Change of use of an office building to residential without landlord's consent

This article discusses the recent case of Shaviram Normandy Ltd-v-Basingstoke and Deane Borough Council (30 August 2019) which relates to an application to the Upper Tribunal for change of use of an office building to residential by way of the discharge or modification of a leasehold covenant restricting use to offices.

This is an interesting decision of the Upper Tribunal in relation to an application by a long leasehold tenant to change the use of a building where the lease prevents, and the landlord opposes, such a change.

Under S.84 (12) of the Law of Property Act 1925, a lessee under a lease for longer than 40 years can apply to discharge a restriction on use once 25 years of the lease has elapsed.

The Building in question is called Normandy House. It was built in the 1980s and is over 76,000 sq ft. The freehold is owned by the Council and it was let in 1985 for a term of 150 years.

Under the Lease, the Council receives 15.5% of the net rents received by the lessee and the lessee covenants to use best endeavours to fully let the Building. The use is restricted to office use only.

The Building used to be IBM’s offices but their Underlease ended in 2014 and the Building has been vacant since then and is now in substantial disrepair. It would require substantial improvement and modification to be let again and could probably only be let by floors rather than as a whole.

The current tenant bought the Lease in 2015 for £5.25 million exclusive of VAT. It wanted to create 114 flats and thought there would not be an issue re change of use but the Council then opposed any such change on the basis it wanted to retain office use (both as the Landlord and Planning Authority) for this part of Basingstoke close to the train station.

The Application to the Tribunal was made in June 2018 so it has taken some 14 months to determine. It was made primarily on the basis that the user restriction prevents a reasonable use of the Building and the change to residential would not damage the Council as landlord. Substantial expert evidence was given as to what effect the change of use would have.

The Tribunal allowed the change on the basis that:

1. The capital value of the landlord’s reversion would be enhanced by it. The Building is to be let on assured tenancies that will generate income that will enhance the reversion more than if it was let for offices.
2. The particular location of the Building was not an office location and the change would not adversely affect the Council re its other office buildings nearby.
3. The Council had to be treated as a landlord rather than the Planning Authority but there was nothing in the proposal that went against the development plan. The change would not have the “thin end of the wedge “effect of allowing wholesale change in the location. It did not assist the Council that, in the recent past, it had indicated that it was not adverse to a change of use of the Building.
4. There is no stricter test for releasing a leasehold covenant than releasing a freehold covenant i.e. a landlord does not enjoy a stronger position than a neighbour.

There were 2 other important findings by the Tribunal, being:

1. It had no power to modify the clause whereby the landlord’s consent was needed for each sub-letting- so consent will be needed for each letting of each of the 114 flats if they are let separately; and
2. That the obligation on the tenant to use reasonable endeavours to keep the Building fully let would cover undertaking improvements if this was necessary in order to let it.

And, just to be clear, a tenant cannot claim damages against a landlord for unreasonably refusing change of use as leases do not include any obligation on the landlord to give such consent- just a right to refuse consent. So the lessee cannot seek compensation for the delay in being able to change the use of the Building so as to let it.

Jonathan is a partner in our Property Litigation team.