Tenant Succeeds in Modifying Use Restriction in Commercial Lease

Almost all commercial leases are subject to covenants restricting the use to which the premises can be put. However, as an Upper Tribunal (UT) ruling made plain, tenants who are prejudiced by such restrictions can take effective steps to have them modified.

The case concerned a long lease of the ground floor and basement of an Edwardian building close to the Harley Street medical district in central London. It contained a covenant restricting the use of the premises to that of a shop or showroom. The premises had been vacant for more than three years.

All the tenant's attempts to sublet the premises or assign the lease to a tenant interested in using them as a shop or showroom had met with failure. It had found a prospective tenant who wished to use them as a medical or health clinic. Such a use was, however, precluded by the covenant.

In those circumstances, the tenant applied to the UT under the Law of Property Act 1925 for the covenant to be modified so as to permit medical use of the premises. The application was staunchly opposed by the landlord, who had sought a substantial premium and an increase in rent in return for authorising such use.

Ruling on the matter, the UT noted that the neighbourhood's character had changed over the years due to the expansion of the medical district. The layout of the premises meant that they were poorly adapted for use as a shop because of modern disability discrimination legislation. However, those factors, and the fact that no tenant was interested in occupying the premises for the currently permitted purposes, were not sufficient to render the covenant obsolete.

In modifying the covenant so as to permit medical use, however, the UT found that the restriction, as currently drafted, brought no practical benefit of substantial value or advantage to the landlord. The modification would not cause the landlord to lose practical control of the premises and their use as a clinic was plainly reasonable.

The current restriction did permit the landlord to bargain away the right to use the premises for medical purposes in return for a financial benefit. However, it was well established that the ability to relax a restriction for payment is not a practical benefit for the purposes of Section 84(1)(aa) of the Act.

The purpose of that provision was to prevent the sterilisation of land and the UT noted that, whilst the premises had proved extremely difficult to let as a shop or showroom, they could readily be let for medical purposes.

Under the terms of the lease, the tenant would still require the landlord's consent before letting the premises to a medical tenant. That consent could not, however, be unreasonably withheld. The UT found that the limited modification did not warrant the payment of any compensation to the landlord.