Restrictive covenants – Modification – Office building let on long lease – Covenants restricting use to offices only and controlling terms of underletting – Claimant seeking modification of user covenant and restriction on underletting – Whether office use restriction securing practical benefit of substantial value or advantage to defendant – Whether restriction on underletting obsolete – Application granted in part
The defendant local authority was the freehold owner of Normandy House, a purpose-built office building of more than 76,000 sq ft in the centre of Basingstoke. The defendant granted a headlease in 1985 for a term of 150 years which included a covenant restricting use of the building to offices only and reserved an annual rent equal to 15.5% of the “aggregate of the net annual rents…actually received by the lessee”. Since the departure of an underlessee in 2013, the building had been vacant and was in significant disrepair.
In May 2015, the headlease was acquired by the claimant which wanted to convert the property into 114 residential flats, to be let on assured shorthold tenancies at open market rents. The required statutory permitted development rights were confirmed by the defendant in its capacity as local planning authority, but the claimant could not implement its proposals unless the office use restriction was modified. In its capacity as landlord, rather than planning authority, the defendant wished the building to be put back into a lettable condition for businesses seeking office accommodation in the town centre.
Since the defendant refused to vary the headlease, the claimant applied to the tribunal, under section 84 of the Law of Property Act 1925, for the modification of the restrictions in the headlease to permit residential use. The claimant relied in particular on section 84(1)(aa) (the office use restriction was an impediment to reasonable use of the land which did not secure practical benefits of substantial value or advantage). The claimant also sought modification of a covenant requiring it to obtain the defendant’s consent to the rent and terms of each subletting.
Held: The application was granted in part.
(1) The covenants in a lease granted for a term of 40 years or less were outside the scope of section 84, and no application might be made for the first 25 years of a term of longer than 40. Beyond that, there were no separate conditions for leasehold covenants. The nature of an objector’s interest was always a relevant consideration in applications under section 84(1), all of which turned on their own facts and on the impact which the proposed modification or discharge would have on the enjoyment by others of their own property.
(2) The practical benefit of a restriction flowed directly from its observance. When considering the value of the defendant’s reversionary interest, the correct comparison was between the proposed residential use and the current covenanted position, and it was irrelevant that the lessee might, in its own interests, take uncovenanted steps which enhanced that value; any such additional value could not be said to be secured by the covenant: Re Diggens’ Application (No.2) [2001] 2 EGLR 163 and James Hall & Co’s Application [2017] UKUT 240 considered.
In this case, the restriction was part of a series of covenants which did more than simply limit the use of the building. Although clause 2(15) was expressed as an obligation to use the building only as offices, it did not oblige the headlessee to use the building at all. However, its practical effect had to be considered in conjunction with clause 2(12)(a), which required the lessee to use its best endeavours at all times to fully let the demised premises. In combination, the covenants obliged the lessee to use its best endeavours to keep the building fully let as offices. The benefits secured to the defendant by the office use restriction therefore included maintenance of the value of the reversion, assuming the building would be refurbished to the agreed specification and not simply repaired. The fact that the building was not currently in that condition was the consequence of a breach of covenant by the claimant, on which in principle it could not be allowed to rely to its advantage.
(3) On the evidence, the value of the defendant’s reversion, assuming the building remained in office use and was refurbished to the agreed specification, would be £3m. Converted for residential use the value would be £3.125m. The defendant’s estimated annual income from the building refurbished to the agreed office specification would be £160,000; for residential use £144,500. If the building was repaired, the defendant’s average annual income assuming office use would be £117,000, with a reversion value of £1.875m. Therefore, the continuation of the restriction on the use of the building to offices secured no benefit to the defendant in terms of the capital value of its reversion. Although the restriction secured a slightly higher annual income, estimated at £15,500 a year, any rent over the lifetime of the headlease was subject to risks, reflected in the yields of 5% for residential use and 6% for offices and were fully reflected in the resulting capital values of the defendant’s reversion. Accordingly, the restriction to office use did not secure the defendant a practical benefit of substantial value.
(4) In considering whether the restrictions secured any practical benefits amounting to a substantial advantage, “substantiality” under para (aa), was to be judged by their practical value to the covenantee, not by comparison with the importance of the proposed development to the claimant. Looking at the evidence as a whole, the retention of the office use restriction did not secure any benefit of substantial value or advantage to the defendant and ground (aa) had been made out. This was a purely commercial dispute, and it would not be appropriate to withhold relief on the basis of the claimant’s breach of covenant in failing to keep the building in repair. Therefore, clause 2(15) would be modified by adding the words “or as a residential building comprising 114 flats”, or such other wording as the parties might agree: Gilbert v Spoor [1983] 1 Ch 27, Re Snaith and Dolding’s Application [1995] 71 P&CR 104 and Shephard v Turner [2006] P&CR 28 considered.
(5) A covenant, the effect of which was to require consent to the terms and rent of a proposed underletting before that underletting could proceed, but which was subject to the proviso that consent could not be unreasonably withheld or delayed, was not a restriction “as to the user” of the land so that the tribunal did not have jurisdiction under section 84(1). In any event, the requirement was not obsolete, in the sense that it no longer served the purpose for which it was intended if the building was in residential occupation.
Philip Rainey QC (instructed by Teacher Stern LLP) appeared for the claimants; Ranjit Bhose QC and Tara O’Leary (instructed by Basingstoke and Deane Borough Council Legal Services) appeared for the defendant.
Eileen O’Grady, barrister
Click here to read a transcript of Shaviram Normandy Ltd v Basingstoke and Deane Borough Council
