Developers! Beware of Restrictive Covenants!

The Court of Appeal has reversed a decision of the Upper Tribunal (Lands Chamber) which had retrospectively modified restrictive covenants on the basis that it would be contrary to public interest to not do so, since the covenants hindered the provision of already-built social housing on the development site.

The law on variation of restrictive covenants

Under s.84 of the Law of Property Act 1925 (s.84 LPA 1925), a person with an interest in property subject to a restrictive covenant which impedes a reasonable user’s use of their property, is entitled to make an application to the Upper Tribunal to modify or discharge the restrictive covenant on several grounds. One such is that it would be contrary to public interest to restrict the use of the applicant’s property and that any consequences of removing/modifying the covenant can be adequately remedied by compensation to the beneficiary of the covenant. The Tribunal must assess whether to use their discretion to award such a modification/discharge in light of the circumstances surrounding the application.

The Facts

• Millgate (the “Developer”) purchased a development site near to Exchange House in Maidenhead in approximately 2013 (the “Exchange House Site”) and sought planning permission to develop the site.
• Around the same time, the Developer also acquired and sought planning permission on a sister site near Woolley Hall in Maidenhead (the “Woolley Hall Site”).
• Planning permission was granted on both sites, with the planning permission on the Woolley Hall Site being conditional on affordable housing being constructed on the Exchange House Site and transferred to an affordable housing provider.
• The Exchange House Site was subject to restrictive covenants which provided that some of the land on which 13 houses were to be built was only allowed to be used as a car park. The restrictive covenants were imposed for the benefit of the neighbouring property, one of the beneficiaries at the time being The Alexander Devine Children’s Cancer Trust (the “Trust”)). The covenants had the effect of preventing the erection of houses within ¾ of a mile of the Trust’s land (the “No Build Zone”).
• The Developer was aware of the restrictions placed on the development at the time of acquisition. Regardless, they proceeded with the development, built within the No Build Zone and sold the units to Housing Solutions Limited for social housing use (as per the planning conditions) in breach of the restrictive covenants.
• The Developer sought retrospective modification of the restrictive covenant under s.84 LPA 1925, to allow the residential properties that it had already built in the No Build Zone. This application was sought on the grounds that it was in the public interest for social housing to be provided and that the Trust could be adequately compensated for any harm caused.
• In the first instance the Developer was granted the modification. The Trust was awarded £150,000 in compensation for the harm to its amenity that it suffered – clearly a lot less than the benefit to the developer of building the 13 housing units.
• The Trust appealed against the decision, on the basis that they proposed to develop a hospice on their own land, to include recreational areas and a wheelchair path, but the social housing abutting their land would compromise their plans. Presumably, the hospice hoped that if successful the restrictions would be reinstated, the Developer would be required to demolish the impeding housing units and the hospice could proceed with their plans unhindered.

The Court of Appeal Decision

On appeal, the Court of Appeal held that the Upper Tribunal erred in their judgment and should not have granted the modification of the restrictive covenants, for the following reasons:

1) when applying the “contrary to public interest” test, the Tribunal must consider whether the applicant had made their application before breaching the restrictive covenants, whether this was a deliberate breach, and whether the applicant had a good excuse for making a retrospective application. The Tribunal must not reward breaking of the rules.

It was contrary to public interest for a developer to proceed with the development knowing that they would be in breach of restrictive covenants in doing so. The Developer should have applied to release the restrictive covenants before they proceeded with the development.

In this case the Developer had knowingly breached the restrictive covenants and had deliberately failed to follow the correct procedure under s.84 LPA 1925, in an attempt to gain an advantage. The Developer may have formed the view that the Tribunal would be more likely to grant the modification to the covenants once the development was completed. If the Developer had made a pre-emptive application this would have forced them to explore other, possibly less cost-effective solutions and would have lost them the public interest argument against demolishing the now-built social houses.

2) if at first glance the Tribunal ascertains that there is a public interest in having the covenants modified/removed, the Tribunal must dig deeper to ascertain whether there is an alternative option to avoid infringement of the covenants. In this case, the Developer could have:

• re-arranged the site layout so as to move the affordable housing outside of the No Build Zone;
• paid a sum of money to the Local Authority to enable them to satisfy their social housing requirements on another development site;

in order satisfy the public’s need for social housing without infringing covenants and thus the Trust’s proposed development.

3) the Tribunal must have due regard to the impact of the modification/discharge of covenants on the private property owners, and balance their interests with the interests of the general public.

A Word of Warning to Property Developers

 The Tribunal may still use its discretion to modify/discharge a restrictive covenant where it is in the public interest to do so. However, the Tribunal will consider all circumstances in the round, they will look to balance the interests of private property owners and the general public and they will not look favourably on developers who intentionally flout the statutory process and delay making their application in an attempt to gain an advantage.

If you are concerned about any of the points raised in the above case review or if you would like any further information on the issues highlighted then please contact our Property Litigation Team.  We will provide an update on the practical repercussions of the case should further information come to light.