Supreme Court's input required on dealing with restrictive covenants

All eyes will be on the Supreme Court this July, as it hears the developer's appeal against the Court of Appeal's decision in Alexander Devine Children's Cancer Trust v Millgate Developments Limited and others [2018] EWCA Civ 2679, a case in which a developer built social housing in knowing breach of covenant. The Court of Appeal refused to allow the developer's application for modification or discharge of the restrictive covenant against building. Will the Supreme Court uphold the Court of Appeal's decision, bolstering the rule that a retrospective application in these circumstances for discharge of a covenant will be unsuccessful? Or will it agree with the decision of the Upper Tribunal at first instance, and allow modification of the covenant on the basis that impeding the occupation of already built and much needed social housing was against public policy if a sum of money could be paid to the beneficiary of the covenant? It will be the first time that the Supreme Court has considered applications for discharge or modification of covenants using the statutory process, and developers will no doubt want to follow with interest.

We first reported on this case in May 2017. Click here for our blog post at that time, and click here for our fuller discussion of the case when it was heard by the Upper Tribunal.

Restrictive covenants and development

Many sites earmarked for development will be the subject of multiple third party rights, such as covenants and easements. Covenants are agreements between owners of land which either restrict the use of the land (restrictive covenants) or impose an obligation on a landowner (positive covenants). When considering purchasing land for development purposes, title to the land should be fully investigated to find out as much as possible about any existing covenants. It is common to see wording along the lines of "No buildings or erections shall be built on this land and the land shall not be used for any purpose other than an open space for the parking of motor vehicles". Once a restrictive covenant such as this comes to light, and the land to which it applies and the beneficiary of the covenant has been identified, the next step is to consider the potential solutions and deal with it proactively.

Background to the Millgate case

Unfortunately for the developer in this case, he was not at all proactive in this sense, and this has proved to be a mistake. The developer purchased a large development site, part of which was subject to a restrictive covenant similar to that described above, which prevented the use of that part of the land as anything other than a car park. The developer was aware of the existence of the covenant at the outset, not least because the neighbouring charity with the benefit of the covenant, a children's cancer trust and hospice, concerned about the reduction in amenity that the hospice would enjoy if housing was built, had informed him. The charity was relying on the restrictive covenant to make sure that its garden and proposed recreational facilities were not overlooked by any housing. In order to meet its planning obligations, the developer built 13 affordable housing units, and after completion, applied to the Upper Tribunal under section 84 of the Law of Property Act 1925, for retrospective discharge or modification of the covenant.

The Upper Tribunal found that although the developer had acted in knowing and deliberate breach of covenant, and although the covenant gave practical benefits for the charity which were of substantial value or advantage, the covenant should be modified to allow the housing to remain on the basis that there was sufficient public interest in making already built and much needed affordable housing available to those waiting for it. The fact that planning permission had been granted for this development strongly supported that.

However the Court of Appeal reversed that decision and reinstated the restrictive covenant.

So what made the difference to the Court of Appeal?

The Court of Appeal was very clear in its position. It disagreed with the lack of weight given to the covenant as a private property right. It also disagreed with the importance given to the grant of planning consent, holding that the public interest in allowing the social housing to remain did not outweigh the public interest in protecting the charity's contractual rights under the restrictive covenant. It was possible for the developer to have built the social housing units on land that was not subject to restrictive covenants, whilst still meeting its planning obligation to deliver affordable housing, but it chose not do this, or to pay the local authority a £1.6 million contribution to provide social housing on an alternative site. Furthermore, the developer acted in a way which was "deliberately unlawful and opportunistic" in waiting until the housing units were constructed before applying for discharge of the covenant, and it should not be able to rely on its own unlawful conduct in having built the housing units as a reason to justify why the covenant should now be modified. The developer had long been aware of the existence of the covenant and should either have tried to negotiate a release with its beneficiary or pursued its section 84 application at a much earlier stage in the development process. The Court also held that the fact that the charity did not object to the grant of planning permission did not prevent it from opposing the discharge of the covenant, as it was entitled to rely on its private contractual rights.

What now for developers?

The Court of Appeal sent a strong message to developers not to wilfully build on land in breach of a restrictive covenant. Whilst it made clear that the decision was not intended to be a punishment, it concluded that it would not incentivise law breaking. The case shows that proper due diligence and planning at an early stage in the development process will avoid unnecessary delays and costs in the long term. A developer wishing to build on land subject to a restrictive covenant that impedes his development scheme has four options, which should be considered before any works start:

1. modify the scheme so not as to infringe the covenants;
2. make an offer to the beneficiary of the covenants for a release, on the understanding that this may then turn into a negotiation over a period of time;
3. apply to the Upper Tribunal at an early stage in the development plans for modification or discharge of the restrictive covenant under section 84; and
4. consider applying for indemnity insurance to cover against the risk of enforcement. Whilst this can be a cost effective way of managing the risk of enforcement and the amount of damages which could be payable and/or the cost of demolition or alteration of part of the development scheme, as well as any reduction in the value of the beneficiary land, insurance is not always available.

Section 84 has an important role in allowing for potential development, at a time when housing is in short supply and development for residential purposes is being encouraged. Clarity on the Supreme Court's position on balancing the public policy grounds in section 84 and the wider interests of the public, and the rights of beneficiaries of covenants, would be much welcome. July cannot come soon enough.

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