Supreme Court unimpressed by developer's "cynical breach" of restrictive covenants

8 minute read
26 November 2020


In this article we consider the recent Supreme Court decision in Alexander Devine Children's Cancer Trust v Housing Solutions Ltd and consider the lessons that developers (in particular) might learn from it.

When selling a parcel of land, a vendor will often impose a restrictive covenant to limit the purchaser's use of that land in the future. There are a multitude of rules that have developed over the years to deal with the enforceability of such covenants - they should 'touch and concern' the land in question, for example, and there should be some clearly identifiable neighbouring land which has the benefit of the covenant.

Provided that a restrictive covenant complies with these rules and is properly registered, it will continue to bind the land even though the legal owner may change from time to time.

Vendors have used restrictive covenants to great effect. Sometimes vendors have grand ideas about the betterment of the general area (think the Cadbury family and their landholdings in and around Birmingham); in other cases, a vendor's interests are more localised. It may be, simply, that a vendor is happy to sell his land but wants to exercise a modicum of control in the use of that land in the future.

It was most likely out of such a sentiment that, in 1972, Mr John Smith imposed covenants on a parcel of land he was selling that (i) no building or structure should be placed on that land and (ii) that land should not be used for any purpose other than the parking of motor vehicles. In 2012 Mr Smith's son, Barty Smith, gifted the land with the benefit of these covenants to a local charity, the Alexander Devine Children's Cancer Trust (the "Trust"), for the construction of a hospice for children with terminal cancer.

In 2013 a developer, Millgate Developments Limited ("Millgate"), acquired the land burdened by the covenants. Millgate was constructing a 75-unit residential development on other land, and planned to use the burdened land to construct a further 23 affordable housing units. This is when the issues began.

Breach of a restrictive covenant

Breaching a restrictive covenant is a serious business. If the beneficiary finds out, they can bring an action for an injunction (to stop the breach) or for damages. If damages are awarded, the amount could be significant - in most cases the calculation is based on a percentage of the gain which the guilty party has made out of their breach.

For that reason, most developers are advised to obtain insurance to safeguard their position in case the beneficiary does bring an action.

But insurance only goes so far - it does not remove the covenant, it simply acts as a protection from any adverse consequences (and often not even a complete protection).

Section 84 of the Law of Property Act 1925

Does a developer in these situations have an alternative? Well obviously they could seek out the beneficiary of the covenant and see whether they will release it voluntarily. But that would take time, and the beneficiary might not agree, and it would void the terms of any insurance which the developer might have taken out.

But there is also a statutory remedy which might help the developer to unlock the land (albeit once again pursuing such action without the consent of the insurer will likely void any insurance). Section 84 of the Law of Property Act 1925 ("LPA 1925") grants the Upper Tribunal a discretionary power to wholly or partly discharge or modify restrictive covenants over land. In order to be successful in such an application, the applicant must establish one of a number of possible grounds against all of the beneficiaries of the covenant:

  • That the covenant is obsolete due to changes in the character of the land or neighbourhood, or other material circumstances;
  • That the covenant hinders reasonable use of the land and the restriction either does not provide any practical benefit of substantial value or advantage, or the restriction is contrary to public interest (and money would provide adequate compensation to the beneficiaries for discharging or modifying the covenant);
  • That the beneficiaries of the covenant have agreed to the discharge or modification of the covenant (whether expressly or impliedly); or
  • That no injury would be caused to the beneficiaries of the restrictive covenant by its discharge or modification.

The Upper Tribunal has a choice: they can remove the covenant altogether or modify it (in which case they can either simply relax the covenant or add further provisions to it). If the Tribunal decides to exercise its discretion then it may also order that the applicant pay compensation to the beneficiary to make up for any loss or disadvantage caused as a result of the discharge or modification.

So what did Millgate do next?

Despite protestations from the beneficiary, Millgate (with the benefit of planning permission) built the units on the burdened land in breach of the restrictive covenants. When they could not reach agreement with the beneficiary, they applied to the Upper Tribunal for retrospective discharge or modification of the covenants on the basis that the covenants impeded some 'reasonable user' of the land.

Before getting to the decision, there are a few important facts to bear in mind. Firstly, Millgate could have laid out its development differently so as not to breach the covenants. Secondly, by the time Millgate applied to the Upper Tribunal, the units had already been constructed. Thirdly, Millgate's development directly overlooked the facility which the Trust had built (which was intended to be a peaceful space for residents and their carers).

Somewhat surprisingly, the Upper Tribunal agreed to the modification of the covenants, albeit they did order that Millgate should make a payment of compensation of £150,000 to the Trust to allow them to undertake landscaping works to mitigate the effect of Millgate's development.

The Trust appealed. But before they did so, Millgate sold the affordable housing to a registered provider of social housing, Housing Solutions Limited ("Housing Solutions"), who became the respondent in the appeal. The Court of Appeal subsequently disagreed with the Upper Tribunal and overturned the decision - meaning that Housing Solutions had purchased units which had been built in breach of covenant (and was potentially vulnerable to a separate application for an injunction which might result in those units being demolished). Housing Solutions appealed to the Supreme Court.

The Supreme Court's decision

The Supreme Court agreed with the Court of Appeal. They viewed Millgate's actions as a 'cynical breach' of the restrictive covenants and were particularly unimpressed by the fact that Millgate could have avoided a breach altogether by planning around the covenants and that Millgate only applied for discharge after they had constructed the units - and used the fact that the units were fully built to support their case.

It remains to be seen how the Trust take this matter forwards - at present there has been no action for an injunction to remove the affordable units, but given that the restrictive covenants are now conclusively valid and binding such an action seems to be inevitable.

Practical tips for developers

Development is a speculative business, and there is invariably an element of risk and reward involved. But restrictive covenants are a serious matters, and the way that a developer conducts itself is an important factor. When coming across restrictive covenants a developer should bear in mind:

  1. The ultimate result of breaching a restrictive covenant could be that your buildings have to be demolished (or that you may have to pay substantial damages which would call the viability of your development into question);
  2. Insurance is not a panacea. It will not resolve the issue of a restrictive covenant (only protect against some of the adverse consequences);
  3. If you can plan around a restrictive covenant, you should consider doing so. At the very least it gives you leverage in any negotiations with the beneficiary;
  4. Section 84 is a powerful legislative tool that can assist developers to unlock land which is otherwise burdened by restrictive covenants. But the Upper Tribunal's power is discretionary - they are unlikely to exercise it if you act with a cynical disregard for the rights of others.

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