Modification of leasehold covenants: The modification, release or discharge of user covenants in long leases (Shaviram Normandy Ltd v Basingstoke and Deane Borough Council 2019)

The Court considers the circumstances where user covenants contained in a long lease may be modified, released or discharged in line with other lease covenants.

The background

Shaviram Normandy Ltd v Basingstoke and Deane Borough Council [2019] concerned a commercial office building. The local authority freeholder granted a 150-year headlease to Greytown Investments in 1985, containing a user covenant restricting use of the building to offices. The building then fell into disrepair but was acquired by the applicant who proposed to convert the building into 114 residential units.

The local authority had two functions in this case. As a local planning authority, it confirmed the permitted development rights but as the building’s freeholder, it wished for the building to be restored to offices and let to businesses. The local authority denied the applicant’s request to vary the headlease. The applicant applied to the Upper Tribunal.

The decision

The Upper Tribunal agreed with the applicant that the user restriction in the lease could be modified, finding that there was no substantive capital value benefit, or other substantive benefits, to the council to retain office-only use.

The UT referred to s.84 of the Law of Property Act 1925 which permits the Upper Tribunal to discharge or modify a restriction in specified circumstances; no application to modify or discharge a restriction can be made for the first 25 years of a lease term of 40 years or more. The Council argued that the UT should be cautious in exercising this right where the covenant is contained within a long lease, but the UT found that cases turned on their facts, and there was no reason in principle why the Court should favour the interests of a landlord above those of a neighbouring owner or other person. The UT considered the length of the unexpired term, the rent, other covenants and the landlord’s other neighbouring interests in reaching its decision.

Advice and action for landlords

The Shaviram case is helpful for developers facing a prohibitive user restriction. Where it can be demonstrated that there is no substantive benefit, whether financially or for the benefit of a wider estate, for a landlord to retain a user covenant in its original drafted form, an application may be made for modification or discharge of a user covenant where a long lease has a term of over 40 years, of which the first 25 have passed. The Court’s decision will turn on the facts of the case.