Modifying restrictive covenants: what are the lessons learnt from Great Jackson St Estates v Manchester City Council [2023]?

In a decision that will be of interest to landlords, tenants and developers, the Upper Tribunal (Lands Chamber) refused an application to modify restrictive covenants burdening two warehouses on Great Jackson Street in Manchester.

The decision in Great Jackson St Estates v Manchester City Council [2023] serves as a useful reminder of the meticulous approach and high threshold the Tribunal will adopt when it comes to examining applications made under section 84 of the Law of Property Act 1925 (the 1925 Act).

Facts

The developer tenant acquired a long leasehold interest with about 60 years remaining over a site on Great Jackson Street in Manchester. The landlord of the site is Manchester City Council (MCC). The site contained two redundant warehouses which the tenant had planned to demolish and redevelop into a large-scale residential flat scheme.

The tenant obtained planning permission for the development in 2021 (from MCC in its capacity as strategic town planner), however the lease contained 11 covenants which, broadly speaking, prohibited works on the site without MCC’s consent, imposed restrictions on development and future use of the site without MCC’s consent. MCC was only willing to grant consent on terms which were unacceptable to the developer tenant.

The tenant therefore made an application under section 84 of the 1925 Act to have the covenants modified to enable the development to be carried out without MCC’s consent.

In order for the tenant’s application to be successful, the tenant would need to satisfy the two-limb test under section 84 of the 1925 Act: (1) one of the jurisdictional grounds applied, and (2) that the Tribunal should exercise their overriding discretion to allow the application.

Jurisdictional grounds

The tenant raised the following jurisdictional grounds in support of their application:

• Ground (a) - the covenants were obsolete owing to changes in the character of the neighbourhood;
• Ground (aa) – the covenants impeded a reasonable use of the land and their modification would not deprive MCC of a practical benefit of substantial value or advantage;
• Ground (c) - MCC would not be injured by the proposed modification.

The Tribunal rejected the tenant’s arguments in relation to all of the jurisdictional grounds, as follows:

• Ground (a) – the covenants had not become obsolete because they continued to provide value to MCC in its ability to control use and redevelopment of the site;
• Ground (aa) – the covenants continued to provide substantial advantage to MCC because they allowed MCC to control any redevelopment of the site and the terms upon which that could be achieved, namely it allows them to restrict development unless the developer could satisfy MCC’s concerns as to deliverability;
• Ground (c) – the Tribunal adopted the same reasoning as to why they rejected ground (aa).

With regards to application of the section 84 grounds, the following points should be noted:

• To succeed on ground (a), it is not sufficient for the applicant to merely demonstrate significant changes to the character of the neighbourhood. A covenant will not be obsolete where it gives the landlord a degree of control over the site, unless they are trying to use the covenant in their own self interests/unreasonably;
• Questions of practicability or deliverability are not relevant to succeed on ground (aa) in determining whether the proposed user is reasonable, instead the focus should be on the land use itself;
• A restriction can still secure practical benefits of substantial advantage to a landlord even where the landlord would be in a better financial position if the modification is allowed.

Discretion

The Tribunal went on to state that even if the application had succeeded on one of the jurisdictional grounds, they would not have allowed the application and would have refused to exercise their discretion under the second limb of the test.

The Tribunal stated that they should be “slow to interfere with a local authority which seeks to use its private rights to ensure that a desired development takes place.” They were satisfied that the development of the site was capable of being achieved through sensible commercial negotiations. Therefore, in the circumstances, it would have been inappropriate for the Tribunal to intervene in those ongoing commercial negotiations between a local authority and commercial developer, both of whom are able to protect their own interests. 

Conclusion

Whilst Manchester’s skyline is being constantly reshaped by the unprecedented development of new high-rise buildings, this decision serves as an explicit warning to developers that Tribunals are reluctant to disrupt MCC’s dual status as a landlord and strategic town planner. The merits of any potential application should be carefully considered in light of this decision to avoid wasted costs.

Key takeaways

The decision provides useful guidance on:

1. How the Tribunal will interpret and apply the section 84 grounds when considering the jurisdictional element of an application, and
2. The high threshold the Tribunal will adopt when deciding whether to exercise their discretion where there is a strategic planning element involved.