The rules of supply and demand have led to a growing number of properties being converted from commercial to residential use.
But it's not just landlords who are looking to exploit this opportunity. Businesses with long commercial leases on property they no longer use are also seeking to overturn restrictive covenants.
What does this mean for landlords' rental incomes and how can they protect their portfolio interests?
Why lease conversions are rising: market pressures and portfolio implications
Since the COVID-19 pandemic, UK town and city centres have seen a marked reduction in demand for office and retail space as hybrid working, online shopping and changing consumer behaviour reshape commercial occupancy. Many office buildings and retail units have remained persistently vacant.
At the same time, continued pressure on housing supply means residential values remain comparatively robust.
Research undertaken by Direct Line Landlord Insurance demonstrates a steady annual increase in applications to convert commercial premises to residential use.
An analysis of local authority data also reveals an increase in the number of commercial to residential change-of-use applications made every year since 2021.
The conversion of commercial premises to residential use under permitted development rights has created thousands of new homes – almost 100,000 in England between 2015 and 2024 with demand still outstripping supply nationwide.
These circumstances are encouraging landlords and tenants to reassess the highest-value use of commercial premises.
For tenants holding long leases of now-redundant premises, the potential to secure planning permission for residential conversion has prompted a growing wave of applications to vary restrictive covenants that prohibit residential use.
How lease conversions affect property values and rental income
For landlords, the implications of lease conversions vary depending on the property type, location and market conditions.
- Capital value effects: in many areas of the UK, converting an underperforming commercial asset to residential use results in a higher capital value. Residential units tend to attract a broader buyer pool and deliver more predictable long‑term demand. Case studies show that where conversion is viable, capital value uplift is often significant, especially for obsolete office buildings.
- Rental income effects: however, rental income may not always follow the same trajectory. While residential lettings can generate stable income streams, commercial leases traditionally offer higher yields and longer terms. In some markets, landlords risk losing premium office or retail rent in return for a more modest rental profile, even if the capital value increases. According to Direct Line Landlord Insurance's research, London has seen the highest rate of growth in commercial to residential change-of-use applications with Haringey, Enfield, Merton, Croydon, Ealing, Lewisham and Hackney showing the highest increases.
- Portfolio‑wide implications: landlords also need to consider the wider strategic context. The conversion of a single building may influence the performance or positioning of surrounding assets. For example, maintaining a critical mass of commercial properties in an estate can be central to its economic value and future regeneration potential.
Can conversions improve portfolio performance?
Despite the risks, commercial-to-residential lease conversions can present the following significant advantages for landlords when approached strategically.
- Repositioning underperforming assets: conversions can breathe new life into ageing or difficult-to-let commercial stock.
- Unlocking latent value: residential redevelopment may reveal value that exceeds what the commercial market can deliver.
- Reducing void risk: conversions can turn stranded assets into productive ones.
- Supporting long-term resilience: a diversified mix of commercial and residential properties can stabilise income across economic cycles.
The key is for landlords to assess each property in the context of its local planning environment, market trajectory and wider estate strategy.
'The key is for landlords to assess each property in the context of its local planning environment, market trajectory and wider estate strategy'
When tenants can apply to modify lease restrictions
Section 84 of the Law of Property Act 1925 grants the Upper Tribunal (Lands Chamber) the power to modify or discharge restrictive covenants.
While it is usually employed to release covenants that restrict the use of freehold land, for example by modifying restrictions on the number of properties permitted to be built on a particular plot, section 84 can be applied more widely, and the tribunal has the power to release or modify restrictions contained in a lease.
Tenants are increasingly relying on this mechanism, subject to the qualification that the lease must have originally been granted for more than 40 years and at least 25 years have elapsed.
The tribunal may modify a covenant where at least one of the following grounds is satisfied.
- The restriction has become obsolete due to changes in the character of the property, the neighbourhood or other material circumstances.
- The restriction impedes reasonable use and does not secure a practical benefit of substantial value to the landlord or is contrary to the public interest, provided that money will be adequate compensation for any loss suffered.
- Beneficiaries have agreed to the modification.
- The modification will not injure those entitled to the benefit.
Even if a ground is met, the tribunal retains discretion and will consider planning policy, development patterns and the original purpose of the covenant.
Protecting wider portfolio: what rights do landlords retain?
Landlords are not without protection regarding lease restriction applications. They can resist applications where it can be demonstrated that the covenant continues to provide substantial practical benefit as follows.
- Portfolio viability: the restriction supports the viability of the landlord's wider estate.
- Neighbourhood: allowing residential use would undermine the strategic function of neighbouring buildings.
- Regeneration: a change of use could disrupt long‑term regeneration plans.
- Portfolio balance: the covenant protects the character or economic role of the property within the landlord's wider portfolio.
However, this defence requires robust evidence. General concerns about precedent or opening the floodgates typically carry limited weight unless supported by concrete analysis of the landlord's wider interests.
'Landlords are not without protection regarding lease restriction applications'
Preparing for tribunal application: evidence landlords need to present
If a tenant seeks a covenant modification, landlords must be prepared to respond quickly and substantively with expert valuation and planning evidence, including:
- a valuation report, showing the impact of the proposed change on capital and rental values
- planning and development analysis, demonstrating how the covenant aligns with local plans or estate strategy
- commercial viability assessments that consider alternative uses or refurbishment options
- portfolio impact studies, outlining how the change could affect adjoining or related properties.
Without this evidence, it becomes significantly harder to persuade the tribunal that the covenant still confers a meaningful advantage.
Negotiating proactively: strategies to secure a favourable outcome
Many disputes can be settled before tribunal proceedings begin. Proactive negotiation can help landlords:
- agree a controlled variation rather than full release
- secure compensation for the loss of benefit
- impose conditions to protect neighbouring assets
- explore alternative uses, sub-lettings or partial redevelopment to preserve income.
A collaborative approach can reduce risk, cost and uncertainty – particularly where the tribunal outcome is finely balanced.
'A collaborative approach to negotiation can reduce risk, cost and uncertainty'
Case law in practice
The case of Shaviram Normandy Ltd v Basingstoke and Deane Borough Council [2019] UKUT 256 (LC) was the first in which the tribunal exercised its section 84 jurisdiction over a long lease.
The tribunal concluded that the restriction requiring office use conferred no substantial practical benefit on the landlord, particularly as residential use increased the property's capital value.
The decision shows the tribunal's willingness to favour economically rational use over outdated lease restrictions. It also illustrates the weight placed on expert valuation and planning evidence in assessing a landlord's claimed benefits.
What this means for landlords in 2026 and beyond
Lease conversion applications are set to rise as commercial demand continues to soften and residential demand remains strong. To prepare, landlords with long‑lease portfolios should:
- review properties likely to be targeted for conversion
- assess portfolio-wide strategic interests early
- gather valuation and planning evidence before disputes arise
- engage proactively with tenants rather than defaulting to opposition.
Landlords who fare best will be those who recognise where conversion represents a strategic threat – and where it presents an opportunity.
Mustafa Sidki is construction litigation partner in the commercial real estate team at Thackray Williams
Related competencies include: Legal/regulatory compliance, Property management
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