Property Focus

Changing use and changing covenants - by no means automatic

Changing the use of an existing building is now a frequently used development route, with many buildings being redeveloped for purposes which were not envisaged when they were originally constructed.  Leaving aside the obvious hurdles such as planning permission, listing or heritage issues and building regulations approval, what happens if the legal title prevents any change in the first place?  Can this be overcome?

The recent decision in Edgware Road (2015) Ltd v The Church Commissioners for England [2020] UKUT 0104 (LC) considered this in relation to a leasehold property where the tenant wanted to change use but a covenant in the lease prevented it.

Facts

Edgware Road (2015) Ltd (E) held a 125 year lease of several floors of 127-175 Edgware Road in the Hyde Park Estate in London.  The Church Commissioners (C) owned the freehold of the Hyde Park Estate which covers around 90 acres with a mix of 2,300 residential and commercial properties.  E obtained planning permission to convert several vacant floors to a 117-bedroom “pod” hotel (i.e. with windowless bedrooms) but a covenant in the lease prevented E from using the property for residential or sleeping purposes and restricted the use of two of the floors to offices.

C refused to alter the covenant to allow the floors to be used as a hotel as it believed that the change in use would be detrimental to its interests and to those of other lessees.  C was concerned that it would not be able to grant long leases of properties on the Hyde Park Estate, because it could not be confident that the user covenants would remain enforceable.  If E’s application succeeded then others on the estate may want to have the covenants altered or discharged.

E then applied to the Upper Tribunal (Lands Chamber) to have the restriction discharged or modified under section 84 (1) (aa) and (c) of the Law of Property Act 1925.

In order to be successful, E had to prove two grounds:

• under section 84 (1) (aa):
  • the covenant impeded reasonable use of the land and that the restriction does not secure any practical benefit of substantial value or advantage; and
  • money would be adequate compensation to anyone suffering loss or disadvantage from the discharge or modification of the restriction
• under section 84 (1) (c) that no injury will be caused by the discharge or modification of the restriction suffered.

Decision

The tribunal refused E’s application under both grounds for the following reasons:

• the covenant gave C practical benefits through its ability to control the use of property through the inclusion of restrictions in both leasehold and freehold titles on its Hyde Park Estate. C had an overall estate management strategy and the tribunal concluded that altering the covenant would make the implementation of C’s strategy more difficult.
• the practical benefit of the user covenant was not only considered a substantial advantage but one that could not be adequately compensated in monetary terms. Allowing this application would mean that other claims would almost certainly follow, leading to an immeasurable reduction in the value of the estate; the disadvantage suffered by C would be impossible to quantify in monetary terms.

Practical points

This case is a useful reminder that section 84 of the Law of Property Act 1925 gives tenants of long leases the same ability to apply for the modification or discharge of user covenants as freehold owners.  This ability does not apply to all leases; the lease must granted for a term of more than 40 years and the tenant can only apply after 25 years of the term has expired.  One of C’s concerns was that if E had succeeded in altering the covenant, then C would have to consider granting shorter leases (i.e. less than 40 years) to avoid section 84 applications.  This in turn would impact on its ability to raise capital sums and finance.

Estate owners in both the private and public sectors will no doubt welcome this decision as the tribunal accepted that restrictive covenants of this nature provide a practical benefit.  However, it does not follow that similar applications will be dismissed – C’s robust commercial strategy was seen as a valuable estate management tool which proved it was of “substantial value” to defeat the claim.

Anyone owning property, whether freehold or long leasehold, should not assume that planning permission will override any restrictions in the deeds either – changing covenants is definitely not automatic!