The repurposing and diversification of the high street is firmly on the agenda. The downward trajectory of the traditional high street has been dramatically accelerated by the rise of e-commerce and changes in consumer behaviour heightened by the huge impact of the pandemic. Retailers, investors and developers who retain commercial leases are rethinking their real estate needs and looking for increased flexibility while they figure out how best they can operate in a post-lockdown era.
The government is on board: its Project Speed infrastructure plan, which was launched in June 2020, included a commitment to “support the high street revival” by addressing the need for more types of commercial premises to have “total flexibility to be repurposed” and to provide “greater freedom for buildings and land in our town centres to change use without planning permission”, with changes to use classes and permitted development forming part of a package to help revitalise the high street.
However, it should not be assumed that the changes give existing or new occupiers of premises the automatic right to put the premises to a new use. Restrictive lease terms can present a significant obstacle to a tenant’s plans to unlock the value of its leasehold property.
The impact of lease terms
The Lease Code 2020 guidance from the RICS provides that landlords’ controls over user should be no more restrictive than necessary to protect the value of the premises and any adjoining estate of the landlord. However, leases nevertheless frequently contain more restrictive user covenants, often linked to the estate management policy of the landlord, which can operate to inhibit the tenant’s plans for repurposing or subletting for the entire duration of the term.
The scope of any particular user clauses will differ according to the particular terms of the lease. It may be qualified or unqualified. It may be drafted by reference to a particular use class, specifically referencing the legislation that was in place at the date of the lease, which may prevent the tenant from benefiting from subsequent planning changes, including the flexibility of the new Class E. It may be an absolute prohibition, in which case there is no scope for implication under section 19(1) of the Landlord and Tenant Act 1927 that consent will not be unreasonably withheld and the landlord’s right to refuse consent is unfettered.
Such restrictions can present real challenges for tenants in practice where the landlord is inclined to object, on grounds such as concerns about damage to its reversionary interest, future plans for the property, preservation of restrictive covenants on its own title, other lease covenants or covenants in other leases within the estate, and broader estate management policy considerations. Following the Supreme Court ruling in Duval v 11-13 Randolph Crescent Ltd [2020] UKSC 18; [2020] EGLR 17, landlords are likely to be mindful of the possibility that permitting changes may expose them to objections or claims by other tenants who might perceive the variation to be prejudicial to their interests.
A tenant should also be mindful of the fact that if the covenant forms part of a letting scheme, that raises the risk of direct enforcement by other tenants of the estate, independently of the landlord: see Williams v Kiley (t/a CK Supermarkets) (No 2) [2004] EWCA Civ 870 (a user covenant in a commercial lease of a unit forming part of a parade of shops with common lease terms was held to form part of a building scheme creating reciprocity of obligations).
Modification or discharge
As a result of those considerations, restrictive covenants affecting user can still present a considerable obstacle to tenants wishing to respond to planning developments or market changes and to adapt their business uses with a view to increasing profitability. If eligible, tenants can use the statutory right of modification or discharge of restrictions conferred by section 84(12) of the Law of Property Act 1925. Applications under section 84 for the discharge or modification of leasehold covenants have been described as a “comparative rarity” (George Bartlett QC in Re Phillips Application [2011] UKUT 346 (LC)). The right is more commonly employed in the case of freehold covenants, but the Upper Tribunal (Lands Chamber) does have jurisdiction to modify restrictions affecting leasehold land “as if it were freehold” where there is a term of 40 years or more and where 25 years of that term has expired.
This important right applies to restrictive covenants “as to user” and can in principle extend beyond user covenants to other lease covenant restrictions, including covenants against alterations, assignments and subletting. It provides tenants, investors and developers with a powerful negotiating tool and the potential means to unlock leasehold land for development in the face of contractual restrictions and the landlord’s attempts to extract financial gain from the enforcement of a leasehold covenant.
The 1925 Act permits an application to discharge or modify restrictions on one or more of the following grounds:
- the covenant is obsolete
- it impedes some reasonable use of the land, and its benefit is of no substantial value and can be compensated for in money
- the beneficiaries expressly or impliedly agreed to a release or modification
- no injury will be caused.
In the current climate, this statutory right may well be increasingly relied on by lessees to unlock leasehold land, and there have been a number of applications of this nature to the Upper Tribunal in recent years.
For example, section 84 came to the tenant’s aid in James Hall & Co (Property) Ltd v Maughan and others [2017] UKUT 240 (LC) (modification from hotel and pub to convenience store, rather than discharge, which may pave the way to uncontrollable widening); Berkeley Square Investments Ltd v Berkeley Square Holdings Ltd [2019] UKUT 384 (LC); [2019] PLSCS 236 (change from offices to private members’ club, on the grounds that the landlord was unable to establish that it would negatively impact its wider estate); and Shaviram Normandy Ltd v Basingstoke and Deane Borough Council [2019] UKUT 256 (LC); [2019] PLSCS 184 (change from office to residential, on the grounds that statutory permitted development rights were relied on to demonstrate reasonableness and no evidence of practical benefit or substantial value was adduced by the objector).
That said, success is never guaranteed and applications may be more difficult if the freeholder owns adjoining property. For example, in Edgware Road (2015) Ltd v Church Commissioners [2020] UKUT 104 (LC); [2020] PLSCS 61, an application for change of use from office to hotel, for which planning permission had been granted, was refused on the basis that the covenant was considered to be an important tool of estate management.
The powers of the tribunal
Given the fact-sensitive nature of such applications, advance detailed consideration of the relevant facts and particular grounds is always required, often with the assistance of experts.
The Upper Tribunal’s power is discretionary, and even if the tenant and its advisers conclude that there is a strong case for modification or discharge, the tenant should not pre-empt the outcome, as a tenant who jumps the gun risks prejudicing its position: see Alexander Devine Children’s Cancer Trust v Housing Solutions Ltd [2020] UKSC 45; [2021] EGLR 1.
The Upper Tribunal also has the power to further “unpick” the terms of the lease by adding further provisions and adding additional clauses into the lease in order to protect the respondent’s position: section 84(1C) of the 1925 Act.
However, that is not a means by which the whole lease can be rewritten: there must be a reasonable link between the modification and the additional clauses, and the power is limited to further provisions restricting user of or building on the land. It cannot be used to modify covenants against alterations or improvements or to modify positive covenants or negative obligations which do not restrict user or building: see Berkeley Square Investments.
Practice points
The following points may be useful when considering how to proceed:
- Review the lease carefully to check the scope of the covenants that need to be modified, including prohibitions against alterations.
- Obtain early advice on issues of interpretation and planning considerations.
- Consider the best grounds for modification.
- Consider whether the landlord owns neighbouring property or whether the covenants form part of a leasehold scheme.
- Anticipate and evaluate potential objections, including estate management and valuation implications, and obtain early expert evidence.
- Consider what other terms could be offered under section 84(1C) of the 1925 Act to bolster an application.
- Frame the application carefully – consider whether modification rather than discharge would suffice.
- Do not proceed in breach – secure agreement or modifications first.
Myriam Stacey QC is a barrister at Landmark Chambers and Emma Chadwick is a partner and head of litigation at Winckworth Sherwood
