Restrictive covenants: breach now – apply later?

When a developer purchases land subject to a restrictive covenant that does not suit its aims it has three options:

• negotiate a release
• go ahead and take the risk of later action
• or apply to the Upper Tribunal under section 84 of the Law of Property Act 1925.

Section 84 provides that the Upper Tribunal may discharge or modify a covenant on being satisfied that the restriction ‘is contrary to the public interest’ ((1A)(b)) and that its continued existence ‘would impede some reasonable user of the land for public or private purposes’ ((1)(aa)) – or would do so unless modified.

But what is the public interest? Is the public interested in land being used or in property rights being upheld? Or perhaps both?

The Alexander Devine Children’s Cancer Trust v (1) Millgate Developments Limited, (2) Housing Solutions Limited [2018] EWCA Civ 2679 highlights how public interests can be multiple and conflicting.

Background

When John Smith sold a portion of land (the Exchange House site) in 1972 he obtained covenants from the purchaser which provided that ‘no building, structure or other erection of whatsoever nature shall be built erected or placed on the land’ and ‘the [site] shall not be used for any purpose whatsoever other than as an open space for parking motor vehicles’. The covenant was for the benefit of land retained by John Smith, being at that time agricultural land.

By the time the appeal came before the court, 13 of the housing units were occupied

In due course John Smith’s son, Bartholomew (Barty) Smith, inherited the retained land. In 2012 he gifted a portion of the retained land to the trustees of the Alexander Devine Children’s Cancer Trust (ADCC Trust) so that it might build a hospice for life-limited children. The hospice was not built immediately as the trustees needed to raise funds.

By 2013, Millgate Developments Limited (Millgate) had acquired the Exchange House site along with some neighbouring land (the Woolley House site). Millgate was aware of the existence of the original covenant when it purchased the land.

Millgate applied for planning permission to build 75 housing units on the Woolley House site. The local authority granted permission on the condition that it also build 23 affordable housing units. The section 106 agreement meant that Millgate had to retain unsold 15 units on the Woolley House site until the 23 affordable units had been built and transferred to an affordable housing provider.

Millgate began construction of social housing on the Exchange House site in July 2014. Barty Smith became aware of the work and, after visiting the site in mid-September, consulted solicitors. He then wrote to Millgate, warning the developer about the covenant and asking it to stop work immediately. Millgate did not stop work.

Millgate construction on the Exchange House site concluded on 10 July 2015. Ten days later, Millgate applied to the Upper Tribunal seeking modification of the covenant under section 84 of the Law of Property Act 1925.

Construction of the children’s hospice began in September 2015.

In February 2016, the section 106 agreement was varied so that if Millgate’s application were unsuccessful, it could pay the local authority £1.6m to enable the agreed affordable housing to be built elsewhere in the area.

The judgment

In 2016 the Upper Tribunal found in Millgate’s favour and varied the covenant to allow the construction and occupation of the residential units (that were, by then, already standing) on the Exchange House site. The tribunal ordered that Millgate pay £150,000 compensation to the ADCC Trust.

The tribunal found there was a public interest in allowing the houses to stand

The tribunal relied on the judgment of Lord Sumption, Justice of the Supreme Court, in Lawrence v Fen Tigers [2014] AC 822 (a nuisance case) which had referred to the grant of planning permission as an objective assessment of the appropriate use of land, taking the public interest into account. It found that there was a public interest in allowing the houses to stand: ‘The fact that the housing in this case is social housing intended for occupation by tenants who are likely to have been waiting for such accommodation for a long time is also a highly material consideration … the houses which have been built are attractive and well-built, and are currently standing empty because of the restriction imposed by the covenants.’

After the Upper Tribunal’s decision, title to the Exchange House site was transferred to Housing Solutions, a social housing provider. Housing Solutions had the benefit of an indemnity from Millgate.

The children’s cancer trust appealed to the Court of Appeal. By the time the appeal came before the court, 13 of the housing units were occupied by tenants.

The appeal

The Court of Appeal overturned the judgment of the Upper Tribunal, finding in favour of the appellants on all four grounds of appeal.

1. The Upper Tribunal was wrong to rely on Lord Sumption’s analysis by analogy.

Guidance given in a nuisance claim (which in any event was not endorsedby the other judges) should not have been applied by analogy to this entirely different statutorycontext, the court found. There was a major difference between nuisance claims and the issue before the court: nuisance claims are ‘infused with ideas of reasonableness in a way that the rights constituted by restrictive covenants are not’ [53]. Lord Sumption’s comments were also made at the remedial stage, the question in this case was not whether an injunction should be granted (which may well be a question for a court in due course) but whether a private property right should be altered.

2. The original analysis of subsection 84 (1A)(b) was wrong in that it incentivised law-breaking.

Lord Justice Sales rejected an argument by the ADCC Trust that the housing which had already been built should be disregarded. However, he held while the fact of the development was relevant, so was the way in which it had come into being. While there is public interest in the provision of social housing, that is not the only public interest in play: ‘There is a public interest in having private contractual and property rights respected in dealings between private persons.’

The Court of Appeal was unwilling to give weight to a development completed before a section 84 application had been made, as this might encourage other developers to breach first, apply for permission later.

3. The Upper Tribunal had failed to take into account the possibility of an alternative provision for social housing.

While the Upper Tribunal had referred to the amendment to the section 106 agreement, it had not then considered that in its judgment.

4. When exercising its discretion, the Upper Tribunal failed to give sufficient weight to Millgate’s behaviour.

While Lord Justice Sales made clear that there are limited circumstances in this case, the Upper Tribunal failed to attach sufficient weight to Millgate’s ‘deliberately unlawful and opportunistic conduct’, which was ‘directed to subverting the proper application of section 84 without good reason’.

Commentary

In several recent cases the Upper Tribunal has found that restrictive covenants which impede the reasonable use of land are not in the public interest and have varied those covenants while ordering payment to the neighbour who previously benefited. The case of Alexander Devine Children’s Cancer Trust v Millgate appears to be a move back from that practice and towards upholding covenants.

While the behaviour of the respondent in this case was unattractive (the court declined to use words such as egregious) and the applicant, a hospice for life-limited children, could not be more sympathetic, in my view the importance of this case goes beyond its own stark facts. Developers who commence work without first obtaining a variation of the relevant covenant take a very significant risk. While the existence of the buildings on the land will be a relevant consideration, so too will be the question of how they got there.

Of course, the court here was not deciding that the houses had to be torn down. That will be a question for the court rather than the tribunal, and Fen Tigers will be of some relevance then.