Discharge or modification of restrictive covenants in leases

Section 84 of the Law of Property Act 1925 confers on the Upper Tribunal a statutory jurisdiction to discharge or modify restrictive covenants affecting land. This power is familiar in the context of restrictive covenants affecting freehold land. However, it also extends to restrictive covenants in leases in certain circumstances. This is the effect of sub-section 12, which provides:

"(12) Where a term of more than forty years is created in land (whether before or after the commencement of this Act) this section shall, after the expiration of twenty-five years of the term, apply to restrictions affecting such leasehold land in like manner as it would have applied had the land been freehold: Provided that this subsection shall not apply to mining leases."

There are four grounds which, if satisfied, confer upon the Tribunal the discretionary power to modify or discharge a restrictive covenant. These grounds are identified and discussed in paragraph 11.244 following of Woodfall's Landlord and Tenant, to which reference should be made for the relevant details. In briefest outline those grounds are:

"(a) the covenant ought to be deemed obsolete by reason of changes in the character of the property or the neighbourhood (or other circumstances);

(aa) the covenant:

(i)                 impedes some reasonable user of the land

(ii)               does not secure to the benefited persons any practical benefits of substantial value or advantage to them; or is contrary to the public interest;

and money will be adequate compensation.

(b) there has been an agreement for discharge or modification; and

(c) the proposed discharge or modification will not injure the persons entitled to the benefit of the restriction."

The most important of these grounds is (aa), and often the others are invoked only as makeweights. 

 “in like manner”

What is the effect of the application of the s.84 jurisdiction to leasehold land “in like manner it would have applied had the land been freehold”? 

In Ridley v Taylor [1965] 1 WLR 611 the Court of Appeal considered and application under ground (c) of section 84(1), before the 1969 amendment which introduced ground (aa). Harman LJ observed (at 617H):

"It seems to me that it should be more difficult to persuade the court to exercise its discretion in leasehold than in freehold cases. In the latter the court is relaxing in favour of a freeholder's own land restrictions entered into for the benefit of persons owning other land. In the former the land in question is the property of the covenantee who prima facie is entitled to preserve the character of his reversion."

Russell LJ agreed, adding that in the case of leasehold land "the freeholder is directly interested in the land in question as owner of the reversion" (at 619F).

However, it does not seem that this means that there is a different, higher, test, to be applied in the case of restrictive covenants in leases. Rather, the point is that, unlike a freehold neighbour, who only has an interest in a distinct piece of land, the landlord has an interest in the same piece of land, and so has an interest capable of being affected by the discharge of the covenant which is different in nature from the interest of a mere neighbouring freeholder. 

As explained by the Upper Tribunal recently in Shaviram Normandy Limited v Basingstoke and Deane Borough Council [2019] UKUT 256 (LC) (at [16]), no separate conditions need to be satisfied in the case of leasehold covenants.

“The nature of an objector's interest is always a relevant consideration in an application under section 84(1), all of which turn on their own facts and on the impact which the proposed modification or discharge will have on the enjoyment by others of their own property. While the landlord of an extensive estate whose reversion will come in hand in the short or medium term has obvious estate management concerns to protect, we do not see why, in principle, the interest of a landlord should necessarily be more deserving of protection than that of a neighbouring owner or other person having the benefit of a restriction. It will all depend on the facts, and on the practical consequences of the suggested change.”

So, in the case of leasehold covenants, there is not a different legal test, and nor is there some kind of presumption in the landlord’s favour. Rather, there is the specific factual matter of the existence of the reversionary interest to take into account when applying the same test, a matter which is not present in freehold cases. Whether that in fact presents a barrier to the proposed modification will depend upon the factual details regarding the reversion. 

Factors in leasehold cases

The existence of the landlord’s reversionary interest is of course itself something which has distinct elements, which will be different in different leasehold cases. In Shaviram the Tribunal noted that in the case of leasehold covenants it will be necessary to consider the impact of the proposed modification in the light of the following factors:

(a)   the length of the unexpired term;

(b)  the rent;

(c)   the tenant’s other obligations; and

(d)  the extent of the landlord's interests in neighbouring land.

 These factors are potentially relevant at two stages:

(a)   when the applicant seeks to satisfy one or other of the grounds (a), (aa), or (c); and

(b)  if one of the grounds is satisfied, when the Tribunal is deciding how to exercise the discretion conferred on it if one or more of the grounds is satisfied. 

However, in Shaviram at [17] the Tribunal sounded a warning note any landlords who might hope that having a policy of wanting to preserve the character of their reversions will enable it to persuade the Tribunal against exercising its discretion, when that discretion has already been triggered by satisfaction of one of the grounds.

“Those factors will all be weighed up in addressing the statutory grounds of application before any question of discretion arises. If one of the statutory grounds is established the Tribunal will acquire jurisdiction and will then have to consider whether and how to exercise it. We would expect it to be an unusual case in which a landlord's preference for preserving the character of its reversion justified refusal on a discretionary basis when the considerations underpinning that preference had not been judged strong enough to defeat the claim on substantive grounds.”

So, for example, in a ground (aa) case, and landlord who, despite invoking its reversionary interest, fails to demonstrate that the covenant secures to it any practical benefits of substantial value or advantage, it unlikely to be able to persuade the Tribunal against exercising its discretion in reliance on that same reversionary interest. 

