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Restrictive Covenants in Long Leases

Shaviram Normandy Ltd v Basingstoke and Deane Borough Council [2019] UKUT 256 (LC), the Upper Tribunal (Lands Chambers).

What happened in this case?

Shaviram Normandy Ltd (Shaviram) was the tenant of a purpose-built office building let on a long headlease. The use was restricted to offices. The headlease did not include a rental figure, but entitled the landlord to 15.5% of the net annual rent received by the tenant from the office underleases. Shaviram was obliged to use its best endeavours to keep the building fully sublet. There was a restrictive covenant in the lease requiring the council's consent (as landlord) to the terms of any subletting. Shaviram wanted to convert the building into residential flats for let, and the council refused consent. Shavrim applied to the tribunal for a release or modification of the restrictive covenant.

What is a Restrictive Covenant?

A restrictive covenant is a term in a property contract which binds all owners and is negative in nature.

Section 84 of the Law of Property Act (Section 84) gives the tribunal power to remove or modify a restrictive covenant under limited circumstances.

What was Shaviram's case?

Shaviram argued that the council would receive a higher rent for the building and the value of its reversion would be greater if it was converted to residential use. Therefore, there was no practical benefit of substantial value in the restrictive covenant remaining.

What was the council's case?

The council argued that the restriction secured the substantial benefit of avoiding any weakening of its ability to rely on the office covenants in the headlease of other buildings. In effect, the council relied on a 'floodgates' argument.

What was decided?

Shaviram won, the tribunal decided that a restrictive covenant in a long lease, limiting the use to offices, could be modified under Section 84(1) of the Law of Property Act 1925 to allow residential use.

What have we learnt from this case?

Although the law isn't new, it is rarely used for long leases. This case is a healthy reminder that owners of property (leasehold or freehold) subject to restrictive covenants are not always 'stuck' with the terms. Specialist advice should be sought and any applications made to the tribunal before any work is carried out.

For more information contact Laura Hallett Lea in our Business Dispute Resolution department via email or phone on 0333 207 1141. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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