Modifying restrictive covenants in the UK – A cautionary tale

What is this case about?

The case involves two warehouses on Great Jackson Street in Manchester and a tenant’s unsuccessful application to modify a series of restrictive covenants affecting the land, under s84 of the Law of Property Act 1925 (LPA). The covenants presented a significant block to the tenant who wished to demolish the warehouses and in their place build two 56-storey tower blocks containing 1037 flats, at a cost of £300 million. The case is of interest due to the Tribunal’s approach to the application and also as it offers a reminder that the power can be used to modify or discharge a leasehold (not just freehold) restrictive covenant. This case will be of interest to landlords, tenants, and developers alike.

The restrictive covenants

The restrictive covenants were contained in a lease of the two warehouses. In essence, the covenants restricted the tenant from changing the permitted use, limited general use and management of the site and also limited the tenant’s ability to erect a new building on the site or carry out certain works. In some instances, the covenants were qualified such that the tenant was able to proceed provided landlord’s consent was secured, such consent not to be unreasonably withheld.

The landlord, Manchester City Council, was only willing to grant consent on terms which the tenant was unwilling to accept – terms which were chiefly required to give the landlord powers to ensure the development was completed within a reasonable time.

The application

The tenant’s solution was to apply under s.84(1) of the LPA to modify the restrictive covenants. It relied on three grounds:

• Ground (a) - The restriction is obsolete.
• Ground (aa) - The restriction would impede some reasonable user of the land and does not secure to the Council any practical benefits of substantial value or advantage to it.
• Ground (c) - The Council would not be injured by the proposed modification.

Even if the applicant succeeded in showing that at least one of the grounds could be made out, the Tribunal would have an overall discretion as to whether to modify the restrictions or not.

The Tribunal’s conclusions

The application failed on each ground. Further, the Tribunal concluded that even if the tenant had satisfied the grounds, it would have refused the application, applying its overall discretion.

Its conclusions on each ground are set out below:

• Ground (a) – The applicant relied on the fact that the land was earmarked within the framework masterplan to become a new high quality residential neighbourhood, and many plots in the immediate neighbourhood had already been developed to deliver at least four substantial residential towers, with yet more in the pipeline. This, said the applicant, satisfied ground (a) as the original purpose of the covenants, to maintain the use of the land as warehouse/light industrial use, could no longer be fulfilled. The Tribunal disagreed. The object of the covenants in this case, the Tribunal stated, was to give the Council control over the form of any development and its delivery and timing. That purpose could still be fulfilled. Further, the Tribunal could see no evidence to suggest that the landlord was using the restrictions unreasonably or for its own selfish interests (i.e., to improve its bargaining position in negotiations) as argued by the tenant.
• Ground (aa) – The Tribunal concluded that the proposed use was reasonable, that the restrictions impeded the proposed use, and that if the restrictions were modified, the Council would not suffer any loss but would in fact be better off in monetary terms as the value of the Council’s reversion would go up. So far so good for the applicant. However, the Tribunal went on to conclude that the restrictions did secure a substantial non-monetary advantage to the Council. In particular, they allowed it to influence the form of the development and mitigate the risk that the land might not be developed in an orderly and timely way. So, the applicant failed at the last hurdle. The Tribunal also made it clear that considerations of practicality or "deliverability" should not be taken into account when assessing whether ground (aa) has been made out, although such considerations could be taken into account at a later stage if the grounds were established and the Tribunal considered whether to exercise its overall discretion.
• Ground (c) - It followed from the Tribunal’s conclusions in relation to grounds (a) and (aa) that injury would be caused to the landlord by modification of the restrictions since it would lose the practical control which it currently enjoys over the redevelopment of the land.

Key points

• Whilst more commonly associated with freehold restrictive covenants, the s.84 route to modify or discharge is available for leasehold covenants as well, provided that the conditions in s.84(12) are met, namely that the lease is for a term of more than 40 years and that over 25 years of the term have expired.
• When assessing whether a restriction is “obsolete” it is important to consider the original object or purpose of the restriction in wide terms.
• It is crucial to also appreciate that the remedy is discretionary. The Tribunal would not have modified the restriction even if one of the grounds had been established. In this case the Tribunal was reluctant to “interfere with a local authority which seeks to use its private rights as landlord to promote its strategic development plan”. Those seeking to make applications against local authorities need to bear this in mind.
• The applicant did not adduce any evidence of the negotiations or seek to argue that the Council was using the restrictions unreasonably. Evidence to that effect, if available, may have influenced the outcome.