Restrictive covenant – Modification – Obsolescence – Qualified leasehold covenants preventing improvement or change of use without landlord’s consent – Sixty-one years of lease remaining – Applicant leaseholder proposing to replace redundant warehouses with residential towers – Objector landlord willing to consent on conditions unacceptable to applicant – Applicant applying to modify covenants – Whether grounds made out for modification of covenants – Application dismissed
The applicant was a special purpose vehicle which held the lease of two redundant warehouses in a part of Manchester that was rapidly being developed as an area of modern, high-density housing. It had no assets other than the lease of the site. It wanted to demolish the warehouses and, at a cost of £300m, to replace them with two 56-storey tower blocks containing 1,037 flats.
The unexpired term of the lease was just under 61 years (which was too short to enable any flats completed to be sold on mortgageable leases). The lease included a series of covenants which prevented the redevelopment of the warehouses without the consent of its landlord, the objector, which owned the freehold reversionary interest in the site. The objector was willing to consent to the redevelopment, but only on terms which the applicant considered to be unacceptable.
The applicant applied to the Upper Tribunal under section 84(1)(a), (aa) and (c) of the Law of Property Act 1925, for the modification of 11 covenants to enable the redevelopment to be carried out without the consent of its landlord. The applicant argued it would then be able to complete the project using only its own money and that, rather than selling it on, it would be able to hold the development, letting the individual flats on short tenancies at rack rents before the land reverted to the objector at the expiry of the term.
Held: The application was dismissed.
(1) To succeed under section 84(1)(a), the applicant had to demonstrate that by reason of changes in the character of the property, or the neighbourhood, or other circumstances of the case, the restrictions ought to be deemed obsolete. The critical consideration was not the degree of change which the character of a neighbourhood or a property underwent, but the extent to which that change rendered the original purpose of the covenant incapable of achievement.
In the present case, there had been significant changes to the neighbourhood since the lease was granted in 1978. A wholly industrial and warehousing area of the city was now becoming dominated by tall residential towers. The purpose and effect of the covenants was to give the objector a degree of control over any change in the permitted use from the original light industrial or warehouse use. The objector was willing to grant consent, but on terms which it considered necessary to ensure the viability of the development.
The objector had a legitimate strategic interest in continuing to influence the use of land on the fringe of the city centre and to secure its orderly and appropriate development. That interest was promoted through the statutory planning process but the leasehold covenants allowed it a further opportunity to control the use of the site: Driscoll v Church Commissioners for England [1957] 1 QB considered.
The touchstone of obsolescence was whether the object of the covenant was still capable of fulfilment. There was no doubt the object of the restriction on use remained capable of fulfilment and ground (a) had not been made out.
(2) When considering whether a proposed use of land was reasonable, and whether it should be modified or discharged under section 84(1)(aa), the tribunal was specifically directed to take into account the statutory development plan and any declared or ascertainable pattern for the grant or refusal of planning permissions in the relevant area: section 84(1B). Given that both parties were keen to see the site developed for residential use, and that such use was in accordance with the development plan, the tribunal was satisfied that it was a reasonable use: Caledonian Associated Properties Ltd v East Kilbride District Council (1985) 49 P&CR 410 considered.
The objector had a dual role as local planning authority exercising public functions on the one hand, and its private capacity as landlord on the other. As planning authority, the objector had positively and enthusiastically encouraged the development. As landlord it nevertheless sought to include provisions within a new extended lease, to which the applicant objected, to ensure the development was completed within a reasonable time.
It was clear the objector’s ability to rely on the restrictions to prevent the applicant from carrying out the development, without agreeing to provisions intended to secure the objector’s development objective, secured a practical benefit.
The objector’s ability to withhold consent to the development until it was satisfied the applicant’s proposals could be delivered did not confer only peripheral or indirect benefits. It allowed it to influence the form of development and mitigate the risk that the site might not be developed in an orderly and timely way.
On the evidence, measured in monetary terms, the restrictions did not (by impeding the development) secure to the objector a practical benefit of substantial value. However, the objector’s concerns about the viability of the development were genuine, and the conditions that it sought to impose, addressed its wish to see the development commencing and being completed within a certain period. That control was a substantial advantage, and the application on ground (aa) failed.
(3) It followed that injury would be caused to the objector by modification of the restrictions since the objector would lose the practical control which it currently enjoyed over the redevelopment of the site. The application on ground (c) therefore also failed.
(4) The tribunal would be slow to interfere with a local authority seeking to use its private rights as landlord to promote its strategic development plan and ensure that a desired development took place. It would also be reluctant to use the tribunal’s discretionary power in a manner which would be liable to disrupt continuing negotiations between a local authority and a commercial developer, both of whom were able to protect their own interests. Having visited the locality, the tribunal was satisfied that the development of the site could be achieved through sensible commercial negotiations. If the necessary jurisdictional conditions had been satisfied, giving the tribunal the opportunity to intervene, it would have been unnecessary and inappropriate to have done so.
Martin Hutchings KC (instructed by Walker Morris LLP) appeared for the applicant; Elisabeth Tythcott (instructed by Manchester City Council) appeared for the objector.
Eileen O’Grady, barrister
Click here to read a transcript of Great Jackson Street Estates Ltd v Manchester City Council
