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Restrictive Covenants and the Supreme Court
Nov 11, 2020
Restrictive Covenants and the Supreme Court
For the first time ever, the Supreme Court has decided on an appeal relating to s84 of the Law of Property Act 1925 (LPA 1925). S84 gives the Upper Tribunal discretion to discharge or modify restrictive covenants where one or more specified grounds are satisfied to enable development of burdened land. In this case, the Supreme Court has held that the threshold to exercise such discretion hadn’t been satisfied and so the primary remedy is an injunction to remove the offending development.
Section 84 powers
Millgate Developments (Millgate) were engaged to build 13 properties for a registered provider of social housing on a plot of undeveloped land. The land was burdened by a covenant that prohibited any use other than for the parking of vehicles. The beneficiary of the covenant was a neighbouring children's hospice, the Alexander Devine Children's Cancer Trust (the Trust). The Trust objected to the development but Millgate went ahead in order to comply with its s106 agreement which required the provision of social housing as a condition of planning consent for a high-end development being constructed elsewhere. Crucially, the site adjacent to the hospice was not the only potential space for the build.
Millgate argued that the social housing development was in the public interest and relied upon the grant of planning permission in support. Millgate then developed in breach of covenant and only later brought an application under s84 LPA 1925 seeking retrospective modification based on section 84(1)(aa), which gives the Tribunal discretion to discharge or modify a restriction where it impedes a reasonable use of the land in circumstances where either:
1. it does not secure any practical benefit of substantial value or advantage to the beneficiary; or
2. the restriction is contrary to the wider public interest with money being adequate compensation.
The Upper Tribunal accepted that there was practical benefit of substantial value to the Trust in preventing use of the land for any purpose other than parking. In this context, the practical benefit conferred by the covenant was not the ability to use the land for parking but rather protection of the privacy and seclusion of the hospice environment by ensuring that no development could take place. However, the Upper Tribunal held that the second limb of ground 84(1)(aa) was satisfied given the immediate and important need for affordable housing to be made available. Essentially, the public interest in having the affordable housing was more important than keeping the land undeveloped.
Court of Appeal approach
The Court of Appeal disagreed with the Upper Tribunal, an important point being that Millgate acted in flagrant disregard for the covenant, in full knowledge of its existence and without going through the proper process provided for by s84.
They made it clear that the existence of planning permission did not mean that there had been an objective assessment of public interest – this still had to be assessed within the parameters provided for by section 84. Millgate had deliberately circumvented the proper procedures for testing the covenants by failing to apply to the Upper Tribunal prior to building (the court did not go so far as to rule out any possibility of applying for modification retrospectively in less clear circumstances).
In a decision handed down on 6 November 2020, the Supreme Court upheld the decision of the Court of Appeal.
Lord Burrows, who gave the leading judgment, referred to "two omitted factors" which the Upper Tribunal erred in law by failing to consider. These were:
1. Had Millgate respected the rights of the Trust by applying for planning permission to develop an alternative plot within its land bank (which did not benefit from the covenant), then an application to modify under s84 would not have been required. The entire dispute could reasonably have been avoided i.e. modification was not necessary to deliver the public benefit advanced by Millgate.
2. Had Millgate respected the rights of the Trust by applying under s84 before starting to build, it is likely that Millgate would not have been able to satisfy the "contrary to public interest" limb of section 84(1)(aa). This is because Millgate would have been met with the objection that planning permission would be granted for affordable housing on alternative unencumbered land so that the upholding of the restriction would not be contrary to the public interest.
The Supreme Court therefore held that it follows that the effect of Millgate's cynical breach of covenant was to fundamentally alter the position in relation to the public interest.
Conclusion
This case demonstrate the importance of seeking to discharge any restrictive covenants prior to commencing works and the dim view that courts take where a developer acts in a high-handed or cynical manner.
A decision in favour of Millgate would have set a precedent to enable modification of almost any covenant where the developer can demonstrate a degree of public benefit in its scheme. The Supreme Court decision shows that demonstrating public benefit does not guarantee modification.
The conduct of Millgate has without doubt, had an impact on the Court’s determination of the case. If another developer had applied for modification prior to carrying out the development and if there wasn’t an alternative unburdened plot of land available for use, the outcome may have been much different.
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