From Basingstoke to Berkeley Square: modification of leasehold covenants in the Upper Tribunal (Lands Chamber)

Cases coming before the Upper Tribunal (Lands Chamber) are relatively uncommon and it is unusual for the Upper Tribunal (Lands Chamber) to hear applications for the modification or discharge of restrictive covenants in leases. However, in 2019 two such cases, Re: 45 Berkeley Square (2019) and Re: Normandy House (2019) came before the Tribunal. In both cases the premises were offices and the applicants, long leaseholders, successfully sought modification of user restrictions in order to permit a more profitable use. 

The Tribunal has power to discharge or modify restrictions on the use of freehold land provided one of the grounds in section 84(1) of the Law of Property Act 1925 is made out. By section 84(12) the jurisdiction extends to leasehold covenants after the expiry of 25 years of a term of more than 40 years.  In both of these recent cases the applicants sought to modify the covenants under grounds (a), (aa) or (c) of s 84(1). This combination of grounds is the most common put before the Tribunal. The rationale is that while ground (aa) is the mostly likely to succeed, it may require the applicant to pay compensation, whereas ground (a) and (c) will not. To succeed under ground (aa) the applicant must show that the restriction impedes some reasonable use of the land and that impeding the user does not secure to persons entitled to the benefit any practical benefits of substantial value or advantage or is contrary to the public interest. Ground (a) requires the applicant to demonstrate that the covenant is obsolete and ground (c) that the modification or discharge will not injure the benefited persons.

In both of these cases the office premises were in need of refurbishment to secure the maximum amount of rental income. However, in neithercase had the long leaseholder made any recent effort to undertake refurbishment or to secure office tenants, as both leaseholders were set on their proposed new uses. The factual similarity, however, ends there. Normandy House is a 1980s building that once offered high specification office accommodation but had been allowed to fall into disrepair.  The freehold was owned by Basingstoke and Deane Borough Council and the leaseholder, Shaviram Normandy Limited, was a company that specialised in the acquisition of commercial properties for conversion to residential use, a process facilitated by permitted development rights. 45 Berkeley Square, on theother hand, is a Grade I listed building, improvements to which would be expensive because of the additional burden of the requirements of its listed status.  The freehold of 45 Berkeley Square was owned by a holding company the beneficial owners of which were members of the Abu Dhabi royal family. The company owned other premises in the vicinity, including the properties either side. The leaseholder was a company beneficially owned by a family trust who had bought the premises as the ‘flagship London office’ for the family business but now wanted to convert the premises into a private members club. 

Both applicants initially argued that office use for the premises was now obsolete under s 84(1)(a). However, in the case of Normandy House this argument was quickly abandoned, and in the case of Berkeley Square the argument failed as no attempt had been made in the preceding five years to market the premises as offices, and the Tribunal found that whilst demand for this kind of office premises was limited, it was not non-existent.

As with most of the s 84(1) cases that come before the Tribunal, in these two leasehold cases, the thrust of the discussion surrounded ground (aa). The main focus of the argument related to whether impeding the proposed user secured ‘practical benefits of substantial value or advantage’. In assessing this the Tribunal considered arguments regarding the impact of the change of use on the rent and the value of the freehold reversion of the premises, the impact on the landlord’s wider estate and also the the extent to which alteration of the user provisions in the lease in question might lead other long leaseholders of each of the landlords to argue that they should also be permitted to change the user clauses in their leases (known as the ‘thin end of the wedge’ argument).

In both leases the landlord’s rent was a percentageof the net rents received from the subtenants. Therefore, in order to demonstrate that impeding the proposed user did not secure ‘practical benefits of substantial value or advantage’ both applicants argued that the rental income received by the landlord would be higher with the new use than could be achieved by office use. In the case of  Berkeley Square the Tribunal found that the rent received by the freeholder from the premises let out as a private members’ club would be £100,000 greater than rent received from office use; a significant increase from the current rent of £143,000. In the Normandy House case the rent received from the proposed change of use would be around £15,500 per annum lower than with office use, but the value of the freehold reversion would be £125,000 higher with residential use than office use.

In addition to considerations of value of the premises, the Tribunal considered the impact of the proposed modifications on the respondents more widely, including the impact on their other land holdings. The respondents in the Normandy House case owned substantial holdings in theneighbourhood, including adjacent buildings and also consideredthemselves to have a role as ‘custodian of the public interest’. The Tribunal cited Gilbert v Spoor

In freehold covenant cases objectors often cite the ‘thin end of the wedge’ argument in opposition to claims under s84(1)(aa). This argument is that a successful application may improve the prospects of others seeking release of restrictions on their land. Such an argument has been found valid in building scheme cases where there are mutually enforceable covenants on a number of plots of land (Re Snaith and Dolding’s Application [1995] 71 P&CR 104) but the principle is not confined to building scheme cases (Re Hextall’s Application (1998) 79 P&CR 382). In the case of Normandy House, the Council owned seven other office buildings where they had been asked to consider modification of the restrictions to enable residential conversion. However, the Council in its function as local planning authority had imposed an Article 4 direction on the areas in which the other buildings were situated meaning that those buildings would, unlike Normandy, require express planning permission for conversion to residential use. The Tribunal therefore accepted that the pattern of covenants could be argued to be analogous to a freehold building scheme but on the basis of the Article 4 direction the pattern of covenants did not confer any substantial benefit or advantage. The thin edge of the wedge argument was necessarily going to be weaker in the BerkeleySquare case as the freeholder did not own as many properties in the vicinity of the applicant premises as the Council in the Normandy House case. In this case the Tribunal found that there were no other leases owned by the respondent in the immediate locality to which section 84(12) applied.

Both cases demonstrate that with a planning permissionand the right valuation evidence tenants of long leaseholds stand a good chance of success in application to modify a user restriction under s 84(1)(aa). This is particularly the case where the prior behaviour of the landlord is inconsistent with their objection.

How to cite this blog (Harvard style)

Walsh, E. (2020). From Basingstoke to Berkeley Square: modification of leasehold covenants in the Upper Tribunal (Lands Chamber) Available at https://law.ox.ac.uk/research-and-subject-groups/property-law/blog/2020/01/basingstoke-berkeley-square-modification (Accessed [date]).