Welcome to the fourth of our RED Alerts of 2023.
Also featuring in this month's update:
Great Jackson Street Estates Limited v Manchester City Council [2023] UKUT 189 (LC), Application to discharge/modify restrictive covenants
Summary
The Upper Tribunal (Lands Chamber) considered an application by the long leaseholder of two redundant warehouses (the Warehouses) to modify/discharge restrictive covenants that prevented its development into two 56 storey tower blocks containing 1037 flats.
The facts
The Warehouses were situated in an area in Manchester which was the subject of significant residential development. Indeed Manchester City Council (the Council) had identified the Warehouses as appropriate for such development in its Masterplan and had even granted planning permission as the local authority.
The Freeholder of the Warehouse was in fact the Council. The applicant enjoyed a lease of the Warehouses granted in 1973 for 99 years and then extended subsequently resulting in an expiry date of September 2083. There were, therefore, 61 years left to run.
The lease had various restrictive covenants that prevented the proposed development. Pursuant to s84 of the Law of Property Act 1925 (s84), a lessee may apply for discharge/modification of the restrictive covenants if the lease was granted for 40 years or more and at least 25 have expired. There was no issue in this case that this applied.
Consequently, the long leaseholder applied for discharge (but then modification) of the restrictive covenants on the following grounds in accordance with the subsections of s84:
- ground (a): that by reason of changes in the character of the property, or the neighbourhood, or other circumstances of the case the restrictions ought to be deemed “obsolete"
- ground (aa): that the proposal is a reasonable use of the land and its completion will cause the landlord no substantial loss or disadvantage
- ground (c): that the objector will not be injured by the proposed modification.
The decisions
The Tribunal set out the correct approach in the consideration of the provisions. Firstly, it had to decide whether any of the grounds were satisfied. If they were so satisfied, the Tribunal then had to consider whether or not to exercise its discretion to modify or discharge. In those circumstances, the Tribunal expressed surprise that they were not provided with the full picture of the commercial negotiations between the parties so they could not consider whether or not either party was being unreasonable in their approach and whether that would justify the exercise of their discretion.
In any event, the Tribunal considered the following:
- ground (a): that by reason of changes in the character of the property, or the neighbourhood, or other circumstances of the case the restrictions ought to be deemed “obsolete".
There was no doubt that the character of the neighbourhood had changed and that the entire zone (as set out in the Council's Masterplan) was earmarked for residential development. However, the real question was whether the restrictions were "obsolete" ie served no useful purpose. The Tribunal confirmed that it needed to consider "the extent to which that change renders the original purpose of the covenant incapable of achievement."
Given there was no evidence on the parties' respective positions, it was not possible to determine whether the enforcement of the restrictions was being pursued unreasonably. Consequently, the restrictions gave the Council a mechanism to control the development of its land which would affect it reversionary interest. For that reason, it was not possible to say that the restrictions were obsolete – they still served a useful purpose. For that reason, the applicant failed on ground (a).
- ground (aa): that the proposal is a reasonable use of the land and its completion will cause the landlord no substantial loss or disadvantage.
Given the grant of planning permission, there was no doubt that the Applicant's proposed development was a reasonable use of the land. However, the Tribunal had to continue to consider whether it would cause the Council no substantial loss or disadvantage. Given the enhanced value of the reversionary interests, the Tribunal considered that there was a real advantage to the Council of the development proceeding. However, it then evaluated the non-pecuniary aspects. In that respect, the Tribunal noted : "The Council is using the covenants for their intended purpose, namely, to afford it a significant degree of control over the development of the Site." For that reason, the Applicant failed also on this ground.
- 3. ground (c): that the objector will not be injured by the proposed modification.
Given its finding on the above grounds, the Tribunal held that the loss of control would amount to injury for the purposes of this ground and so the Applicant failed.
Judgment on discretion
Although the Applicant failed on all of the jurisdictional grounds, the Tribunal continued to consider whether or not it would have exercised its discretion in the Applicant's favour. Given this was a decision of a local authority seeking to protect its personal property rights alongside its statutory role, the Tribunal stated clearly that they would not have exercised its discretion to allow the modification of the covenants.
Our comments
These applications are always difficult but it seemed clear that this particular application was brought to improve the negotiating position of the Applicant. Given agreements had been reached between the Council and other developers, the Tribunal seemed swayed by the notion that they should not improve the bargaining position of one party over the other. The Tribunal was also unimpressed with the evidence given by the Applicant which seemed "combative" and this may have influenced the Tribunal in thinking that this may have been the approach adopted in the negotiations that had been conducted previously.
