[2023] UKUT 189 (LC)

Mr Hutchings submitted that the question of whether the proposed use is reasonable must be considered assuming the restrictions do not exist. We agree. The proposed development has the benefit of a resolution to grant planning permission, subject to the negotiation of a s.106 agreement. The Council, both as the local planning authority and as landlord and respondent to this application, wishes to see the development take place. How could it be said that the use of the Site for residential purposes was other than reasonable?

Ms Tythcott submitted that when considering whether a particular use is reasonable, the Tribunal cannot entirely ignore the related question of what she referred to as “practicability”. Even if a proposed use appears reasonable, if it cannot practically be achieved then for the purposes of the statute it should be deemed unreasonable. In support of that submission she relied on Caledonian Associated Properties Ltd v East Kilbride DC (1985) 49 P&CR 410.

Caledonian was a decision of the Lands Tribunal for Scotland on an application under the (subsequently repealed) Conveyancing and Feudal Reform (Scotland) Act 1970 which contained similar powers to those found in section 84, 1925 Act. Sections 1 and 2 of the Act provided that the Tribunal might by order vary or discharge a restriction on the use of land (referred to as a “land obligation”) on being satisfied of certain conditions. One condition was where the obligation was “unduly burdensome”; another, in section 1(3)(c), was where, in all the circumstances the existence of the obligation impeded some reasonable use of the land. The Tribunal could refuse to vary or discharge a land obligation on that ground if they concluded that, “due to exceptional circumstances related to amenity or otherwise, money would not be an adequate compensation for any loss or disadvantage which a benefited proprietor would suffer from the variation or discharge”.

The applicant was the owner of a cinema which was at risk of closure unless the Tribunal allowed a change to a combined use as a bingo hall with a much smaller cinema element. The respondent was the local development corporation. It opposed the modification of the restriction and made it clear that it would also resist the grant of planning permission because of the adverse effect it might have on its own proposals to attract a rival bingo hall operator as the anchor tenant for a new leisure complex elsewhere in the town. The Tribunal accepted that the respondent’s scheme would not be commercially sustainable if another bingo hall was already established at the cinema. The Tribunal explained that the question before it was this:

Refusing the application, the Tribunal accepted that whilst the proposed bingo use on the face of it appeared reasonable, it was not practicable, by reason of planning difficulties. We are not inclined to apply the same approach to the “reasonable use” question as it arises under section 84(1)(a). While the purpose of the two pieces of legislation is very similar, the statutory context is slightly different. In our judgment the sole focus of the issue of reasonable use is on the land use itself. When considering whether a proposed use of land is reasonable, and whether it should be modified or discharged on ground (aa) of section 84(1), the Tribunal is specifically directed to take into account the statutory development plan and any declared or ascertainable pattern for the grant or refusal of planning permissions in the relevant area (section 84(1B)). The Scottish statute with which the Caledonian case was concerned contained no such direction; that seems to us to justify the rather wider consideration given to the issue of reasonable use by the Lands Tribunal for Scotland in that case. Considerations of practicality or “deliverability” could of course be taken into account if the Tribunal gets to the stage of exercising its discretion, but not, we think, when determining whether ground (aa) has been made out. The proposed development with which we are concerned is entirely in accordance with the development plan, as the uncontested evidence of the applicant’s planning expert, Mr Lloyd, confirmed.

In any event, the suggested impracticality in this case does not depend on the prospects of planning permission being granted (which appears to have been the difficulty in the Caledonian case), but on the ability of the applicant to fund, manage and complete the development without securing a new, longer lease. Without proper evidence on those issues we are not prepared to form a judgment on the basis of mere assertions by one side or the other. Given that both parties are keen to see the Site developed for residential use, and that such use is in accordance with the development plan, we are satisfied that it is a reasonable use.

As for whether the restrictions impede the proposed use, we are satisfied that they do, including by the restriction on use itself (clause 2(viii)) which requires the Council’s consent to any change, the restriction on alterations (2(vii)) (notwithstanding that the Council may not withhold its consent unreasonably), or more peripherally by the restriction on the removal of trees (2(xiii).

The next question is whether, by impeding the proposed use, the restrictions secure to the Council practical benefits, and if so whether those benefits are of substantial value or advantage to it. This question highlights the Council’s dual role as local planning authority exercising public functions on the one hand, and its “private” capacity as landlord on the other. As planning authority the Council not only does not object in principle to the development occurring, it has positively and enthusiastically encouraged it. As landlord it nevertheless seeks to include provisions within a new extended lease to which the applicant objects. The purpose of those provisions, the Council says, is to ensure the development is completed, and within a reasonable time. The principal conditions it requires are a set of development milestones requiring the developer to commence construction within a certain period of being granted the new lease, and to complete the development within a certain period. To enable this timetable to be enforced and to ensure the development is completed if they are not, the Council envisages forfeiture provisions, (subject to force majeure), and step-in rights in favour of the project’s funders in the event of the applicant’s insolvency. Mr Rose took particular exception to these provisions.

