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How Can You Unlock Your Leasehold Property's Potential?

on Thursday, 16 January 2020.

A recent case has highlighted how a tenant of a long lease can use s.84 of the Law and Property Act 1925 (the Act) to unlock the commercial potential of a building via a change of use.

Could You Modify Your Long Lease Property?

For freehold property, s.84(1) of the Act allows covenants restricting the use of premises to be discharged. S.84(1) allows for modification or discharge in circumstances where any of the following grounds can be demonstrated:

(a) the restriction should be deemed obsolete due to changes in the character of the property or neighbourhood or other circumstances

(aa) the restriction in question prevents some reasonable use of the land and is not of any practical benefit or of substantial value to the person with the benefit of them

(b) the persons with the benefit of the restriction has agreed to it being discharged or modified

(c) the proposed discharge or modification will not injure the persons entitled to the benefit of the restriction

What is less known is that, under s.84(12) of the Act, the rights of discharge and modification which apply to a freehold property can also apply to a leasehold property if the lease was granted for a fixed term of 40 years or more, and 25 years have expired.

How s.84  Has Been Used in Practice

In the case of Shaviram Normandy Ltd-v-Basingstoke and Dean Borough Council [2019] UKUT 256 (LC), Shaviram Normandy Ltd (Shaviram) was the tenant of a building let on a long headlease. Its use was restricted to offices, and Shaviram applied to the Council to convert the building into 114 residential flats.

As the local planning authority, the Council confirmed that the proposed change of use was allowed under statutory permitted development rights. However, as the landlord the Council refused to vary the headlease.

Therefore, Shaviram made an application to the Upper Tribunal Lands Chamber under s.84(12) of the Act, relying on s.84(1) grounds (aa) and (c) to modify the clause in the headlease which restricted the use of the property. It also applied to modify a subclause relying on ground (c), stating that every subletting should be at full market rent and on terms approved by the Council.

The Upper Tribunal held that the covenant restricting the property's use to offices conferred no practical benefit of substantial value or advantage on the Council and decided to modify it to allow the residential use. However, it rejected the application to modify the requirement for consent to subletting as this was not a restriction 'as to the user' of the land and so did not fall within the remit of s.84.

Key Points to Remember

Regardless of how restrictive the user clause within a lease might be, property developers and investors may be able to use s.84(12) to unlock the value of leasehold land against the wishes of their landlord.

The applicant of a long lease must:

  • have a lease over 40 years, of which the first 25 have passed
  • demonstrate that one of the grounds in s84(1) of the Act has been met

The Court's decision will however ultimately turn on the facts of the case.

For specialist advice on modifying your leasehold property, please contact Mark Hughes in our Commercial Property team on 020 7665 0922, or complete the form below.

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