Modifying leasehold covenants – how easy is it?
Developing any type of property to its full potential often involves negotiations to release or amend restrictions in title deeds with those who have the benefit of them. If this cannot be achieved amicably an application can be made to the Upper Tribunal (Lands Chamber) (UT) for the modification or discharge of the covenants in question.
A common application is to modify user covenants so that a freehold property can be developed for a different use; but does the same law apply equally to leasehold properties where a landlord’s interest has to be taken into account? The recent case of Berkeley Square Investments Ltd v Berkeley Square Holdings Ltd  is a good example of the UT’s approach when deciding whether to modify covenants in a lease.
Facts of the case
As the names of the parties suggest, the case concerned property in Berkeley Square, London. Berkeley Square Investments Ltd (the tenant) was the tenant under a long lease (expiring in 2070) of 45 Berkeley Square together with a property at the rear. The freehold was owned by Berkeley Square Holdings Ltd (the landlord) who also owned the building next door, 46 Berkeley Square, home to the well-known Annabel’s, a private members’ club.
The lease of 45 Berkeley Square contained a covenant which restricted the use of the property to offices with residential accommodation on the fourth floor. The tenant wanted to implement a planning permission it had obtained in 2016 to change the use of the property to a private members’ club with plans for three restaurants, eight bars, a private dining room as well as ancillary accommodation. As the landlord would not agree to modify the covenant in the lease, the tenant applied to the UT under section 84 of the Law of Property Act 1925 (LPA 1925) on the basis that:
- the property was not suitable as office space (it was a Grade 1 listed building) and therefore the covenant was obsolete for the purposes of section 84(1)(a); or
- the covenant would impede the reasonable user of the land and so could be modified under section 84(1)(aa) and/or section 84(1)(c) (amendment of the covenant would not cause injury to the landlord).
The freeholder objected to the application; it owned around 90 properties in the area and its objections were based around estate management concerns, specifically:
- allowing this change would result in three private members’ clubs in a row with the risk of the area becoming synonymous with nightlife which would damage the Square's reputation;
- another private members' club next to Annabel’s would result in competition with a likely loss in business and profit (rent was partially based on turnover); and
- modification of the covenant could lead to other lessee’s making similar applications which would have an adverse impact on the freeholder’s management of the estate as a whole.
Before granting the application, the UT considered the tenant’s three grounds and agreed with two of them:
- section 84(1)(a) (obsolescence) – this was not accepted by the UT who took the view that whilst there was a limited market for office space in a Grade 1 listed building, it was not non-existent. Therefore the covenant could not be considered as obsolete on that ground;
- section 84(1)(aa) (reasonable user) – the fact that there were a number of similar clubs in the area, and Westminster City Council had given both planning permission and a premises licence for the development, all supported the case for reasonable use;
- section 84(1)(c) (no injury) – there was little evidence that another private members’ club would diminish the value of the freeholder’s reversion or reduce its rental income; it was more likely to have the opposite effect. Keeping the property as offices conferred no practical benefit to the landlord.
This decision is not be seen as allowing all tenants to be able to apply to the UT for modification of a covenant when the landlord does not agree to their plans. For an application to be made under section 84 LPA 1925, the lease must be for a term of 40 years or more and at least 25 years of that term must have expired.
So, is it easy to modify covenants in a long lease? A case brought under this section needs to be properly prepared and effectively argued as modification is not automatic, however, section 84 provides tenants looking to develop long leasehold premises with a powerful negotiating tool which can unlock land for development against a landlord's wishes.
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