We have not been asked to consider the reasonableness or otherwise of these conditions, to which we were referred in only the most general terms. However, it is clear that the Council’s ability to rely on the restrictions within the lease to prevent the applicant from carrying out the development without agreeing to provisions intended to secure the Council’s development objective, does secure a practical benefit. Mr Hutchings submitted that practical benefits for the purpose of the Act must be direct, rather than peripheral benefits secured by the covenants, and that benefits were not “practical” if they were merely pecuniary in nature i.e. if the only benefit derived from the restrictions was in enabling the Council to extract a higher premium for agreeing to their relaxation. It is the restrictions themselves that must secure the practical benefit, and not the ability of the Council to bargain them away – “that the restriction, in impeding the [reasonable] user does not secure….any practical benefit of substantial value or advantage..”. We accept Mr Hutchings propositions, but we do not accept that they assist him in this case. The Council is not simply seeking to obtain a monetary advantage or relying on the covenants as an obstacle which the applicant must negotiate away. The Council is using the covenants for their intended purpose, namely, to afford it a significant degree of control over the development of the Site.

The Council’s ability to withhold its consent to the development of the Site until it is satisfied that the applicant’s proposals can be delivered does not confer only “peripheral” or indirect benefits. They allow it to influence the form of the development and mitigate the risk that the Site might not be developed in an orderly and timely way. It would no doubt also be commercially desirable for a new longer lease to be granted to underpin the development, and to enable the applicant to recoup its investment over a longer period, but that would be the case whether or not the restrictions in the current lease impeded development. The Council’s negotiating position is not a benefit which it derives from the terms of the lease, or not from those terms alone, but from the fact that the lease will expire in only 60 years.

We now turn to the substantiality of those practical benefits, first as regards value.

Mr Davies, the applicant’s valuation expert, had carried out an exercise valuing the Council’s reversionary interest at the end of the 60.5-year lease based on the restrictions being modified as the applicant wishes, compared with that value if the restrictions remain unaltered. Assuming the restrictions remained, Mr Davies postulated that the Site would remain undeveloped and that the Council would itself carry out the development, or sell to a developer, at the end of the lease. He assumed the eventual development would be similar to the buildings permitted by the applicant’s anticipated planning permission and used a residual valuation method, deducting from the projected gross development value the usual build costs, acquisition costs etc, to arrive at a negative land value of -£33,023,276. His next step was to apply a sensitivity analysis, increasing rental value by 5-10%, and reducing construction costs by the same amount, which produced a positive land value of £31,625,897. A swing of £60 million highlights the fragility of the residual approach when applied to very large developments, where a very slight touch on the tiller can result in significant, and potentially unreliable, changes in the course of the valuation. This caused Mr Davies, quite rightly, to consider comparable land sales as an alternative approach to valuation; these ranged from £5.6 to £6.2 million per acre, from which he came to a land value for the Site of £8.75 million. Deferring this amount for 60.5 years at 6% resulted in a present land value of say £260,000.

He then considered the value of the Council’s interest should the restrictions be modified. This, the applicant said, would enable it to fund and build its own ‘build to rent’ scheme, which Mr Rose and Mr Davies maintained was entirely feasible despite only having a 60.5 year lease. On this scenario, instead of the development occurring at the end of the lease, the Council would inherit the completed development which had been built by the applicant and would need to carry out refurbishment. We note that this assumption was at odds with Mr Hutchings’ closing submissions to the effect that that the applicant could rely on its rights under the Landlord and Tenant Act 1954 to obtain a new 15-year lease, thereby allowing it additional time to recover its investment. Mr Davies’ view was that the market would disregard any potential right to extend or continue the lease, which makes it unnecessary for us to resolve the question of whether the applicant will be able to exercise the option. On this basis, Mr Davies valued the completed development at £308 million, which deferred as before resulted in a current value of £9,112,000.

Comparing the two, Mr Davies’ view was that not only was the Council’s interest not diminished by the restrictions being modified, there was in fact a clear positive effect on the value of the reversion of some £8.85 million.

Mr Norbury, the Strategic Lead in the Council’s city centre development team accepted that there may very well be a positive effect on the Council’s reversionary interest, but that did not go to the heart of the Council’s objection. The Council’s expert, Mr William Ward MRICS of Savills, also agreed that, taken individually, the modification of each restriction as the applicant wishes would not result in a diminution in value of the Council’s interest. In his view, the Site was unviable as a commercial development prospect because there was only a 60.5-year wasting leasehold interest, not long enough for normal residential disposals or funding.

We have reservations about some aspects of Mr Davies’s valuation, for instance that it did not take account of the rent passing, nor that under the terms of the lease that rent would increase significantly once the development was completed. But of more significance, deferring capital values by sixty years renders the resulting figure indicative at best, and of dubious utility. It also assumed that capital values, build costs, and land values, would all increase by the same proportions over sixty years.

However, the general thrust of Mr Davies’ conclusions, that the reversion to two substantial residential buildings is likely to be more valuable than the reversion to two redundant warehouses, is not difficult to accept. Given the Council’s witnesses’ acceptance of that proposition we need say little more about it. From the evidence, we are satisfied that, measured in monetary terms, the restrictions do not (by impeding the development) secure to the Council a practical benefit of substantial value. Whether the practical benefit is a “substantial advantage, however, is a different question. The nub of this application is about the control the restrictions secure to the Council as a local authority. We are satisfied that the Council’s concerns about the viability of the development are genuine, and the conditions that it seeks to impose address its wish to see the development commencing and being completed within a certain period. We have no view as to whether the proposed periods are realistic or reasonable, but that isn’t the issue before us. The question is about the extent of the advantage which the restrictions secure for the Council, by preventing the development going ahead unless the applicant satisfies its concerns. Those concerns are not pecuniary in nature but are aimed at ensuring one of the last pieces of the development jigsaw slots into place. We are satisfied that this control is a substantial advantage, and the application on ground (aa) therefore fails.