A recent Court of Appeal case, Great Jackson ST Estates Ltd v Manchester City Council, examined the considerations that a tribunal must have regard to when dealing with an application to modify leasehold restrictive covenants, under section 84(1) of the Law of Property Act 1925 (LPA).
In this article we consider the statutory grounds that an applicant has to prove under section 84 and the key takeaways from this case for both landlords and tenants.
The law
The power to wholly or partially discharge or modify restrictive covenants affecting land is set out in section 84 of the LPA. The key points to note about this power are:
- Any person with an interest in freehold or qualifying leasehold land can apply. A qualifying lease is one where the term is more than 40 years and at least 25 years have already expired.
- The power is limited to user covenants.
- Each case turns on its own facts.
- The tribunal has discretion even if one or more of the statutory grounds are satisfied.
- The applicant must prove one or more of the following statutory grounds which are the same for both freehold and leasehold covenants:
- The covenant is obsolete due to changes in the character of the property, neighbourhood or other material circumstances. For example a covenant requiring industrial / commercial use in an area which is now predominantly / entirely residential.
- The covenant impedes reasonable user of the land for public or private purposes and:
- EITHER it does not secure practical benefits of substantial value or advantage to those entitled to enforce it
- OR it's contrary to the public interest
- AND money would be adequate compensation for any loss
In determining whether the either/or grounds above apply, the tribunal shall take into account the development plan and any patterns in the grant or refusal of planning permissions in the relevant areas.
- Agreement – all persons entitled to the benefit of the restriction have either expressly or impliedly agreed to the discharge or modification.
- No injury - that the proposed discharge or modification will not injure those entitled to the benefit.
Great Jackson ST Estates Ltd v Manchester City Council case
In this case the landlord, a local authority which was also the planning authority, owned the freehold of a site comprising two redundant warehouses.
The leaseholder held a long lease, 60 years remaining, subject to restrictive covenants which required the authority’s consent for development and imposed restrictions on use and management. The leaseholder has obtained planning permission for a major residential development.
The authority offered the leaseholder a new 250-year lease with conditions, but the leaseholder refused and made an application under section 84 of the LPA to the Upper Tribunal to modify the restrictive covenants.
The tribunal determined that the covenants provided the local authority with 'practical benefits of substantial value or advantage' under section 84(1A), and refused modification.
The Court of Appeal dismissed the leaseholder’s appeal on the basis that the covenants gave the authority the following significant practical benefits:
- The ability to influence the form and timing of the development.
- The assurance that development would commence promptly and be completed.
- Support of the authority’s wider strategy for orderly development of the area.
The implications of the Great Jackson ST Estates Ltd v Manchester City Council case for landlords
- Covenants are strategic tools – the Court of Appeal confirmed that restrictive covenants can legitimately be used to secure strategic objectives such as supporting long-term estate management strategies. Landlords should therefore be clear as to the strategic rationale behind covenants in the event of a section 84 challenge. The key is to have a legitimate strategy.
- 'Practical benefit' is interpreted widely to include influence over the form and timing of development. The ability to charge a premium in return for permitting a development is not a practical benefit nor is the ability to insist on any other form of quid pro quo e.g. requiring that a new lease be entered into.
- If the landlord is a planning authority then its public duties can be considered when assessing the value of covenants.
- Tribunals are reluctant to modify or discharge covenants which serve a genuine purpose.
- Whilst the case did not directly deal with forfeiture, the case does have important implications for landlords considering whether to pursue forfeiture as a remedy for breach of user covenant. The key takeaways on forfeiture for breach of user covenant are:
- Breach of user covenant is generally treated as a continuing breach and if there is a forfeiture clause in the lease, landlords can serve a section 146 notice to start the process of forfeiture at any time whilst the breach continues.
- Other remedies, such as damages or an injunction, may be more proportionate in the circumstances. Courts often grant relief from forfeiture for long leases with substantial value so it is important that there is a clear strategic rationale for enforcing the covenant – i.e. that the covenant provides the landlord with 'practical benefits of substantial value or advantage'.
- Above all else, whilst forfeiture is a landlord right, proceedings should not be used opportunistically by the landlord – i.e. as leverage in negotiating more favourable terms of a new lease. There has to be a genuine intention to enforce the user covenants. In our experience forfeiture can be a pressure point in the landlord’s armoury.
The implications of the Great Jackson ST Estates Ltd v Manchester City Council case for tenants
For tenants, the inverse of the above applies with the net effect that tribunals are loath to modify or discharge restrictive covenants where they are proven to provide substantial practical benefits to landlords and especially in the context of valuable leases with a lengthy unexpired term left to run. There is also the cost to the tenant of bringing an application under section 84.
With regards to the risk of forfeiture, if a tenant has been in a long-standing breach of user covenant then they need to be aware that it's continuing breach which means that the landlord can potentially exercise the right to forfeit at any time. A laches defence, one which applies when a party has unreasonably delayed in asserting their rights causing prejudice to the other party, does not apply in this instance although there may be scope to bring an estoppel defence.
Tenant should be mindful of the length of time the covenant has been in place for as even very old covenants can survive a section 84 application if they continue to confer real benefits.
Conclusion
This case is a salient reminder of the wide range of factors that can be taken into account by tribunals when determining whether a covenant confers 'practical benefits of substantial value or advantage'. Developers looking to make an application under section 84 need to be mindful of this and the tribunals’ general reluctance to modify or discharge covenants which serve a genuine purpose.
For more information about this evolving area of law or commercial leasehold matters generally please contact our property disputes team.
