Welcome to the second edition of RED Alert of 2024.

Also featuring in this month's update:

• Adverse possession: the need for speed.
• Minorities prevail over majorities: savage family fall-out.
• Party Walls: who should pay for pre-existing damage?

Blackhorse Investments (Borough) Limited v The Mayor and Burgesses of the London Borough of Southwark [2024] UKUT 33 (LC), 2024 WL 00410085

Modification of Restrictive Covenants in a Long Lease

Summary

The Upper Tribunal (Lands Tribunal) reviewed its own decision to modify restrictive covenants in a lease and decided its original decision was wrong.

The facts

This case concerned a 2 storey building which formerly comprised of a public house on the ground floor and residential premises above. There was also some surrounding land. The freehold interest was owned by Southwark Borough Council (Southwark) and the leasehold interest by Blackhorse Investments (Blackhorse). The lease was granted for a term of 99 years from 1966 (the Lease).

The pub business failed and closed in 2019. Despite Blackhorse's efforts to find another pub tenant, there was no interest.

On 29 May 2020, Southwark, in its capacity as local planning authority and not as Blackhorse's landlord, granted planning permission for the demolition of the pub and a new building comprising of 6 storeys with a pub/commercial premises on the ground floor and residential flats above.

However, in order for the planning permission to be implemented, there needed to be modifications to the Lease to prevent any breach of lease covenants by Blackhorse. An application was therefore made to the Tribunal on 9 September 2021 under section 84 of the Law of Property Act 1925 (the Section 84 Application).

Section 84 of the Law of Property Act 1925.

This provision is more commonly seen in respect of freehold land which is burdened by restrictive covenants which benefit other land. However, it is equally applicable to leasehold land provided:

• the original lease was granted for 40 years or more
• at least 25 years of the original lease have already expired.

The Lease satisfied these conditions and so it was open to Blackhorse to apply for modification of the leasehold covenants.

However, covenants can only be modified if they are negative or restrictive in nature and relate to user. There is no jurisdiction to modify positive covenants. There are various grounds that may be relied upon including that the covenant is obsolete or impedes a reasonable user of land. 

However, this case concerned the process and whether or not the covenants were negative or positive in nature.

The Lease covenants

The lease covenants which needed to be modified to allow the development to proceed were as follows:

• Clause 3(i) stated:
  ”Not to assign any part or parts (as opposed to the whole) of the demised premises and not without the previous written consent of the Lessor to assign the whole or to underlet (other than by way of mortgage) or part with possession of the demised premises or any part thereof PROVIDED that the consent of the Lessor shall not be required to the underletting of the demised premises for a term not extending three years”.
• Clause 3(k) restricted against cutting or maiming timbers or other structural parts of the demised premises or making external alterations or alterations to the internal arrangement of counters and serving hatches.
• Clause 3(n) stated:
  ”So long as the requisite licences could be obtained to use the demised premises or cause or permit the same to be used as a licensed victualling house only and keep the same open as such during all lawful hours and conduct or cause to be conducted the business thereof in a lawful and orderly manner and so as to preserve or cause to be preserved the character of the said premises with the licensing authorities and the public”.
• 3(o) the tenant covenanted at all times to use its best endeavours to obtain a renewal or transfer of all licences authorising the sale and consumption of alcohol on or off the demised premises, and if the licence was refused, to appeal against the refusal.
• 3(p) the Lessee covenanted that for as long as the premises were licensed for the sale of alcohol it would use them as a “bona fide refreshment house” which was to be managed in a manner described in eight detailed sub-clauses covering more than 2 pages of text. These included a requirement that all food and alcoholic drinks served to the public were to be “of good quality and unadulterated”, and others concerning furnishing the premises appropriately, employing an experienced manager……

The decisions

The solicitor acting for Blackhorse personally delivered a copy of the Section 84 Application to Southwark at the address shown in their title at the Land Registry. Unfortunately, it seems that the papers were lost and never came to the attention of the Property department.

As a result, Southwark did not object to the Section 84 Application and so it was dealt with on paper without a hearing. The covenants were duly modified by an order dated 24 February 2022 (the Order) following which the demolition and re-building works went ahead. The residential apartments were duly let on new subleases.

On 1 November 2023, Southwark applied to have the Order set aside and for an extension of time to object to the application on the following grounds:

• that Blackhorse's Section 84 Application was not properly served
• the Tribunal had been misled by Blackhorse's Section 84 Application
• the Order "lacked coherence"
• the Order varied positive covenants or did not relate to user which could not be modified by section 84.

The Tribunal rejected all these grounds except for the last ground. It accepted the following:

• 3(i) – a restriction on assigning part of the land was not a restriction as to user
• 3(o) – the obligation to obtain a licence was a positive covenant
• 3(p) – to requirement to operate as a "refreshment house" was a positive covenant

and so could not be modified pursuant to s84.

No point was taken by Southwark in relation to clause 3(k) which restricted alterations which could be modified. The Tribunal also amended the modification to clause 3(n) to the extent it restricted the use to "a licensed victualling house only."

Our comments

The reality of the outcome of the decision is that Blackhorse could continue operating the premises as developed. As the Judge said, "The Tribunal’s order will then properly reflect the parties’ rights as they have been since the order of 24 February 2022 was made." Perhaps a missed opportunity for Southwark but this can only be attributed to the fact that the Section 84 Application was lost internally. In any event, the premises are clearly being better utilised as developed.