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The Problem with Restrictive Covenants

05 Feb 2016

One of the more frustrating telephone calls that you can receive when you are in the throes of acquiring property in England is from your Solicitor flagging up a problem. Having had a look at the Title to the property that you are looking to buy, there is a ‘restrictive covenant’ imposed probably 50 years or more and the original beneficiary of the covenant, a company for example, has since been dissolved. Despite a commercial assessment indicating low probability of that restrictive covenant being enforced – particularly if the current owners or occupiers of the property have happily been using the property for many years –will persuade your Solicitor that the covenant needs to be dealt with. Your Solicitor will rightly point out that, if properly drafted, the original beneficiary of the covenant is irrelevant and that property owners in the area will in all likelihood have the benefit of the covenant. Similarly, persistent and continuing breaches of restrictive covenants do not necessarily denote consent or acceptance of their unenforceability. What is more, no Lender taking the property as security will accept it without either the covenant being released, discharged or covered by appropriate Title Indemnity Insurance (assuming that it is available).

One way of dealing with these restrictive covenants is to seek a discharge or modification from the Upper Tribunal under Section 84 of the Law of Property Act 1925. Assuming that you, as the property owner, have the time and patience to deal with the procedures, a discharge or modification by the Tribunal can be the most effective way of settling effective releases of restrictive covenants on a permanent basis. Anyone seeking to use this procedure would need to show that a modification or discharge of the covenant is justified on one or more grounds set out in the Act. These grounds are that the covenant is now obsolete or that it impedes some reasonable use of the land or that the beneficiaries expressly or impliedly agreed to the release or modification or that no injury would be caused by the modification or discharge.

The use of Section 84 is well known where the property concerned is freehold and subject to restrictive covenants. What is a little less known is that the same procedures can be used where the offending restrictive covenant is contained in a long lease.

Perhaps the property that you are seeking to buy is not freehold but is a long Lease of 125 years granted in 1970. At the time it may have seemed a good idea to put a restriction on the use of the land, to say, a particular type of industrial process. The identified industrial use is, however, no longer permissible or warranted in the market and thus effectively, unless that covenant is breached, the property is to all intense and purposes unusable and of no value to the Tenant.

Section 84(12) of the Act can be brought into play. The same procedures used to modify or discharge restrictive covenants on freehold land can be used where a restriction is to be found in a Lease where that Lease was originally granted for a term of more than 40 years and more than 25 years have elapsed since the beginning of that term. In other words the Act first of all recognises that the Landlord who imposed the restriction should have 25 years ‘free run’, before anyone should be in a position to be able to modify or discharge that restriction.

The Act is quite prescriptive in that the restriction must be found in the Lease itself. A restriction to be found in any supplemental document such as a Deed of Variation does not apply. The other difference is that the powers of the Upper Tribunal to modify or discharge a restriction in a Lease are more circumscribed. They have a discretion to modify or discharge so even if one or more of the grounds detailed above is proved, the Upper Tribunal can still refuse to do so.

A Tenant does need to be wary. The Landlord may have legitimate reasons for objecting to the discharge or modification of the restriction, particularly if it owns neighbouring property which could be adversely affected by a relaxation of the Lease terms. Disagreement merely as to the amount which the Landlord wishes to extract from the Tenant by way of payment in return for the modification of the Lease is not, however, generally accepted as being a good reason.

This little known section of the Law of Property Act 1925 is frequently overlooked by Tenants who find themselves saddled with Leases containing out-of-date restrictions with no conventional means of seeking the relaxation or discharge. It is always worth seeking appropriate legal advice, as there are work-around provisions such as these that make property acquisitions that little bit less complicated.

For further information or advice, please contact Richard Freeman – Wallace, Commercial Property Partner at Hay & Kilner

Call: 0191 232 8345

Email: Richard.Freeman-Wallace@hay-kilner.co.uk