Depending on the length of a lease, and how long it still has left to run, a tenant can apply to the Upper Tribunal to modify covenants that it may contain.

Such applications are rare, but are often of considerable interest when they do come along. Blackhorse Investments (Borough) Ltd v The London Borough of Southwark [2024] is no exception.

In this case, the tribunal had to decide whether it had exceeded its powers when it made an earlier order modifying various covenants in a lease, including a positive obligation to keep the premises open as a pub.

The facts

The Black Horse was a pub in Southwark built in the 1960s. The pub was on the ground floor and there was residential accommodation above.

A 99-year lease was granted to the Courage brewery in 1966. Blackhorse Investments (“BHI”) took over the lease as the tenant in 2011.

The London Borough of Southwark (“Southwark”) was and remains the landlord.
By 2019 the pub had closed.

BHI sought, and in May 2020 obtained, planning permission to demolish the existing building and construct a new six-storey block comprising residential flats above a commercial unit that could be used for a variety of business and other non-residential uses (not just as a pub).

We are told that there were occasional discussions between BHI and Southwark between 2016 and 2021 over a possible sale of the freehold or the grant of an extended term to facilitate the development, but they came to nothing.

It is understood that BHI has, more recently, started a statutory enfranchisement claim to try to buy the freehold.

The problem

The main problem for BHI was that its lease contained certain covenants that:

- Prohibit the making of alterations without the landlord’s consent.

- Place restrictions on the assignment and subletting of the lease.

- Require the premises to be kept open and used as a pub.

These covenants threatened to interfere with BHI’s proposed development plans.

BHI accordingly applied to the Upper Tribunal under section 84 of the Law of Property Act 1925 to modify the covenants.

As explained in an article last year (Modifying restrictive covenants: no groundworks if no ground works), although such applications usually involve restrictive covenants over freehold land, it is possible for tenants (such as BHI) to apply to discharge or modify restrictions contained in leases granted for a term of 40 years or longer, after 25 years of the term has expired.

The section 84 application

In September 2021, BHI started its section 84 application to modify the covenants to enable it to implement the planning permission it had obtained.

BHI was directed to serve the application on Southwark, but not at any specific address or by any particular method.

Rather than posting the application or copies of it to Southwark’s PO Box address, or sending it by e-mail, BHI’s solicitors hand delivered the application to Southwark’s main administrative offices.

It appears that the application was then lost somewhere in Southwark’s “administrative innards,” and it did not come to the attention of the correct department.

Unaware of the existence of the modification application, Southwark did not file a notice of objection and the application was unopposed.

The tribunal dealt with the application on the paperwork, without a hearing. It made an order modifying the covenants in early 2022.

BHI went on to convert the existing building into two flats which it has let out on long leases. It has not, however, yet started the proposed redevelopment for which it has planning consent.

Southwark only found out about the tribunal’s order modifying the covenants in June 2023, after BHI had already granted the two long leases and started its enfranchisement claim.

The set aside application

In November 2023, Southwark applied to set aside the earlier order and for an extension of time to file an objection to BHI’s modification application.

The set aside application was put forward on the basis that BHI’s original application hadn’t been served; the tribunal had been misled by the form of the application; the order lacked coherence; and because the order varied positive covenants which the tribunal did not have the power to do.

The tribunal found that there was no irregularity about the way in which MHI’s solicitors had served the modification application. The non-service challenge was therefore rejected.

Nor did the tribunal consider that the way the modification application had been presented had been misleading. BHI had not made any attempt to conceal relevant information about the keep open obligation or the fact that the pub had ceased trading, it had explained which covenants it wished to modify and had provided a copy of the lease containing the full wording of those covenants.

The suggestion that the original order lacked coherence was similarly unsuccessful. Although the end result of the amendments the tribunal originally made was “inelegant”, those changes could still be understood.

This therefore left the question of whether the tribunal had jurisdiction to modify the covenant prohibiting the assignment of any part or parts of the premises, or the covenant requiring the tenant to keep the premises open as a pub.

The tribunal’s jurisdiction under section 84 only allows it to discharge or modify any restriction as to the use of the land or the building on it.

The tribunal found that the covenant prohibiting assignment of part of the premises was not a restriction as to the use of the land. It was a restriction as to ownership, not the activity conducted on the land. The tribunal therefore did not have jurisdiction to modify that covenant.

It found that it also did not have jurisdiction to modify the keep open covenant because it was a positive covenant. It required the tenant positively to trade and keep the premises open as a pub and to conduct the business of a pub. There were associated covenants obliging the tenant to use best endeavours to obtain a renewal of all requisite licenses, and to use the premises as a refreshment house for supplying food and liquor to the public. These were also positive, rather than restrictive, covenants.

The upshot was that the original order was set aside in part but only to the extent that it was made without jurisdiction.

The order was accordingly remade so that those modifications that the tribunal did have jurisdiction to make would remain in their modified form, but those that it did not have the power to modify would remain in their unmodified form.

The restriction on the assignment of part, and the positive covenant to keep the premises open as a pub, have accordingly been reinstated as per the terms of the lease.

It is quite possible that discussions between the parties will have resumed. The outcome of this case, and the separate enfranchisement claim, may well have a bearing on how much BHI might have to pay as part of a commercial settlement to modify the positive covenants or otherwise buy the freehold.

WolfBite

The case confirms that the tribunal does not have the power to modify positive covenants.
The more subtle takeaway is that it highlights the difficulties that can sometimes be faced in determining whether a covenant is restrictive or positive.

As the tribunal explained, in one sense all covenants as to use are restrictive. For example, a covenant to paint a house blue on the one hand positively requires someone to use a particular colour, but on the other restricts the use of any different colour.

Similarly, an obligation to keep a garden square in an open state, uncovered with any buildings, looks like a positive covenant on the face of it, but was found in one of the leading cases to actually be a negative obligation not to build on the land.

It was clear in Blackhorse that the keep open covenant was positive in nature, but the distinction may be more finely balanced in other situations.

If your freehold or leasehold land is subject to a covenant we can advise on its potential enforceability or ways to deal with it whether by negotiated release, application to the Upper Tribunal, declaration from the Court or through indemnity insurance.

If you would like to find out more about restrictive covenants, just send an email to hello@hagenwolf.co.uk or call us on 0330 320 1440.