Real Estate Focus – October 2023

How watertight are restrictions in leases?

It is (reasonably) common knowledge that the Upper Tribunal has power under section 84 Law of Property Act 1925 to discharge or modify a restriction on the use of, or building on, freehold land provided one of the grounds in that section is made out. It is perhaps less well known that this jurisdiction also extends to restrictions in leases, once 25 years of a lease term of over 40 years have expired.

Examples of the latter jurisdiction being exercised are rare. However, in Shaviram Normandy Ltd v Basingstoke and Deane BC [2019] UKUT 256 (LC), a tenant under a lease of a dilapidated office building, who had been refused consent from its landlord to convert the building into flats, made a successful application under section 84, with the Tribunal directing that the user clause in the lease be modified by the addition of the words “or as a residential building comprising 114 flats”.

The tenant was less successful in Great Jackson Estates Limited v Manchester City Council [2023] UKUT 189 (LC). A long lease of two redundant warehouses contained a series of covenants preventing redevelopment without the consent of the local council as landlord. The tenant sought consent to demolish the warehouses and replace them with two residential tower blocks. The request was contained in a letter before action threatening that, in the absence of a positive response, proceedings for the discharge of the restriction under section 84 would be commenced.

The landlord was willing to consent to the redevelopment but only on terms which the tenant considered unacceptable. It therefore applied to the Tribunal for the modification or discharge of the offending restrictions on three grounds. The tenant argued that:

• The restrictions ought to be deemed obsolete. The Tribunal found that the touchstone of obsolescence was whether the object of the covenant was still capable of fulfilment and in this case it was: the leasehold covenants allowed the council as landlord a further opportunity to control use of the site, over and above the control afforded through the statutory planning process.
• The restrictions prevented a reasonable use of the land and did not secure to the landlord any practical benefits of substantial value or advantage. The Tribunal disagreed. The restrictions prevented the development going ahead unless the tenant satisfied the landlord’s concerns and this control was a substantial advantage.
• The proposed discharge or modification would not injure the persons entitled to the benefit of the restriction. Again, the Tribunal disagreed: injury would be caused to the council as landlord as it would lose the practical control which it currently enjoyed over the redevelopment of the site.

As the tenant failed on each ground, the Tribunal was not required to exercise its discretion as to whether or not to discharge or modify. Interestingly, however, it  commented that, had it been required to do so, “the Tribunal should be ..slow to interfere with a local authority which seeks to use its private rights as landlord to promote its strategic development plan and to ensure that a desired development takes place. We would also be reluctant to use the Tribunal’s discretionary power in a manner which would be liable to disrupt continuing negotiations between a local authority and a commercial developer, both of whom are well able to protect their own interests”.

Business leases: challenging the right to renew

Tenants occupying premises for the purpose of their business are entitled to a new lease on the termination of their existing lease unless the latter is “contracted out” of the security of tenure regime contained in the Landlord and Tenant Act 1954.

Disagreements between landlords and tenants on the right to renew are all too common, as evidenced by the wealth of caselaw on the topic. Gill (as Trustee of the Gillcrest UK Pension Scheme) v Lees News Limited [2023] EWCA Civ 1178 is a case in point.

The grounds on which a landlord may oppose a tenant’s application for a new tenancy are set out in section 30(1) of the 1954 Act. The landlord in this case argued that the tenant “ought not to be granted a new tenancy” on three of the statutory grounds:

(a) The tenant’s failure to comply with its obligations in the lease to repair and maintain the premises. The premises were found by the lower court to be in substantial disrepair on the date that the landlord served its counter-notice opposing renewal, but this had been remedied by the date of the hearing.

(b) The tenant’s persistent delay in paying rent. The lower court concluded that the delay in payment of rent was minor and would not recur.

(c) Other substantial breaches of the tenant’s obligations under the tenancy or for any other reason connected with the tenant’s use or management of the premises. Again, the lower court found that there were other breaches of covenant but they too were minor.

