Case study: Normandy House

The case of Shaviram Normandy Ltd v Basingstoke and Deane Borough Council [2019] UKUT 256 (LC) demonstrates how section 84 of the Law of Property Act 1925 can be applied to long leasehold interests.

Beckett and Kay acted on behalf of Shaviram Normandy Ltd (“Shaviram”), the long leaseholder of Normandy House in Basingstoke. Shaviram made an application under section 84 to modify the user covenant of the lease.

The Facts

At the time of the application (June 2018), Normandy House was configured as offices but had been vacant since 2013. The headlease restricts the use to offices only. The freeholder, Basingstoke and Deane Borough Council, is entitled to receive an annual rent equal to 15.5% of the “aggregate of the net annual rents … actually received” by Shaviram.

Shaviram had permitted development rights and wished to covert the 76,000 square foot building into 114 flats, to be let on Assured Shorthold Tenancies. To do so, they needed to modify the user covenant to include residential.

Section 84

Section 84 gives the Upper Tribunal the “power from time to time …. wholly or partially to discharge or modify any … restriction”, providing the Tribunal is satisfied that one of the grounds imposed by s84 is met. The application in this case was made predominantly under ground (1A)(a) – that the covenant did not secure any practical benefits of substantial value or advantage to the freeholder. (See here for a summary of all the grounds for modification).

Application to leases

S84 is more commonly used in relation to freehold interests. It only applies to lease covenants where the lease was granted for a term of more than 40 years, and where at least 25 years of the term have already passed.

The applicant held a leasehold interest for a term of 150 years, granted in 1985. At the date of application, 33 years had passed. Both tests were therefore met.

Valuation

Peter Beckett, as expert witness for the applicant, argued that the landlord’s reversion would be more valuable if the property was in residential use than if it remained as offices. There could therefore be no financial advantage (or “substantial value”) in maintaining the existing use.

The freeholder resisted the application. The concern was that conversion to residential use could set a precedent on the remainder of its estate, the majority of which is held on similar headleases to the subject.

Decision

The Upper Tribunal modified the restrictive covenant to permit residential use. The Tribunal agreed that there was no (or strictly, no significant) financial benefit in leaving the use restriction in place. Further, there was ample alternative office space in the area, and the desire to maintain a pattern of office use was not enough to establish a “substantial benefit or advantage” to the existing covenant. The “thin end of the wedge” argument was dismissed on the basis that Normandy House is outside the core office location and the change of use would therefore not adversely affect other buildings owned by the Council.

Lessons

We understand this was the first case where the Upper Tribunal applied its jurisdiction under s84 to a leasehold interest. In doing so, it confirmed the test was no stricter than the test to be applied to a freehold interest.

To see the full decision, click here.