The Upper Tribunal has shown its reluctance to interfere with the rights of local authorities in Great Jackson Street Estates Ltd v Manchester City Council [2023] UKUT 189 (LC), refusing to exercise its discretion to modify restrictive covenants on the application of the tenant.
Background
Great Jackson Street Estates Ltd is the leaseholder of two disused warehouses in an area of Manchester currently undergoing significant development. It wanted to demolish the warehouses and build two new tower blocks containing 1037 flats. However, it found there were several restrictive covenants in the lease which required the consent of the landlord, Manchester City Council, to redevelop. The Council’s planning committee approved the tenant’s application for planning permission. But separately the Council proposed terms in order to grant its consent as landlord, which the tenant considered to be onerous and a deterrent for potential investors. The parties were unable to reach an agreement on the terms, and the tenant applied to the Tribunal initially for discharge, and subsequently for modification, of the restrictive covenants.
Grounds
The tenant applied under the following grounds under section 84(1) of the Law of Property Act 1925:
- ground (a) – that the covenants were obsolete due to changes in the character of the property or the neighbourhood;ground (a) – that the covenants were obsolete due to changes in the character of the property or the neighbourhood;
- ground (aa) – that the covenants impeded reasonable use of the land, and their modification would not cause the Council to lose practical benefits of substantial value or advantage;
- ground (c) – that the proposed modifications would not injure the Council.
While section 84 gives the Tribunal the power to discharge or modify restrictive covenants, if the applicant establishes one of the grounds, that power is discretionary.
Decision
Firstly, the application failed on all grounds. The Tribunal confirmed that there had been significant changes to the neighbourhood, but nevertheless rejected ground (a) given that the purpose of the covenant – to allow the Council to control development of the land – could still be fulfilled and therefore the restriction was not obsolete. Under ground (aa), the Tribunal agreed with the applicant that the covenants did impede the reasonable proposed use of the land. However, the restrictions provided the Council with control over redevelopment which the Tribunal viewed as a practical benefit of substantial advantage, causing ground (aa) to fail. It followed that ground (c) was also not satisfied as modification of the restrictions would cause injury to the Council through loss of control over the land.
As for the discretionary part, the Tribunal went on to state that it would not have exercised its discretion even if one of the grounds had been satisfied. The Tribunal confirmed that it would be slow to interfere with a local authority’s right to strategically influence the development of land within its locality. The Tribunal was also reluctant to disrupt commercial negotiations between a developer and the relevant local authority, and considered both the Council and the commercial tenant to be eminently capable of representing themselves during negotiations. The Tribunal decided its intervention would have been unnecessary and inappropriate in this case.
In its judgment, the Tribunal highlighted the limited evidence which the tenant had provided to support its application. No evidence was heard in relation to the ongoing commercial negotiations between the parties, and the Tribunal was consequently not able to determine whether the position or the terms proposed by each party were reasonable. The Tribunal emphasised that relevant evidence may have influenced its final decision.
The Tribunal also criticised the applicant’s ‘combative’ approach to giving evidence, stating the lack of consistency and transparency in the applicant’s evidence was disappointing. The Tribunal was left with ‘two concerning impressions’: the applicant’s proposals were not properly formulated or had changed significantly without adequate explanation, and the application may have merely been the applicant’s latest ploy in the ongoing negotiations.
Impact
This decision serves as a warning to landlords, tenants and developers that the Tribunal adopts a stringent approach when considering the exercise of its discretion to modify restrictive covenants.
Developer tenants must pay particular attention to this judgment when dealing with a local authority in its separate roles as both landlord and town planner. The Tribunal will be hesitant to intervene if a local authority acting as landlord exercises its private right to ensure strategic development in its area, even where in its public role capacity it has granted planning consent.
The decision is also a reminder that applications must be properly prepared and well evidenced throughout if the Tribunal is to be persuaded to exercise its discretion. The Tribunal will avoid interfering when it considers commercial negotiations to be a sufficient vehicle to reach an agreement.
If you have any queries about restrictive covenants affecting freehold or leasehold development, please get in touch with our Real Estate Disputes team and we will be happy to advise you further.
This article was written by Georgia Leach, Trainee Solicitor in our Real Estate team with help from Armel Elaudais.
