Restrictive covenants and development

Restrictive covenants and development

Restrictive covenants and development

This summer the Supreme Court is due to decide a controversial dispute between a property developer and a children’s hospice.  The decision will be important for both developers and landowners and hopefully provide some much needed clarity about the process for varying and removing restrictive covenants which affect land.

 

In brief

The developer (Millgate) built a number of affordable housing units on a plot of land subject to a restrictive covenant against building.  Millgate did not ask permission from the neighbouring landowner (which had the benefit of the restriction) nor did it make an application to the Tribunal to ask for the restriction to be modified or removed until after the units were complete.  The neighbouring land is now the site of a children’s hospice, owned and run by the Alexander Devine Children’s Cancer Trust.  The Trust and the developer have been in a dispute for several years to determine whether or not the restriction should be varied or removed and, crucially, whether the affordable housing can remain in situ.

At first instance, the Tribunal described Millgate’s behaviour as “highhanded and opportunistic” but nevertheless decided that it was contrary to the public interest to allow much needed affordable housing to stand empty and consequently found in favour of the developer.  The Tribunal also gave weight to the fact that Millgate’s development had planning permission, on the basis that this was persuasive evidence that the use of the land as affordable housing passed the ‘public interest test’.

The Trust appealed the Tribunal’s decision to the Court of Appeal who reversed the initial decision, describing Millgate’s conduct as “deliberately unlawful and opportunistic”, saying that it had “acted with its eyes open and completely at its own risk”.

The Court of Appeal was swayed by the fact that the developer had built in breach of the restriction and presented the Tribunal with a fait accompli: “daring the Tribunal to make a ruling which might have the result that those buildings have to be taken down”.

The Court of Appeal heard the case back in October 2018 and Millgate should have been out of time to appeal the decision to a higher court.  However, the Supreme Court will allow appeals out of time in certain circumstances and granted permission to appeal in June 2019.  Millgate has stepped out of the proceedings and the appeal is made by Housing Solutions Limited, which is the new owner of the affordable housing units.  It is reported that the hearing will be in July 2020, and this will be the first time that the Supreme Court (or the House of Lords in its previous incarnation) has considered a dispute regarding the process for modifying or removing restrictive covenants.

In detail

Background

Millgate Developments Limited (“Millgate”) acquired a plot of land in the green belt near Maidenhead and secured planning permission to develop the land for housing.  As part of that permission, Millgate had to include a certain amount of affordable housing on what is known as the Exchange House site.  The main development of 75 housing units for commercial sale was to be built on a different site but the two permissions were linked so that Millgate could not occupy more than 15 units of the main development until it had constructed the 23 affordable housing units and transferred these to an affordable housing provider.

Part of the Exchange House site was subject to a restrictive covenant.  This stated that the parcel of land could not be used other than as an open space for the parking of vehicles and that no buildings at all could be built, erected or placed on the relevant land.

The neighbouring land, which had the benefit of the restriction, is owned by the Alexander Devine Children’s Cancer Trust (“Trust”).  The Trust had secured planning permission to build a children’s hospice on the site.  The Trust was not aware that it had the benefit of the restrictive covenant and did not know about Millgate’s planning permission until Millgate started building.

The Tribunal found that Millgate was aware of the restriction, or at least wilfully disregarded it, and Millgate made no attempt to approach the Trust to discuss whether it would be prepared to release the restriction before they started building.  Millgate also failed to make an application to the Tribunal to request that the restriction be modified or removed.

Millgate did finally make its application to the Tribunal but only after it had finished constructing the affordable housing units.  The Trust objected and the Tribunal had to determine whether it should modify the restriction so as to allow the affordable housing units to remain in situ.

Modifying and removing restrictive covenants

Section 84 of the Law of Property Act 1925 sets out a regime under which those affected by a restrictive covenant can apply to the Upper Tribunal (Lands Chamber) to modify or remove the relevant covenant.

There are a number of different grounds on which an applicant can rely to modify or discharge a restriction.  In essence, the purpose is to remove obsolete or irrelevant restrictions which grant no practical benefit and which might hold up further reasonable development of land.  The Tribunal has a wide discretion when considering these types of cases, making it difficult to advise on a potential applicant’s prospects of success.  This is because the decisions of the Tribunal vary and it is not easy to predict how they might approach any specific application.

