Restrictive covenants – proposed discharge/modification of long leasehold covenant against subletting
In this case, the Upper Tribunal (Lands Chamber) refused the tenant's application to discharge or modify a leasehold covenant which prohibited him from sub-letting his flat. The Tribunal concluded that the desire to keep a block of flats as mostly owner-occupied can be sufficient to constitute a practical benefit of substantial value.
The applicant was a tenant in a flat located in a 1930s owner-occupied block of 31 flats called Courtenay Gate, situated on the sea-front of Hove. The landlord was a company named Courtenay Gate Lawns Limited ("the Company"). The Company owned the freehold of the building and its shareholders were the lessees in the block. The applicant tenant was initially granted a 125 year lease from January 1973, but the term was later extended to 215 years by a deed of variation and a supplement lease. His lease contained an absolute covenant against sub-letting.
In 2009, the tenant went to work in Australia and in November that year he asked the Company for permission to sublet his flat. Although the Company was initially willing to grant such consent, they subsequently decided not to do so. The Company's solicitors wrote to the tenant and to his letting agents, who had advertised the flat to let, stating that he was not authorised to sublet. In February 2010, the tenant nevertheless granted an assured shorthold tenancy of the flat. The Company obtained a determination from the Leasehold Valuation Tribunal in April 2011 that this subletting was in breach of the tenant's lease.
In August 2011, the tenant granted another assured shorthold tenancy agreement of his flat and submitted an application to the Upper Tribunal, pursuant to section 84(12) of the Law of Property Act 1925, seeking to (i) discharge the covenant prohibiting sub-letting or (ii) modify it so as to permit him to sublet with the landlord's consent. He also sought a related modification of the user covenant. To succeed, the tenant had to show the existence of one or more of the four grounds which justify modification or discharge (under s.81(1) of the 1925 Act). The tenant sought to rely on ground (aa), i.e. that the covenant impeded the reasonable use of the land. This required him to show that (i) the restriction on sub-letting did not secure any practical benefit of substantial value or advantage or was contrary to public interest and (ii) money would be adequate compensation to anyone suffering loss or disadvantage from the discharge or modification of the covenant.
The Company objected to the tenant's application, explaining that the restriction had been imposed to ensure that the persons responsible for the upkeep, maintenance and decision-making of the flats were those who had their primary residence there, thereby insuring a distinct community. The tenant sought to reject this argument on the basis that the Company had agreed to modifications of the leases of two other flats so as to permit sub-letting (although subject to conditions) and that the leases of seven further flats permitted sub-letting.
The Lands Chamber found that the Company had agreed to modify one of the leases in the block to allow subletting because of the threat of legal proceedings. In relation to the seven leases which were said to permit subletting, the Lands Chamber found that four of these did not do so in substance because they only allowed the flats to be used by the tenant and his family. The remaining three leases were not clear-cut regarding permission to sublet. The Chamber noted that only one flat within the block (other than that of the applicant tenant) was actually sublet.
The Lands Chamber stated that the principal issue to decide was whether owner-occupation of the block had been so diluted by the provision for subletting in certain leases of the other flats, that the prohibition on further sub-letting would not give the Company any substantial value or advantage.
The Lands Chamber accepted the Company's submissions that the prohibition on sub-letting brought with it a number of benefits for the block as a whole, including the fact that blocks of owner-occupied flats were often better kept and better managed, with decisions able to be taken more quickly. On a more practical level, it was also less desirable to live in a block where tenants were continually moving in and out and where there could be lengthy periods of vacancy.
The ability to prevent an additional flat being sublet was therefore a practical benefit of substantial value to the Company, whether or not it could prevent the sub-letting of the other flats within the block. The fact that a small minority of the block's leases did not contain the same prohibition on sub-letting did not dilute the character of the block enough to mean that the covenant was of no practical benefit. The tenant had therefore failed to make out ground (aa).
The Lands Chamber added that – even if the applicant tenant had been able to make out ground (aa) - it would most likely have refused to exercise its discretion in the applicant's favour in light of his conduct in continuing to grant further assured shorthold tenancies of his flat despite the finding of the Leasehold Valuation Tribunal that this was in breach of his lease.
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