On the Eighth day of Christmas – James Walters

On the 8th day of Christmas… James Walters from Irwin Mitchell’s Real Estate Disputes team considers an interesting case where Manchester City Council (Council) successfully opposed an application by its tenant Great Jackson Street Estates Ltd (Tenant) to modify restrictive covenants in its lease. 

Facts

The Tenant had a lease of a former industrial site containing two redundant warehouses in Manchester (Site). Over time the area around the Site had gradually changed from industrial to residential and the Council (in its capacity as planning authority) was promoting the Site and other adjoining areas for residential development. 

The Tenant wanted to redevelop the Site into flats. The Tenant’s lease (Lease) had around 60 years left to run, which was too short to enable any flats to be sold on mortgageable leases. This meant that the Tenant was unable to get a loan to fund the development of the Site. 

The Lease also contained a number of covenants requiring the Council’s consent to carry out redevelopment work. The Council was keen for the Site to be redeveloped but had concerns about the feasibility of the Tenant’s development plans. 

The Council was willing to give consent and grant a new 250-year lease which would enable the Tenant to obtain a loan. However, this was subject to the Tenant agreeing to various conditions which were unacceptable to the Tenant. 

Rather than accept the Council’s conditions, the Tenant wished to develop its own build-to-rent scheme (Scheme) paid for from its own funds and with the Tenant letting the flats out itself under short-term tenancies. 

The Council accepted that if the Scheme was completed the value of the Council’s freehold would increase substantially, but it refused to consent to the Scheme. 

The Tenant applied to the Tribunal under the grounds set out in Section 84(a), (aa) and (c) of the Law of Property Act 1925 (Act) to modify several covenants in the Lease to enable the Scheme to proceed without the Council’s consent. The Council opposed the application. 

The requirements set out in Grounds (a), (aa) and (c) give the Tribunal a discretionary power to discharge or modify of covenants where:

• the covenants are obsolete by reason of changes in the character of the property or the neighbourhood or other circumstances of the case (Ground (a));
• the continued existence of certain covenants (including those where money will be adequate compensation for any loss and which also do not provide substantial practical benefits/advantages) which impede, or unless modified will impede, some reasonable user of the land (Ground (aa)); and
• the proposed discharge or modification will not injure the persons with the benefit of the covenants subject to the applicant paying compensation to such persons for any loss (Ground (c)). 

Decision

The Tribunal dismissed the Tenant’s application, finding that:

• Ground (a) was not made out because the original purpose of the covenants (allowing the Council to control development of the Site) was still capable of achievement. The change of the surrounding area from industrial to residential was not sufficient on its own to show that the covenants were obsolete. 
• Ground (aa) was not made out because the covenants did give the Council practical benefits/advantages (the ability to control how the Site was developed). 
• Ground (c) was not made out because the proposed modifications would injure the Council as it would lose its ability to control the development of the Site. 
• even if one of the Grounds have been made out, it would not have exercised its discretion to modify the covenants because the Tribunal “should be … slow to interfere with a local authority which seeks to use its private rights as landlord to promote its strategic development plan, and to ensure that a desired development takes place” (paragraph 63).

Key points to note 

1. The Tribunal, in line with earlier caselaw, confirmed that local authorities can use restrictive covenants to promote their planning goals. Anyone seeking to discharge or modify such covenants will be facing an uphill battle.
2. Anyone wishing to apply under Section 84 of the Act should ensure that they have strong evidence in support of their application. It is for the applicant to persuade the Tribunal to exercise their powers in the applicant’s favour, and the Tribunal will be slow to intervene. The Tribunal found that the Tenant’s evidence as a whole was vague and incomplete. It was left with the impression that the Tenant’s intentions for the Site were not clear, and that the application was simply an attempt to improve its negotiating position with the Council.
3. The Tribunal will give substantial weight to the non-monetary benefits of a covenant (such as the ability to control development), even where the land of the person with the benefit of the covenant will increase in value if it were to be discharged/modified. 
4. The Tribunal’s powers to discharge/modify covenants apply not only to freehold land but also to some leases (such as the Lease referred to above) for a term of more than 40 years.