Shaviram Normandy Ltd v Basingstoke and Deane BC  UKUT 256 (LC)
30th October 2019
The Upper Tribunal granted the Claimant’s application to modify a restrictive covenant confining the use of a building to ‘office premises’ on the basis that the restrictive covenant did not secure any practical benefits or financial value for the local authority owner of the freehold or for the wider community. Whereas, on the other hand conversion to residential use would increase the value of the reversion.
The headlease of a purpose-built office building contained a covenant restricting its use to that of office premises. The headlease was granted in 1985 for a term of 150 years and included a covenant restricting the building’s use to ‘office premises.’ The headleasee was obliged by the terms of the lease to use its best endeavours at all times to fully let the premises, and pass on a percentage of the annual rental income to the local authority freeholder
The building became vacant in 2013 and fell into disrepair. The applicant acquired the headlease in 2015 and applied for modification of the use restriction under s.84(1)(aa) to remove the office user restriction on the basis that it did not secure to the local authority any practical benefits of substantial value or advantage to them. The expert evidence was that the building would be easier to let for residential use.
The applicant argued that the local authority would receive a higher rent for the building if residential use was permitted. The local authority resisted the applicant on the basis that, among other things, the modification of this covenant would have the effect of weakening its ability to rely on other office use covenants in the headleases of other buildings within their portfolio.
This was a first instance decision of the Upper Tribunal applying its jurisdiction to discharge or vary covenants in leases more than 40 years in length when more than 25 years of the term have elapsed.
The Upper Tribunal found in favour of the applicant and amended the covenant to permit residential use. Chief among the Upper Tribunal’s reasons was that the existence of a restriction in and of its itself could not be practical benefit. Although the local authority, and any other substantial private landowner, was entitled to regard the prosperity and amenity of the wider neighbourhood in which their land was situated as a practical benefits secured for them by the covenants imposed, on the facts of this case, preservation of a pattern of covenants for office use in local authority-owned properties in the location did not confer any substantial benefit or advantage on the local authority. There was no shortage of office space in the local area and the local authority had been willing to market the property for sale with a potential change of use four years previously. All things considered, retention of the building in office use would not make a significant contribution to the economic well-being of the locality.
The value of the reversion in terms of capital value and rental income with the restriction in place was very similar to the hypothetical values if residential use was allowed. Indeed, in the latter scenario, despite the projected annual rental income (the property was to be let on ASTs) being slightly lower, the capital value of the reversion was slightly higher. There was therefore no practical benefit to the counsel in keeping the use restriction.
This decision is interesting as an example of the practical application of established principles rather than for any novel point of law.
The decision is notable for the willingness of the Tribunal to discharge a covenant in the face of the Local Authorities’s arguments that a change of use would be the ‘thin end of the wedge,’ leading to a wholesale conversion of commercial buildings to residential in the area. The Tribunal accepted that such an argument may succeed in the right circumstances and that, in the case of a building scheme, it is legitimate to have regard to the scheme of covenants as a whole and to assess the importance to the beneficiaries of maintaining the integrity of the scheme. Here, however, the local authority had previously indicated a willingness to change use; the change of use was not contradictory to the local development plan; and there was ample provision for office premises in the local area.
The Upper Tribunal confirmed that the test to modify a leasehold covenant was no stricter than the test to be applied in relation to freehold covenants (additional to the limitation of the length of lease and the minimum period of the term that must have elapsed). The Tribunal concluded that “the covenants in a lease granted for a term of 40 years or less are outside the scope of section 84 altogether, and no application may be made for the first 25 years of a term of longer than 40. But beyond that there are no separate conditions for leasehold covenants.”
The Tribunal did not have jurisdiction under section 84 to modify the clause requiring the landlord’s consent for each sub-letting, so it will still be necessary for the headlessee to obtain the landlord’s consent for each subletting following the conversion.
Expertise: Residential Landlord & Tenant
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