What is of practical benefit to a landlord?

What does it take for a given restriction to be of practical benefit to a landlord, for these purposes, or for it to have ceased to have such benefit if it once had it?

The first point to note is that the burden is on the applicant to satisfy the Tribunal that the covenant does not secure practical benefits of substantial value or advantage (Shaviram at [113]).

However, as is well established in the case of freehold covenants, the mere existence of a restriction cannot, in itself, be a practical benefit. As explained in Re Diggens' Application (No.2) [2001] 2 EGLR 163, at [67]:

“A practical benefit is secured by a restriction when it flows directly from the observance of that restriction.”

The ransom value of the covenant does not qualify, because it arises not from the observance of the restriction, but from its discharge. 

However, the question of whether a practical benefit is secured does not turn upon any comparison of the impacts on the landlord and tenant respectively. In Shephard v Turner [2006] P & CR 28 at [21], Carnwath LJ explained:

“The "substantiality" of the benefits, as I understand paragraph (aa), is to be judged by their practical value to the covenantee, not by comparison with the importance of the proposed development to the applicant.”

Impact on the reversion

Often the landlord’s primary objection will be based upon the alleged impact of the respective observation, and discharge, of the covenant, on the value of the its reversion. In Shaviram (at [62]) the Tribunal cites the above passage from Re Diggens' Application, and concludes that the correct comparison for these purposes is between:

(a)   the proposed use; and

(b)  the current covenanted position

If the diminution in that value which would be caused by the relaxation of the restriction is substantial, that is likely to mean that the covenant confers a practical benefit of substantial value on the landlord, in which case ground (aa) will not be satisfied unless the public interest test can be passed instead. On the other hand, if the impact of the relaxation of the covenant – and of the implementation of the tenant’s proposed project – would in fact be value-neutral, or would even enhance the value of the landlord’s reversion, then this element of the ground (aa) test may well be satisfied.   

However, it is important to note that while a landlord’s primary, and best, point will often be the potential impact on the value of its interest in reversion expectant upon the determination of the tenancy, the fact that the landlord owns other land can also be important in landlord and tenant cases (as it always is in freehold cases), and may sometimes prove to be the decisive point, even if no damage to the reversion can be established.

Impact on landlord’s interests other than in the reversion?

What kinds of impacts, on which kinds of interests (other than the landlord’s reversion), can count in a landlord and tenant s.84 case? As explained in Shaviram at [101]:

“The assessment is not restricted to benefits of a particular type, such as the protection of land, or benefits measurable in money, but must be conducted on a wide-ranging basis.”

One factor often invoked by landlords (just as by freehold neighbours) is the “thin end of the wedge” argument. This can apply in landlord and tenant cases, as it can in “building scheme” cases (Re Hextall's Application (1998) 79 P & CR 382, at 391). 

The landlord will often rely upon “estate management” arguments, which may or may not overlap with the thin end of the wedge argument. A very important factor in this context is the purpose for which the restriction was imposed. A correct appreciation of that purpose can sometimes itself help establish substantial benefit. In Shaviram at [108] the Tribunal accepted the landlord’s submission that:

“[…] in principle a covenantor which has imposed restrictions for a particular purpose, whether commercial or not, may rely on the achievement of that purpose as a benefit derived from the maintenance of the restrictions.”

The impact on the landlord’s wider estate need not be quantifiable impacts on its wider reversionary value. As was common ground in Shaviram, practical benefits need not be measurable in purely financial terms to be relevant (at [109]). Impacts on “the physical and social fabric of the neighbourhood” can also be relevant, both to private landowners and ones with a public status. For both kind of landlord, on the right facts, the “prosperity and amenity of the wider neighbourhood in which their land is situated” can be regarded as practical benefits for these purposes (Shaviram [108]).

Restrictive?

The s.84 jurisdiction only applies to covenants which are restrictions “as to the user thereof or the building thereon” (s.84(1)). There is no jurisdiction under the section to modify other kinds of covenant. In the leasehold context, this distinction can prove problematic for the applicant, because a lease may well contain, as well as restrictions on use, or alterations comprising building works, other covenant which restrict the tenant’s ability to carry out the project involving the proposed alterations and/or change of use. 

For example, in Shaviram the tenant wanted to reconfigure an office building as residential apartments. As well as the covenant restricting the tenant to office use, there was also a covenant requiring that every subletting of part of the building be on terms, including a full market rent, approved in advance by the landlord. The tenant argued that this requirement would be obsolete in the case of multiple assured shorthold tenancies. The Tribunal held that that it did not have jurisdiction to discharge or modify this covenant, because such a covenant was not a restriction “as to the user” of the land. 

The important point here is that in any given long lease there will be an overlapping set of restrictions and controls imposed on the tenant, some of which may get in the way of the tenant’s proposed change of use (or alterations) despite not themselves being framed as restrictions on use as such (or restrictions on building). In such circumstances, the tenant may find that a successful application is a pyrrhic victory, as it will not be able to implement its desired project even if modification or discharge is granted. So, when advising tenants, all the potential impediments to the project in the lease will have to be carefully analysed, to ensure that all the problematic covenants do in fact fall within the s.84 jurisdiction.  If not, a different approach may be required. 

This article is published in the Woodfall Landlord and Tenant Law Review