Unlocking value in your Property Portfolio – Leasehold Property

5th July 2016

It is widely known that the Upper Tribunal has jurisdiction to modify or vary restrictive covenants affecting freehold land in accordance with section 84 of the Law of Property Act 1925 (LPA 1925). It is it is less widely known that this jurisdiction can also extend in certain circumstances to leasehold covenants by virtue of Section 84(12) LPA 1925. These provisions can in the right circumstances provide a landowner of a long leasehold interest with a mechanism to override restrictions on use and hence unlock additional value in its portfolio.

It is commonplace for land to be the subject of restrictive covenants which prevent it being used for a particular purpose or purposes. Such restrictions may restrict the type or even density of development that can take place. Often the restrictions will be historic and where their existence can have a significant impact upon the marketability and value of land.

Any party wanting to vary or relax such covenants will either need to come to an agreement with the beneficiary and where a substantial premium may be sought for the relaxation, or alternatively it can ask the Upper Tribunal to exercise its jurisdiction to discharge or modify restrictive covenants.

This note summarises the position in relation to discharging or modifying restrictive covenants in a leasehold context, and considers some scenarios that could arise in practice where Section 84(12) LPA 1925 might be of assistance. Where successful, these provisions can unlock significant value in the site and avoid the need to pay the beneficiary a premium for agreeing to the variation or release. A further article will follow and which will examine the law in a freehold context.

Discharging or modifying restrictions in leasehold land – An Overview

Section 84(12) LPA 1925 provides that:

“where a term of more than forty years is created in land (whether before or after the commencement of this Act) this section shall, after the expiration of twenty-five years of the term, apply to restrictions affecting the leasehold land in like manner as it would have applied had the land been freehold…”

The provisions will only apply where the lease is for more than 40 years and where more than 25 years have expired. It will not assist in the case of short term occupational leases, but instead is relevant to longer leases, whether in a commercial or residential context.

It will be necessary for any applicant to establish that one or more of the four grounds which justify modification or discharge apply, i.e that:

• the covenant is obsolete; and/or
• it impedes some reasonable use of the land; and/or
• the beneficiaries expressly or impliedly agreed to the release or modification; and/or
• that no injury will be caused.

The most common ground relied upon is that the covenant impedes some reasonable user. This can be established where planning consent is obtained for the proposed scheme and where it can be shown that the covenants do not secure practical benefits of substantial value or advantage to the beneficiary.

The Upper Tribunal’s power to modify or discharge a restriction is discretionary, although if an applicant is able to satisfy one of the above grounds, it is likely the application will be granted. The Upper Tribunal’s power only covers restrictions and so careful consideration must be given as to whether the covenant in question is truly restrictive.

It is of course important when considering any application to the Upper Tribunal to consider the nature of the landlord’s objections and the legitimacy of those. Consideration also needs to be given to whether the landlord owns any neighbouring property or whether the restrictions form part of a leasehold scheme of local law. It may be that there are reasons why a landlord might legitimately want to use the covenant to exert control and to restrict uses that it may deem undesirable or in conflict with its own interests.

Importantly, however, the ability to extract financial gain from the enforcement of a leasehold covenant will not provide the landlord with a good reason to oppose the application and indeed any attempt by the landlord to extract money would be strong evidence that control was being exercised unreasonably. Where control has been exercised unreasonably the Tribunal has not hesitated to grant relief. In cases where the landlord owns no neighbouring property then questions of control and estate management are going to hold less sway and an applicant may therefore find it is significantly easier to make out its claim.

Practical Scenarios

There are set out below two examples of where Section 84(12) LPA 1925 may assist a long leaseholder :

Scenario one

ABC Limited is tenant of a lease of commercial premises in London. The lease was granted for a term of 120 years and has 70 years remaining, and contains a restrictive user covenant that the premises can only be used for offices. ABC Limited wishes to redevelop the premises for residential use as it has advice that this would be a more valuable use. ABC Limited approaches its landlord for consent to change of use but the landlord refuses to provide consent and provides no justification for its refusal. It also refuses to entertain any discussions about payment of a premium for a variation or discharge of the covenant. ABC Limited obtains advice from a planning expert that the proposed use for residential purposes is reasonable and that planning permission is likely.

In such circumstances, ABC Limited may wish to consider making an application under section 84(12) LPA 1925 to modify the covenants so as to permit a residential user and also potentially look to enfranchise the lease (the subject of enfranchisement would need to be considered separately). However the landlord might argue that the ability to prevent enfranchisement is of itself a practical benefit of substantial value or advantage. There would also need to be considered whether as a matter of practice covenants other than the user covenant would need to be modified to permit the proposed user ie any prohibition against making alterations.

Scenario two

XYZ Limited is the tenant of a lease of a car park in Manchester. The lease was granted for a term of 150 years and has 100 years remaining. The lease contains a restrictive user covenant so that the premises can only be used as an open air car park and for no other purpose. XYZ Limited wishes to convert the premises for leisure use and approaches the landlord seeking its consent to do so. The landlord does not refuse consent outright but demands payment of a substantial premium for agreeing to any change of user. XYZ Limited obtains advice from a planning expert confirming that the proposed use is reasonable and in such circumstances, XYZ Limited may wish to consider making an application under section 84(12) LPA 1925 to vary the covenant to permit the proposed user.

Summary

The terms of section 84(12) LPA 1925 should be of interest to anybody with a long lease containing a restrictive covenant that impedes some more valuable alternative use and where the landlord refuses to agree to vary the covenants or instead demands a substantial premium for doing so.

The provisions can provide the ability to unlock value by modifying or discharging restrictive covenants and at the very least provide a solid platform to negotiate from in order to avoid paying a substantial premium.

Cases of this type are likely to be fact specific and the type of application discussed in this note will not be suitable in all cases. If this article has been of interest and you have any queries you would like to discuss then please do not hesitate to contact Martin McKeague at martin.mckeague@walkermorris.co.uk in the first instance and he would be happy to talk through any scenarios you might have regarding applications to the Upper Tribunal.