value of the Sargeants' retained land, but a complaint about potential damage to their business, and that a compensatory payment would be very hard to evaluate, Mr Dowding riposted that damage to the landlord's business interests (as opposed to his property interests) was not a legitimate consideration; and in any event valuers can value anything.
76. There is, as always, considerable force in Mr Dowding's submission. However, as to the first part of it, I consider that he reads Peter Gibson L.J.'s reference to the landlord's "property interests" in too narrow a sense. As the House of Lords emphasised in Ashworth Frazer, reasonableness is a broad concept. As to the second part, it is not the alterations themselves that will damage the Sargeants' business interests, but the use that Macepark will (or might) make of the alterations. Moreover the submission that valuers can value anything proves too much. Apart from sentimental considerations, anything (even aesthetic considerations) can have a money value placed on them if need be. But I do not consider that Parliament can have intended to cut down the landlord's right to withhold consent to alterations on reasonable grounds to the extent that Mr Dowding's submission implies. In my judgment the Sargeants were not confined to asking for money.
77. Mr Male submitted that if I came to the conclusion that the Sargeants could have refused consent to the alterations based on their fear of competition then I should look "charitably" on the wording of the disputed condition, since the consent they were prepared to give to the alterations was itself a concession.
78. However, I do not consider that the Sargeants' fear of competition would have justified an outright refusal of consent. First, looked at purely from the point of view of the Sargeants, a reasonable landlord in their position would have weighed up the potential competition to the wedding business on the debit side; and the potential increase in rent (through a potential increase in turnover of the hotel) on the credit side. Second, an outright refusal of consent, in circumstances in which the vast bulk of Macepark's business consisted of management training and conferences, would have been wholly disproportionate. Third, if the Sargeants had refused consent, they would no doubt have been asked for their reasons; and if they had given as their reasons those reasons on which I have held they are entitled to rely, Macepark could have reapplied for consent on the basis that they would undertake not to use the extension for weddings, or functions unrelated to training or conferences. An application along those lines could not, in my judgment, have been reasonably refused.
79. In summary, I consider that the Sargeants were entitled to protect themselves against perceived competition to their wedding and functions business. They were not entitled to protect the future possibility of their entering the conference business, which was already part of Macepark's existing business. The condition on which I am asked to rule limits use of the extension to "functions and activities which are directly related or connected to management training conferences held at the Premises". I should say in passing that it was common ground that the word "functions" in the licence is to be read as a composite phrase "functions and activities" and not as a freestanding synonym for parties. Under this form of words the only types of conference permitted are management training conferences. It excludes all other types of conference. Mr Male submitted that this phrase could be generously interpreted, but he accepted (or asserted) that even on a generous interpretation it would preclude Macepark from holding product launches, award ceremonies and exhibitions, all of which are part of Macepark's existing business and are not within the specific exemptions from paragraph 7 of Schedule 7.
80. In addition, the proposed covenant is an absolute one. It is not qualified by any provision enabling the tenant to apply to the landlord for consent to widen the use, even if the landlord has no reasonable grounds for refusal.
81. In my judgment the clause goes further than was reasonable to protect the Sargeants' legitimate concerns. I think that, in effect, Mr Sargeant accepted as much, since he agreed in cross-examination that the form of words proposed by Prettys ("functions and activities directly related to or connected to management training and conference uses") would have been satisfactory to him. Had that form of words been adopted, it seems unlikely that this litigation would have taken place (although I express no view on whether it would have been reasonable for the Sargeants to have imposed that condition in the absence of agreement). It is unfortunate that this litigation turns on the use of the word "and".
82. However that may be, both counsel agreed that I could only rule on the clause as it stands. Either it is reasonable as it stands, or it is not. It is not open to me to impose a compromise form of words. In my judgment the clause is not reasonable as it stands; and the lease will not, therefore, be varied to incorporate it.