Councils wearing two hats

Lydia Dent considers a recent Upper Tribunal case where a city council was acting as local planning authority and as landlord.

Can a council support redevelopment in its capacity as local planning authority, but then in its capacity as landlord defend the tenant's Tribunal application to modify the leasehold covenants concerning alterations and use which prohibit redevelopment?

The short answer is yes!

In the case of Great Jackson Street Estates Limited v Manchester City Council [2023] UKUT 189 (LC) the Upper Tribunal refused to modify leasehold covenants which prevented the tenant from redeveloping two redundant warehouses into two tower blocks containing 1037 flats, even though the landlord, Manchester City Council, supported the redevelopment and had approved the tenant's planning application, subject to negotiation of a section 106 agreement. It was accepted by the Tribunal that the terms of the section 106 agreement were broadly agreed and that, once finalised and completed, planning permission would be granted. 

The tenant's development proposal was consistent with Manchester City Council's local development plan and the council strongly supported the project in its capacity as local planning authority. However, the council was also the landlord pursuant to the tenant's lease of the site. The lease contained covenants which prevented the tenant from carrying out development works and changing use without the landlord's consent. 

In its capacity as landlord, the council was not prepared to consent to the development works being carried out under the terms of the existing lease. However, the Council had offered to grant the tenant a new lease of the site on similar terms to other leases it had granted of development sites in Manchester. The proposed new lease would include provisions including development milestones to govern the redevelopment works and timescale for completion. 

The proposed new lease terms were not accepted by the tenant, and the tenant applied to the Upper Tribunal under Section 84 of the Law of Property Act 1925 for the lease covenants to be modified. 

Section 84 of the Law of Property Act 1925 provides a mechanism pursuant to which eligible parties can apply to the Upper Tribunal for an order to modify or discharge a restrictive covenant which affects the use of land or building on it. The eligible parties include freehold owners, and anyone with an interest in leasehold land where the lease is granted for a term of 40 years or more and at least 25 years of the term have expired. The Tribunal's power to make an order under Section 84 is discretionary. 

In order to make an application under Section 84, the applicant must establish at least one of four statutory grounds against the persons who benefit from the restriction. The grounds are:

• Ground (a): the covenant is obsolete by reason of changes in the character of the property or neighbourhood, or other circumstances of the case.
• Ground (aa): the covenant impedes some reasonable use of the land.
• Ground (b): the persons entitled to the benefit of the restriction have agreed, either expressly or by implication, to modify or discharge the covenant.
• Ground (c): no injury will be caused to the persons entitled to the benefit of the restriction.

In this case, the tenant relied on grounds (a), (aa) and (c). On the facts, the Tribunal found that the tenant did not successfully make out any of the grounds it relied on. Interestingly however the Tribunal held that, even if the applicants had succeeded in making out one of the grounds, it would not have exercised its discretionary power to modify the covenants.

The council was considered to have a legitimate interest as landlord in retaining control over the use of the land and development process, notwithstanding its support for the redevelopment proposal in line with the local development plan, and therefore the covenants were being used for their intended purpose under the lease. The Tribunal noted that the parties can achieve development of the site through sensible commercial negotiations and that the Tribunal would be reluctant to exercise its discretionary power in such situations.

This case demonstrates the dual role councils play as planning authority and landlord in connection with land within their ownership. Even where a council is keen for redevelopment in its capacity as the local planning authority, it is entitled to retain control over the development using its private rights as landowner, and the Tribunal will be reluctant to interfere with those rights.

Lydia Dent is an Associate at Trowers & Hamlins.