The lower court concluded that the landlord had not established that the tenant “ought not to be granted a new tenancy”, ordering that one be granted.

The landlord appealed. The two specific issues before the Court of Appeal were:

• By reference to what date or dates must the grounds be established? The Court of Appeal held that, insofar as grounds (a), (b) and (c) are concerned, the court was not confined to considering the position as at a specific date, without regard to the tenant’s overall behaviour. For example, if the court is invited to consider whether there is a persistent delay in payment of rent, it is entitled to survey the tenant’s overall performance in this respect.
• What is the scope of the value judgment that is implicit in the phrase “the tenant ought not to be granted a new tenancy”? The Court of Appeal held that a compartmentalised approach should not be followed as this could lead to unjust results. As an example, a tenant could breach numerous covenants which, if viewed separately, might not mean that he should be denied a new tenancy. But if taken collectively, the totality of the breaches could be of such significance as to make it obviously unfair to compel the landlord to re-enter into legal relations with the tenant.

The Court of Appeal dismissed the landlord’s appeal. The judge in the lower court had appreciated that the overall question was whether it was fair to the landlord to require him to re-enter into a legal relationship with the tenant, having regard to the tenant’s past behaviour, concluding that it was.

The case provides welcome guidance for the courts, landlords and tenants when considering these grounds of opposition, particularly in relation to the compartmentalised approach: “In my judgment, [that] approach should no longer be followed and to do the trial judge justice, in this case he considered the grounds of opposition both singly and cumulatively. That was entirely the correct approach.”

Real Estate Podcast - The Building Safety Act 2022: Remediation Orders

Welcome to our Real Estate Podcast series, where we explore the themes and trends that our clients are facing in today’s fast changing real estate market.

This Podcast features David Stevens, Partner in our Real Estate Litigation team and Amy Armitage, Counsel in our contentious Construction team.  In their first Podcast on the Building Safety Act 2022, David and Amy explored the complex issue of who pays for the replacement of defective cladding in residential high-rise buildings. On this occasion they consider what has changed since then, with a particular focus on Remediation Orders.

Listen

Bite-size updates

• In February this year we reported on the long-awaited Supreme Court decision in Fearn and others v Board of the Trustees of the Tate Gallery [2023 UKSC 4] in which it was held that the fact that visitors to the Tate Modern public viewing gallery can see straight into the interior of neighbouring flats with floor to ceiling windows amounted to an actionable private nuisance. 
  
  The Supreme Court commented that, if the parties could not agree on an appropriate remedy  between themselves, the case should be remitted to the High Court to do so. It was reported earlier this month that a mutually acceptable solution has now been agreed, with Tate Modern undertaking that the viewing platform will not be operated in a way which causes nuisance.
• Biodiversity Net Gain (BNG) is a concept that aims to leave the natural environment in a measurably better state than it was before development by delivering improvements through habitat creation and enhancement and avoiding or mitigating harm as far as possible. It requires a biodiversity gain plan to be approved by the local planning authority before development can lawfully commence and approval may only be given if the biodiversity value of the proposed development exceeds the pre-development biodiversity value by at least 10%. 
  
  In our August 2023 Real Estate Focus we reported that The Environment Act 2021 makes BNG mandatory for developers from November 2023 in relation to most major developments, from April 2024 for “small sites” (as defined), and from November 2025 for nationally significant infrastructure projects. 
  
  The UK government has since announced that mandatory BNG will no longer start to be implemented this year, with the November deadline postponed until January 2024.
• In our September 2023 Real Estate Focus, we reported on speculation that the Renters (Reform) Bill, which includes controversial proposals to abolish section 21 ‘no fault’ evictions, might have been “put on ice” due to the complete lack of progress since it was introduced to Parliament on 17 May 2023. However, since then, the Bill has had a seemingly last-minute second reading in the House of Commons, so it is once again moving forward.