Overcoming a restriction on use in a lease

The Upper Chamber (Lands Tribunal) has permitted a lease variation to allow residential use of premises alongside the office use originally permitted.

Restrictive covenants that no longer serve a useful purpose can be released or varied by the Upper Chamber using the procedure set out in section 84 of the Law of Property Act 1925. The procedure is usually used to release covenants that restrict the use of freehold land.

However, section 84 applies more widely. The Upper Chamber has the power to release or vary restrictions contained in a lease on the application of the tenant. There is one qualification to this power. The lease must have originally been granted for a term exceeding 40 years and more than 25 years of the term must have expired.

Facts

In Shaviram Normandy Limited v Basingstoke and Deane Borough Council, the Council was the freeholder of an office building, Normandy House, in Basingstoke. The building was let in 1985 for a term of 150 years and the use permitted was as an office building. The Council were entitled to receive a proportion of the rental income received from underlettings of the building.

The building was vacant and in disrepair. The tenant, Shaviram, wanted to redevelop the building as a residential apartment block with 114 residential flats, to be let on assured shorthold tenancies at open market rents.

The conversion of the building from office to residential use had been discussed previously with the Council in its capacity as the local planning authority. For planning purposes, the change of use was permitted under Class O of the Town and Country Planning (General Permitted Development) (England) Order 2015 without the grant of planning permission.

However, although residential use would be permitted under planning law, it would still be in breach of the restriction on use in the lease. Wearing its landlord’s hat, the Council refused consent to change of use under the lease. Shaviram therefore applied to the Upper Tribunal to vary the restriction on use in the lease.

Decision

The Upper Tribunal allowed Shaviram’s application. It concluded that the restriction in the lease impeded the reasonable use of the building for residential purposes and the restriction on use conferred no practical benefit of substantial value on the Council.

In reaching its decision the Upper Tribunal took into account the development plan and the pattern for the grant or refusal of planning permission in the area.

In deciding whether the covenant conferred any practical benefit, the Upper Tribunal looked closely at the experts’ opinions of the estimated capital value of the building and the rental income that could be received depending on whether its use was as offices or for residential purposes.

Having analysed the figures, it concluded that the capital value of the building would be increased if used for residential purposes but would produce a slightly lower rental figure. As the capital value was the more important consideration, the Upper Tribunal concluded that the restriction requiring office use did not confer a practical benefit on the Council.

The Upper Tribunal also considered whether the restriction on use conferred a wider benefit for the Council. Looking at the evidence as a whole, it rejected the Council's case that restricting the use of Normandy House to offices would make a significant contribution to the economic wellbeing of the town. It rejected an argument by the Council that allowing residential use would be the thin end of the wedge encouraging further changes of use under leases of office buildings owned by the Council.

Consent to underletting

Shaviram also asked the Upper Tribunal to vary a restriction in the lease that required the Council to consent to the terms of each underletting. Given the terms of the lease and the Council’s right to receive a proportion of the rental income from the building, the Upper Tribunal concluded that this restriction still conferred a practical benefit on the Council. The restriction on underletting would not, therefore, be varied.

Conclusion

Although it does not establish any new law, the Shaviram case is a useful reminder that the powers of the Upper Tribunal to release or vary restrictive covenants extend to some leases as well as to freehold land.

The prospects of being able to vary a restriction in a lease will be fact specific, taking into account the location of the building, the development plan and planning history of the area, the effect of any change of use on the capital and income values of the building and the impact on the landlord’s interest in other properties in the area. If you have a long lease and want to change the permitted use, an application to the Upper Tribunal may be the solution where the landlord is unwilling to consent to that change.

Shaviram Normandy Limited v Basingstoke and Deane Borough Council [2019] UKUT 256.