[2023] UKUT 189 (LC)

To succeed on ground (a) the applicants must demonstrate that by reason of changes in the character of the property, or the neighbourhood, or other circumstances of the case the restrictions ought to be deemed “obsolete”.

The circumstances in which a restriction will be deemed to be obsolete, and liable to discharge or modification under section 84(1)(a) were explained by Romer LJ in Truman, Hanbury, Buxton & Co’s Application [1956] 1 QB 261, at 272, in the context of an application to modify a scheme of freehold covenants imposed when a building estate was laid out:

“… these covenants are imposed when a building estate in land is laid out, as was the case here of this estate in 1898, for the purpose of preserving the character of the estate as a residential area for the mutual benefit of all those who build houses on the estate or subsequently buy them … If, as sometimes happens, the character of the estate as a whole, or of a particular part of it, gradually changes, a time may come when the purpose to which I have referred can no longer be achieved, for what was intended at first to be a residential area has become, either through express or tacit waiver of the covenants, substantially a commercial area. When that time does come, it may be said that the covenants have become obsolete, because their original purpose can no longer be served and, in my opinion, it is in that sense that the word “obsolete” is used in section 84(1)(a).”

In Chatsworth Estates Ltd v Fewell [1931] 1 Ch 224, Farwell J provided a more concise explanation, at 229:

“To succeed on [ground (a)] the defendant must show that there has been so complete a change in the character of the neighbourhood that there is no longer any value left in the covenants at all.”

These citations emphasise the extent of the change necessary for a covenant to become obsolete, but the critical consideration is not the degree of change which the character of a neighbourhood or a property undergoes, but the extent to which that change renders the original purpose of the covenant incapable of achievement.

In presenting the case for the applicant on this ground Mr Hutchings did not differentiate between the various restrictions, but his main focus was on clause 2(viii) of the lease which restricts the use of the Site. In order properly to interpret the restriction it is necessary first to refer to clause 2(vii), coming immediately before it, which restricts alterations and prevents the erection of any building other than those existing on the Site without the Lessor’s consent (which is not to be unreasonably withheld). The Lessee’s covenants then continue with clause 2(viii), as follows:

“Not to use the said plot of land for any other purpose than as the site of the said buildings nor without the consent in writing of the Lessors use or permit to be used the said buildings other than as a light industrial building or buildings or wholesale warehouse or repository or warehouses or repositories for any purpose.”

The reference to “the said buildings” is to whatever buildings may be on the Site from time to time, whether the original warehouses or any replacement for which the Lessors have given consent. Read in context, therefore, the restriction on use prohibits the use of the site for any purpose other than as the site of buildings to which the Lessors have given their consent and restricts the use of those buildings to light industry, warehousing etc unless the Lessors consent to a different use.

Mr Hutchings submitted that the restriction was obsolete by all three standards identified in ground (a), to changes in the buildings themselves, the neighbourhood, and the general circumstances. The buildings had not been used for industrial purposes for at least 16 years and since there was no prospect of them being so used in the future, the current permitted use had become an anachronism. That submission was undermined to an extent by Mr Rose’s evidence that, should the application be unsuccessful, his client would refurbish the buildings and let them ‘tomorrow, five times over’ to operators of ‘dark kitchens’ (explained to us as being where food ordered by online apps such as Deliveroo was prepared). He was confident that could be achieved without breaching the restriction on use in the lease, but if that wasn’t right his evidence was that the buildings could still be let as warehouses. If we accept that Mr Rose’s confidence is well founded, we would be justified in concluding that there have been no changes in the character of the Site itself such that the restriction on use could be considered obsolete. However, we are more inclined to think that these were examples of Mr Rose resorting to debating or negotiating points without much connection to reality.

There is no doubt that there have been significant changes to the neighbourhood since the lease was granted in 1978. What was a wholly industrial and warehousing area of the city is now, and will increasingly become, dominated by tall residential towers. Mr Hutchings submitted that, in the light of the changes in the neighbourhood the use of the Site as light industrial buildings or wholesale warehouses or repositories should be considered obsolete. On that basis, we could readily conclude from the totality of the evidence that the use of the buildings on the Site as warehouses has become obsolete. Whether that conclusion is of any assistance to the applicant begs the question whether the purpose of the restriction was to retain the buildings as warehouses.