Millgate sought to rely on the provisions in section 84(1)(aa): that the continued existence of the restrictive covenant would impede some reasonable user of the land for public or private purposes.  This is quite a common ground for developers to cite.  In order to rely on this ground, Millgate had to show that:

  • The restriction did not secure any practical benefits of substantial value or advantage to the Trust; or
  • the restriction, in impeding the development, is contrary to public interest; and
  • that money will be an adequate compensation for the loss or disadvantage (if any) which might be suffered from the discharge or modification of the restriction.

The focus of the Tribunal at first instance was on the proposed use of the affected land for affordable housing units.  The Tribunal heard evidence that Millgate had agreed with the local authority that, if the affordable housing could not be used as a result of the dispute with the Trust, then Millgate could discharge its obligations to the local authority by making a payment of £1,639,904 to allow the local authority to secure an equivalent amount of replacement affordable housing.  Nevertheless, the Tribunal felt that it would have been an unacceptable waste of resources for affordable housing to remain empty when there is such a pressing need for it in the country.

Overall, while the Tribunal was very critical of Millgate’s conduct in this matter it was persuaded that it was contrary to the public interest to allow the restriction to remain in place when the site could be used to house families in need.

Decision of the Court of Appeal

In a complete reversal of the Tribunal’s decision, the Court of Appeal rejected the argument that the restriction was contrary to the public interest.  The Court was extremely critical of Millgate’s conduct and felt that it would be more damaging to the public interest to sanction the actions of a contract breaker which had presented the Tribunal with “a fait accompli in terms of having constructed buildings on the affected land without following the proper procedure, and then in effect daring the tribunal to make a ruling which might have the result that those buildings have to be taken down”.

The definition of ‘public interest’ in this context is taken from the case of Re Collins’ Application (1975) 30 P&CR 527 which states that the interest is “so important and immediate as to justify the serious interference with private rights and the sanctity of contract”.

The purpose of the procedure in s84 of the 1925 Act is to balance the need to respect private rights and obligations with the need for development.  If the Tribunal and the courts were to allow developers to simply ignore these type of restrictions and have the system sanction their actions after the event, then there would be no incentive to respect these private rights at all.

While it is of course possible that a developer can have legitimate reasons for failing to make its application for discharge or modification prior to commencing building works, in this instance the Court of Appeal concluded that Millgate had deliberately refrained from making any application until after construction was complete.  It then put a great deal of weight on arguments around waste of resources and lack of affordable housing to persuade the Tribunal that the restriction should be removed / amended.  The Court of Appeal heard evidence that, had Millgate chosen, it could have reorganised its development to avoid breaching the restriction and could have provided the required 23 affordable units on land unaffected by the restriction, leaving the burdened land as car parking.

The Court of Appeal also gave weight to the arrangement that Millgate had made with the local authority to pay a sum of money to provide alternative affordable housing if the units on the burdened land could not be occupied.  As it turned out, as a result of an error by Millgate this money was never paid and never would be paid, but this did not change the fact that the Tribunal had erred in failing to consider the importance of this proposal to provide alternative affordable housing.

Appeal to the Supreme Court

Millgate transferred the affordable housing to Housing Solutions Limited, an affordable housing provider and is no longer a party to the proceedings. Housing Solutions has been granted permission to appeal the decision of the Court of Appeal to the Supreme Court and reports indicate that there will be a hearing this summer.

Comments

We do not have any details of the grounds of the appeal, but expect that Housing Solutions will argue that the Court of Appeal gave undue weight to the conduct of Millgate when deciding whether or not the restriction, in impeding the development, was contrary to the public interest.  The Court of Appeal made much of what it saw as Millgate’s highhanded approach and said that it was contrary to the public interest to facilitate / encourage this kind of behaviour.  However, the test in the legislation is whether the restriction itself is contrary to public interest, not whether it would or would not be in the public interest to remove the restriction, nor whether it is in the public interest to deter contract-breakers.  This may seem a rather subtle distinction, but the Supreme Court’s decision on these issues will have wide consequences, particularly for developers, so it is definitely one to watch.

In the meantime, developers of land subject to restrictive covenants would be well-advised to engage with their neighbours at an early stage to try to negotiate a release of the relevant restrictions.  If the parties cannot agree terms then the developer should make a prompt application to the Tribunal to remove or modify the restriction before starting work.

 

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