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02 Jan 2020

A new lease of life - Why a restrictive covenant in a lease may not be the end of the matter

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Ripe for development

You’re a property fund manager looking to unlock value from your portfolio. Amongst your assets you have an office block which you hold on a long lease. The block has performed well, but the occupational tenant has just vacated and the building is in need of a complete refurbishment. Thinking outside the box, you see that the value of the building would be enhanced if it was let for residential rather than commercial use. In high spirits you dig out the papers to see if there are any obstacles that need to be overcome before you set off to discuss your plan with your lawyer.

Leasehold issue

There’s nothing on the freehold title to prevent residential use and, for planning purposes, the property is located in an area where residential use is permitted. So far, so good. 

Then you look at the lease. The lease was granted decades ago, back in the early 90’s for a term of 150 years and you’ve had very little to do with your landlord since. But when you look at the permitted use it’s very clear; the property can only be used as offices. So that’s that you think – unless you go to the landlord on bended knee and then the landlord’s bound to either demand a ransom or refuse consent. Lease covenants are set in stone so there’s nothing you can do…or are they?

Modification - freehold

It’s fairly well known that if restrictive covenants affect freehold property you can apply to the Upper Tribunal of the Lands Chamber for the covenants to be modified or discharged in certain circumstances. Those circumstances include where it can be shown that the covenants in question prevent some reasonable use of the land and aren’t of any practical benefit or of substantial value to the person with the benefit of them. But that doesn’t seem to help here as we’re dealing with a lease and the restriction on use is in black and white.

Modification - leasehold

What it less well known is that those rights of discharge and modification apply equally to leasehold property, but only if the lease was granted for fixed term of 40 years or more and 25 years have expired. This can be a very valuable right and, in our scenario, could well mean that the residential development could go ahead with no or only a small amount of compensation being paid to the landlord. The courts would look closely at whether the landlord would suffer a material disadvantage, but recent case law suggests that they won’t infer that disadvantage lightly and that the courts are undoubtedly prepared to exercise their rights to modify in appropriate cases.

Moral

Even if you come across seemingly damning covenants in a long lease, there may be ways around them. Our expert team can guide you through the possibilities to make sure that you don’t miss out on valuable opportunities. 

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