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Unlocking value in leasehold land

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21/01/2016

Discharging or modifying restrictions

It is widely known that The Upper Tribunal has jurisdiction to discharge or modify freehold restrictive covenants in accordance with section 84 of the Law of Property Act 1925 (LPA 1925). The relevant parts of that section state:

The Lands Tribunal shall (without prejudice to the concurrent jurisdiction of the court) have power from time to time, on the application of any person interested in any freehold land affected by any restriction arising under covenant or otherwise as to the use thereof or the building thereon, by order wholly or partially to discharge or modify any restriction.”

The applicant has to show one or more of the four grounds which justify modification or discharge, with those being that the covenant is obsolete; the covenant impedes some reasonable use of the land; the beneficiaries expressly or impliedly agree; and/or that no injury will be caused.

Jurisdiction extends to leasehold land

However, it is often over looked that this jurisdiction extends to leasehold land by virtue of Section 84(12) LPA 1925 which provides that:

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 the leasehold land in like manner as it would have applied had the land been freehold…“.

The power only covers restrictions and therefore careful consideration must be given as to whether the covenant in question is truly restrictive. It also bears noting that restrictions may be contained in the lease itself, a separate agreement, supplemental deed or even a covenant affecting the freehold title and where the covenant is noted on the leasehold title.

The power of the Upper Tribunal to modify or discharge a restriction is discretionary. Therefore, even where one or more of the grounds are made out, the Upper Tribunal still has to consider whether to exercise its power but, generally speaking, where an applicant makes out its ground(s), the application will be granted.

Practical Application

There are a number of cases where tenants have applied to the Upper Tribunal for the relaxation of leasehold covenants and where such applications have been successful. This remedy can be of real assistance where a tenant has a lease with a restrictive user covenant and where there is an alternative more valuable use to which the property might be put, but which is restricted by the covenant. A common example would be where a landlord refuses to agree to vary the covenant or alternatively demands payment of a substantial premium for doing so. In those circumstances, a well advised tenant would look at the merits of an application under section 84 (12) LPA 1925.

When looking at any such application it is important to consider the nature of the landlord’s objection and whether the landlord owns neighbouring property or whether the restrictions form part of a leasehold scheme of local law. There may well be legitimate and good reasons why a landlord might want to use the covenant to exert control and to restrict uses that it may deem undesirable.

Importantly, however, the ability to extract financial gain from the enforcement of a leasehold covenant will not provide the landlord with a good reason to oppose the application and indeed any attempt by the landlord to extract money would be strong evidence that control was being exercised unreasonably. Where control is exercised unreasonably the Tribunal has not hesitated to grant relief. In cases where the landlord has no neighbouring property then questions of control and estate management would not apply as strongly and an applicant may find it easier to make out its claim.

The terms of section 84(12) LPA 1925 ought to be of interest to any tenant with a long lease containing a restrictive covenant that impedes some alternative use. In our experience, the terms of this provision can provide tenants with a powerful weapon when seeking to unlock value by modifying or discharging restrictive covenants affecting their leasehold interest.

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