Build in breach of restrictive covenants at your peril!

Honour restrictive covenants or risk paying the consequences, so says the Supreme Court. The highest court in the land has handed down judgment in Alexander Devine Children's Cancer Trust v Housing Solutions Limited [2020] UKSC 45, a case which saw it consider an application to modify or discharge a restrictive covenant on land, made under section 84 of the Law of Property Act 1925. This was the first ever decision on section 84 in the Supreme Court’s or its predecessor’s history. This unanimous judgment dismissing the appeal of the property developer serves as a reminder that not abiding by any restrictive covenants burdening land can be very risky, and developers should consider making an application for discharge or modification before commencing development or redevelopment works, irrespective of whether planning permission has already been granted.

How big a problem is this judgment for real estate developers? Arguably, it is not as damning for the wider industry as it would appear. It is, however, a fervent reminder that there is substantial risk if a developer does not follow the correct procedures from the outset. If the public interest threshold can be met (more on this below), then it would be inadvisable to attempt to circumvent that by pressing ahead anyway. Any court or tribunal will likely treat any such conduct unfavourably when considering whether to exercise its discretion once that first hurdle is overcome.

Another important point for developers is to recognise that if alternatives do exist, they should be pursued instead. Where planning permission can be sought for development on unencumbered land, that option should be considered. If other options are available (albeit possibly at a reduced profit) there might be no need to modify or discharge the covenants, and the encumbered land would have been unaffected. In this case, the breach could reasonably have been avoided.

We first reported on this case in May 2017, following the first round Upper Tribunal’s judgment. Click here for our blog post and here for our fuller discussion of Tribunal’s judgment. Similarly, our consideration of the Court of Appeal’s judgment can be found here.

How did we get here?

Millgate Developments Limited owned a large car park (along with some other land which would become a wider high value development) and intended to redevelop it into affordable housing. The car park abutted land which housed the Alexander Devine Children’s Hospice, which provided end of life care. The car park land was burdened by a restrictive covenant, preventing its use as anything other than a car park. Despite this, and whilst being fully aware of the existence of the covenant, Millgate built 13 affordable houses on the car park (what the courts ultimately termed a “cynical breach”). Following completion, Millgate applied retrospectively to discharge or modify the covenant pursuant to section 84 of the Law of Property Act 1925 (specifically subsection (1)(aa) and (1A)(b): that it would be contrary to the public interest that the restrictive covenant should continue). Housing Solutions Ltd, a prospective buyer of the houses, was joined as an interested party.

In 2016, the Upper Tribunal found in favour of Millgate, modifying the covenant to allow the housing. It held that whilst the covenant did provide the practical benefit of privacy to the hospice, it would be contrary to the public interest not to permit its modification in the circumstances. The Tribunal considered that the fact that planning permission had been granted was a “material consideration”, the housing’s use as social housing was a “highly material consideration”, and that it was influenced by Millgate’s open offer to compensate the hospice in the sum of £150,000. The hospice appealed.

In 2018, the Court of Appeal overturned the Upper Tribunal’s decision, and found in favour of the hospice, on the basis of its belief that the Upper Tribunal had placed too much importance on the granted planning permission, and, alongside that, the fact that Millgate could have paid a sum of money to the council to secure release from its section 106 obligations to build the affordable housing. Housing Solutions Ltd, who had since acquired the housing, appealed.

This leads us to the Supreme Court’s judgment, in which it unanimously dismissed the Millgate/Housing Solutions appeal, but, interestingly, for different reasons to the Court of Appeal.

The final showdown

The Supreme Court reconfirmed that there are two stages: the “jurisdictional stage” and the “discretionary stage”, i.e. that once one of the section 84 limbs is satisfied, then there is the discretion for the Tribunal/Court either to modify or discharge the restrictive covenant, or decide not to do so.

At the jurisdictional stage, the Supreme Court had only to assess whether the continuation of the restrictive covenant is contrary to the public interest. This exercise involved weighing up the inability to use 13 already built housing units against the hospice providing “a sanctuary for children dying of cancer”. It found that, contrary to the Court of Appeal’s judgment, the Tribunal did not make an error of law when ignoring Millgate’s deliberate breach at the jurisdictional stage.

At the discretionary stage, the Supreme Court made it clear that it would only interfere with the ruling of a lower court where it considered that an error of law had occurred. It held that the Upper Tribunal omitted to take account of two particular factors, which amounted to an error in law: (1) this could have all been avoided had Millgate applied for planning permission on its other, unencumbered, land; and (2) if Millgate had made the application before building the housing units, it likely would not have met any jurisdictional ground. Regarding this latter point, Millgate “fundamentally [altered] the position in relation to the public interest” by pressing ahead and making the application following completion, and such action should be deterred.

The Supreme Court found that its decision on this ground was “sufficient for the dismissal of this appeal”.

A burdened future?

The judgment has no bearing on what the hospice’s remedy now is for the breach of covenant. Typically, enforcement of rights over land are enforced by injunction. The starting point would then be that the hospice could seek an order to have the housing torn down or to prevent occupation permanently. Injunctions however are discretionary remedies so there is a new question yet to go to Court as to whether a Court would grant an injunction or (perhaps) award the hospice damages in lieu (potentially based upon “negotiating damages” – i.e. what commercial bargain would have been appropriate). If the case does not now settle (and the hospice’s hand has been strengthened in that regard), that may be the subject of further litigation.

It will be also interesting to see the reaction of insurers to the decision. In this case, the identity of the beneficiary of the covenant was known, not least because the hospice had informed the developer itself. Typically, when indemnity insurance is taken out to cover against the risk of enforcement, insurers will require that the insured developer does nothing in respect of the covenant, such as applying to Court under section 84 for modification or discharge, as doing so would increase the risk of a (usually unknown) beneficiary becoming aware that it may have rights. This is particularly so because some section 84 applications need to be advertised. Insurers, therefore, as well as developers, may be mindful of the possibility that an objecting beneficiary will emerge, and that an early application under section 84 may be preferable.

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