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Prettys Solicitors Ipswich

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Modification of lease covenant to allow office to residential conversion

In the recent case of Shaviram Normandy Ltd v Basingstoke and Deane BC 2019, Shaviram was the tenant of a building let on a long lease by the Council. The permitted use covenant in the lease was restricted to offices.

The lease did not include a rental figure but entitled the council as landlord to 15.5% of the net annual rent received by the tenant from the office underleases. The tenant was obliged to use its best endeavours to keep the building fully sublet. The landlord's consent to the terms of any subletting was required, subject to a condition that consent would not be unreasonably withheld.

Shaviram applied to convert the building into residential flats. The statutory permitted development rights allowing conversion to residential use were confirmed by the Council in its capacity as local planning authority. However, the Council, as landlord, refused to vary the lease user clause.  Shaviram therefore made an application to the Upper Tribunal (Lands Chamber) to discharge or modify a leasehold restriction following the expiry of 25 years of a term of more than 40 years.

The Tribunal applied established principles on the facts and decided to modify the restriction on use as offices to allow residential use. After comparing the likely capital value and returns for office and residential use, it held that the covenant conferred no practical benefit of substantial value or advantage on the Council. However, it refused to modify the requirement for consent to underletting as this was not a "restriction as to user”.

This case confirms established principles, but is interesting because it concerns an application to modify a covenant in a long lease rather than a freehold covenant. This could give an opportunity to developers that is sometimes overlooked, but which can be a useful negotiating tool. If the application is followed through and is successful, it might unlock leasehold land for development against a landlord's wishes.

If you would like more information the merits of seeking a release or modification of a covenant please contact commprop@prettys.co.uk.

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