Long Leaseholders: Modifying Restrictive Covenants

A recent case serves as a welcome reminder to tenants of long leases that they may be able to modify or remove restrictive covenants using section 84(12) of the Law of Property Act 1925. While section 84 is most often used to amend/release covenants that restrict freehold land, it may be applied to leases of at least 40 years, if at least 25 years have expired.

In the case of Shaviram v Basingstoke*,  Shaviram purchased the head lease of Normandy House, a vacant building in disrepair, intending to refurbish it for use as residential flats.  The lease, however, contained a covenant that restricted the use of Normandy House to offices only.  Basingstoke, the landlord, refused to vary the head lease to allow Shaviram’s intended use.

Shaviram subsequently applied to the Upper Tribunal to have, among other things, the lease amended to allow its planned use as residential flats, under section 84(12) of the Law of Property Act 1925.

When can changes be made under the Act?
The Act allows the Upper Tribunal to make changes if, among other things, the continued existence of the covenant would impede a reasonable user of the land (section 84(1)(aa)) and does not secure any practical benefit to the benefitting party (section 84(1A)).

Shaviram applied to the Upper Tribunal to modify the restrictive covenant to allow the use of Normandy House as residential flats on the basis that, among other things, the covenant did not secure any practical benefit to Basingstoke. There was no argument against the idea that residential flats were a reasonable use of Normandy House.

Financial effect primary measure of benefit
The financial effect of the restrictive covenant was the primary way in which benefit was measured. Expert evidence and financial analysis were put forward to show that allowing the requested modification of the covenant would result in a modest increase in the capital value of Normandy House, though a minor decrease in the rental income.  Despite the fact that the lease allowed Basingstoke a proportion of the rental income from subletting the property,  the Upper Tribunal found that capital value was the primary means of determining benefit to Basingstoke.  Given the rise in capital value that would accompany Shaviram’s intended use, the Upper Tribunal found that Basingstoke would obtain no practical benefit from the continuation of the restrictive covenant.

This case is a timely reminder that if leaseholders believe that another use of their leased property would unlock significant financial potential, then it is worth pursuing even if the lease contains restrictive covenants prohibiting the intended use.

Narrow modification
It is important to note that in this case, the Upper Tribunal allowed only a narrow modification of the restrictive covenant; just enough to allow the argued for use.  Consequently, the lesson for leaseholders is that this avenue would likely not be successful as a speculative venture to provide freedom to pursue a broad range of possible options for future use.  Rather, a leaseholder should have a specific use in mind and be prepared to present detailed financial evidence to show that the landlord would ultimately financially benefit from the intended change.

*Shaviram Normandy Limited v Basingstoke and Deane Borough Council [2019] UKUT 256 (LC)

For more information please contact Elizabeth Deyong (email: e.deyong@barrellison.co.uk) (telephone: 01223 417 267).

Disclaimer: While we do all that is possible in terms of ensuring its accuracy, this blog contains general information only. Nothing in these pages constitutes legal advice. You need to consult a suitably qualified lawyer from the firm on any specific legal problem or matter.