Modifying Restrictive Covenants

What is a Restrictive Covenant?

A restrictive covenant is a binding condition written into a property’s deeds or a contract by a seller to impose restriction on the land and to limit what one can do with that land under particular circumstances.

Can Restrictive Covenants be discharged or modified?

Section 84 of the Law of Property Act 1925 allows for the Upper Tribunal (Lands Chamber) (one of 4 chambers of the Upper Tribunal which settles legal disputes and is structured around particular areas of law) to have the power from time to time to discharge or modify restrictive covenants affecting land.

There are four potential grounds upon which the Lands Tribunal can discharge a covenant:

• The covenant is obsolete;
• There is agreement to the discharge or modification between all those with the benefit of the restriction;
• The restriction restricts a reasonable use of the land and confers no practical benefit of substantial value or advantage on the persons entitled to the benefit of it (or is contrary to the public interest) and the loss of the covenant can be compensated in money; or
• No injury will be caused to those entitled to the benefit of the covenant by reason of its discharge or modification.

The test is not one that is known to be easily satisfied as it is completely discretionary.

Recent case law

In the recent decision in Great Jackson St Estates Ltd v Manchester City Council [2023] the Upper Tribunal refused to modify leasehold covenants which prevented the tenant applicant from redeveloping 2 warehouses into 1,037 flats. The project was an estimated £300 million development for which it had previously obtained planning permission from Manchester City Council for in 2021. This case is likely to be of high interest to landlords, tenants and developers moving forward.

Despite the planning permission being granted, the lease contained 11 restrictive covenants. The covenants prohibited the projected works as they imposed impractical restrictions on the development that were not agreeable for the tenant or for the proposed plans.

The covenants in question restricted the tenant from changing the permitted use, limited general use and management of the site and limited the tenant’s ability to construct a new building on the site or carry out certain works. Most of the covenants were such that the tenant could proceed provided that the landlord’s consent was obtained, however, the Council was only willing to grant consent to the development on terms that did not work for the developer tenant.

An Application was made by the tenant under Section 84 to modify the restrictive covenants to enable the development to go ahead without needing the consent of the Council on the following basis:

• the covenants were obsolete owing to changings in the character of the neighbourhood
• the restriction would impede some reasonable user of the land and does not provide the Council with any practical benefits of substantial value or advantage to it
• the Council would not be injured by the proposed modifications.

The Tribunal rejected the tenant’s arguments in relation to all 3 of the grounds which it sought to rely on. They stated that the covenants were not obsolete, they continued to provide a value to the Council in its ability to control use and redevelopment of the site. The decision went on to state that the covenants did indeed provide substantial advantage to the Council because they allowed the Council to control any redevelopment and allowed them to restrict the development unless the developer could satisfy the Council’s concerns as to deliverability.

The Section 84 route is most commonly associated with freehold restrictive covenants, but this case affirms that it is available to leasehold covenants as well, provided that the lease is for a term of more than 40 years and that over 25 years of the term have expired.

It appears that a covenant will not be considered obsolete where it gives the landlord a degree of control over the site, unless using the covenant in their own self-interests. It demonstrates that a restriction can still secure practical benefits of substantial advantage to a landlord, even where the landlord would be in a much better position financially if the development were allowed.

The Tribunal commented that they should be ‘’slow to interfere with a local authority which sees to use its private rights to ensure that a desire development takes place’’ and that the development of the site could proceed with sensible commercial negotiations. This should be highlighted to commercial developers as it suggests that the Tribunals are reluctant to intervene in negotiations, particularly when both parties are capable of protecting their own interests. This is particularly notable for anyone wanting to make an application against a local authority in the future.

Perhaps most significantly, this case shows that the Section 84 remedy is wholly discretionary. Even if the grounds had been established, the restrictions would not have been modified. This case was one of three decisions on this Act in the month of August 2023 and should be considered by anyone wishing to make such an application in the future to avoid unnecessary costs.

If you have any queries regarding restrictive covenants on commercial properties please contact our Commercial Team on 0800 088 6004.

For queries relating to residential properties please contact our Residential Property team.