It is clear that clause 2(viii) is not as restrictive as Mr Hutchings implied. Buildings on the Site need not be used as warehouses and can also be used for other purposes, with the consent in writing of the Council. The purpose and effect of the covenant is not to fossilise the use of the Site, but to give the Council a degree of control over any change in the permitted use from the original light industrial or warehouse uses. The Council has indicated its willingness to grant consent, but on terms which it considers are necessary to ensure the viability of the development.

Mr Hutchings nevertheless submitted that the Council was withholding consent simply to improve its bargaining position in negotiations for a re-gearing of the lease. He referred to Driscoll v Church Commissioners for England [1957] 1 QB 330 which was an application for the modification of leasehold covenants restricting the use of large houses to single private dwellings on the ground that the houses were too large for such use and the restrictions had become obsolete. The Church Commissioners, as landlords, had offered to consent to the proposed changes of use to allow multiple occupation, but only on terms which the lessee found too onerous and refused to accept. Mr Hutchings cited the following passage from the judgment of Denning LJ, after he had referred to the findings of the Lands Tribunal that changes in the neighbourhood and social circumstances meant that very large houses could no longer conveniently be retained in single occupation:

“In one sense, therefore, the covenant is obsolete, because it can be said no longer to serve the purposes originally contemplated; but, as [the President of the Lands Tribunal] says, the covenant still serves a useful purpose in another way: it enables the landlords, the Church Commissioners, to keep control over the use to which these houses are put. It enables the landlords to keep the area as a residential area, instead of being used, as it might have been, for commercial purposes. It seems to me that, so long as the landlord uses this covenant reasonably for a useful purpose, then, even though that purpose goes beyond what was contemplated 90 years ago, the covenant is not obsolete; whereas, if the covenant is shown no longer to serve any useful purpose, then, of course, it is obsolete. and in considering whether it still serves a useful purpose, I think it very important to see the way in which the landlord, or whoever is entitled to the benefit of the covenant, has used it in the past and seeks to use it in the present. If he uses it reasonably, not in his own selfish interests but in the interests of the people of the neighbourhood generally - as, for instance, when he gives his consent for any reasonable change of user - then it will serve a useful purpose. I should have thought that if he uses it unreasonably - for instance, to exact a premium as a condition of his consent; or if he refuses consent altogether when he ought to give it - as, for instance, for turning the house into flats - it would no longer serve a useful purpose. In short, so long as the landlord uses the covenant reasonably in the interests of the public at large it is not obsolete, but, if he seeks to use it unreasonably, then it is obsolete.”

Mr Hutchings submitted that the purpose of the restriction when the lease was granted was to protect the reversionary interest of the Council. We agree that that was at least part of the purpose of the covenant but nothing in the evidence suggested that it was being used for any different purpose. Nor was there any evidential basis to support his submission that the Council is seeking to use the covenants unreasonably. We were not asked to determine whether any commercial objective of the Council (for example, to negotiate a premium for the grant of a lease on terms more appropriate to the site of a major residential development) was being pursued unreasonably. Nothing in the evidence allows us to make such an assessment.

In any event, we have no doubt that the Council’s aim in the negotiations is not a purely commercial one. It has a legitimate strategic interest in continuing to influence the use of land on the fringe of the city centre and to secure its orderly and appropriate development. That interest is promoted through the statutory planning process, but there is no reason why its promotion and protection must end there, and the leasehold covenants allow it a further opportunity to control the use of the Site. The evidence of Mr Ken Richards, the Council’s Principal Development Surveyor, fully satisfied us that the Council wishes to ensure that development of the Site takes place in the manner proposed by the applicant subject to appropriate safeguards to ensure that it is commenced in a timely fashion and not left incomplete. That objective is plainly in the interests of the public of Manchester, and its achievement is a facet of the control over the use of the Site which the covenants were intended to allow the Council.

As Mr Hutchings submitted, the touchstone of obsolescence is whether the object of the covenant is still capable of fulfilment. We have no doubt that the object of the restriction on use, on which his submissions were primarily based, remains capable of fulfilment. The case on obsolescence was not developed in relation to other restrictions. We therefore conclude that the applicant’s case on ground (a) has not been made out.