Variation to an office lease to allow use as a private members’ club

The Upper Tribunal has allowed a variation to a lease that restricted the use of a property to office use (with minor residential use) so that the tenant could implement a planning permission to convert the property into a private members’ club.

Background

A user clause in a lease is a restrictive covenant.  If the lease is for a term of more than 40 years and more than 25 years of the term have elapsed, the tenant may apply to the Upper Tribunal for a release or variation of the restrictive covenant under section 84 of the Law of Property Act 1925.

The Upper Tribunal has the power to release or vary a covenant on a number of grounds.  The key ones are:

• if it considers that by reason of changes in the character of the property or the neighbourhood or other circumstances that it may deem material, the restriction ought to be deemed obsolete; or
• if the continued existence of the covenant would impede some reasonable user of the land for public or private purposes or would do so unless modified.  In this case, the Upper Tribunal must be satisfied that the restriction does not confer any practical benefits of substantial value or advantage to the person benefiting from the covenant or is contrary to the public interest and, in either case, be satisfied that money will be adequate compensation for the loss or disadvantage that would be suffered from the release or variation of the covenant.

Facts

Berkeley Square Investments Ltd is the tenant of premises in Berkeley Square, Mayfair, London under a lease for a term of 92 years from 20 August 1978. The tenant had obtained planning permission to change the use of the property to a private members’ club. However, the user covenant in the lease restricted the use of the property to an office, with a small element of residential use.  The freeholder, Berkeley Square Holdings Ltd, was unwilling to consent to a change of use under the terms of the lease. The tenant therefore applied for a variation of the restrictive covenant under section 84 of the Law of Property Act 1925.

Decision

The Judge  considered that there were no “special criteria” that applied to applications to vary leasehold covenants.  He said, “Each case is factually highly sensitive, and that careful attention must be paid to the particular circumstances of the case, regard being had to the length and nature of the landlord’s reversion.  The principal focus must be on the statutory grounds, and whether the applicant has satisfied us, on the balance of probabilities, that one or more grounds for modification have been made out.”

The Judge had first to consider whether the covenant was obsolete.  The property was an 18^th Century Grade I listed building in an area with similar buildings, some of which were used as offices and some as other private members’ clubs.  Although demand for office properties of the size and kind as the property was limited it was not non-existent.  The tenant had made no attempt to market the property as offices.  The judge therefore reached the view that it would be wholly wrong to deem the restriction to be obsolete.

The Judge next considered whether the proposed use as a private members’ club was a reasonable use of the land for public or private purposes and whether retaining the restriction on use secured practical benefits to the freeholder of substantial value or advantage.

The Judge had little difficulty in concluding that the proposed use of the property as a private members’ club was a reasonable user of the land for private purposes, given that there were other private members’ clubs in the area and that planning permission for the use of the property for the proposed use had been granted.

The main point of dispute was whether the current restrictions on use in the lease conferred practical benefits to the freeholder of substantial value or advantage.

The freeholder argued that the restriction on use in the lease fulfilled an important function in the implementation of its estate management policy.  If the restriction were to be modified that would be to the detriment of the freeholder’s estate as a whole and Berkeley Square in particular.  The restriction therefore, it said, conferred practical benefits of substantial advantage.

Whilst the judge was satisfied that the restrictions in the lease provided the freeholder with the practical benefit of being able to exercise control over and manage its estate, he was not satisfied that the restriction conferred benefits of substantial advantage.

To an outsider, it was difficult to identify the extent of the freeholder’s estate. It was a portfolio of diverse properties whose one common characteristic was their location within a relatively close geographic area.  In truth, the freeholder’s estate defined itself not by any physical demarcation or by any commonalty of design but by the fact that its component properties had a common owner.  The freeholder, therefore, had an uphill task to persuade the Tribunal that there was any real practical benefit in enforcing the restriction to office use in a lease that did not expire until 2070.  Any benefit there may be was of nebulous value or advantage.  Accordingly, the Judge allowed the variation of the restriction on use.

Comment

Many long leases of offices will have been granted in previous years where the age and location of the properties now means that, even if they could still be used as offices, they may be better used for other purposes such as residential properties, hotels or clubs.  In this case, as in an earlier case of Shaviram Normandy Ltd v Basingstoke & Deane Borough Council (see our article here), the Upper Tribunal has shown flexibility in allowing changes to the user clause in a lease to accommodate the tenants’ proposed uses of the property.

Berkeley Square Investments Ltd v Berkeley Square Holdings Ltd [2019] UKUT 384 (LC)