Modification of Leasehold Covenants: The latest decision 09 April 2020
In its latest decision on the modification of restrictive covenants in leases under s. 84, the Lands Tribunal has refused to modify a use covenant in a long lease prohibiting the use of the demised premises in question as a hotel.
Members of Falcon Chambers appeared on both sides. Guy Fetherstonhaugh QC appeared for the applicant, leading Nicholas Trompeter of Selborne Chambers, and, for the Church Commissioners, Edwin Johnson QC of Maitland Chambers led Greville Healey.
The Jurisdiction
Section 84 of the Law of Property Act 1925 confers on the Upper Tribunal a statutory jurisdiction to discharge or modify restrictive covenants affecting land. This power is familiar in the context of restrictive covenants affecting freehold land. However, it also extends to restrictive covenants in leases in certain circumstances (s. 84(12)).
Although applicants also rely upon other statutory grounds, the most important ground in most cases is ground (aa), which requires the applicant to show, amongst other things, that the restriction does not secure to the landlord any practical benefits of substantial value or advantage (or that it is contrary to the public interest, which cannot normally be shown), and also that that money would be an adequate compensation.
As explained by the Upper Tribunal recently in Shaviram Normandy Limited v Basingstoke and Deane Borough Council [2019] UKUT 256 (LC) (at [16]), no separate conditions need to be satisfied in the case of leasehold covenants.
“The nature of an objector's interest is always a relevant consideration in an application under section 84(1), all of which turn on their own facts and on the impact which the proposed modification or discharge will have on the enjoyment by others of their own property. While the landlord of an extensive estate whose reversion will come in hand in the short or medium term has obvious estate management concerns to protect, we do not see why, in principle, the interest of a landlord should necessarily be more deserving of protection than that of a neighbouring owner or other person having the benefit of a restriction. It will all depend on the facts, and on the practical consequences of the suggested change.”
Factors in leasehold cases
The existence of the landlord’s reversionary interest is of course itself something which has distinct elements, which will be different in different leasehold cases. In Shaviram the Tribunal noted that in the case of leasehold covenants it will be necessary to consider the impact of the proposed modification in the light of the following factors:
- the length of the unexpired term;
- the rent;
- the tenant’s other obligations; and
- the extent of the landlord's interests in neighbouring land.
Berkeley Square
In Berkeley Square Investments v Berkeley Square Holdings [2019] UKUT 0384 (LC) a decision of the Lands Tribunal handed down in December 2019, the applicant sought the modification of a use covenant in a long lease restricting the demised premises to office use. The applicant tenant wanted to convert the premises to a private members club, and the respondent landlord resisted. However, extent of the freeholder’s estate around Berkeley Square was never fully explained to the Tribunal, and, although the Tribunal considered that the existence of the restriction conferred a practical benefit on the freeholder, it was not persuaded that it was a substantial advantage.
Edgware Road v Church Commissioners
By contrast, in the latest case, the Church Commissioners had a well-defined estate, and a well-established estate control system. The Tribunal considered that the proposed modification threatened the integrity of that system of control, and that the ability to maintain control was a substantial advantage to the Church Commissioners. Accordingly, the application was rejected. As explained by Peter McCrea FRICS at para. [138] of his decision:
“In my judgment the effect on the wider estate of a relaxation of the Commissioners’ ability to manage the Estate in accordance with their own strategy could be significant in the medium to long term. It would make the implementation of their Office Strategy more difficult and could, depending on the eventual form and success of the applicant’s hotel concept, undermine their aspirations to improve the quality of Edgware Road. The impossibility of reliably measuring those impacts in financial terms is an indicator that the disadvantage that the Commissioners’ would suffer by modification of the covenant cannot adequately be compensated by money.”
This decision well illustrates the sensitivity of such applications to the individual facts of each case. More importantly, it demonstrates that, in leasehold modification applications, the potential impact not only on the landlord’s reversion, but also on a landlord’s broader estate, can be decisive.
Greville Healey
Falcon Chambers
April 2020
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