The Supreme Court has its say on the modification of restrictive covenants

Summary

The Supreme Court has recently handed down its judgment in the case of Alexander Devine Children's Cancer Trust v Housing Solutions Ltd [2020] which upholds the earlier Court of Appeal decision denying a developer's application to modify a restrictive covenant under section 84(1)(aa) of the Law of Property Act 1925.

Despite the fact that, in different circumstances the proposed development of the burdened land for housing could have been found to be in the public interest the Supreme Court decided that by applying for planning permission and starting to build before seeking to modify the covenant the developer "had fundamentally altered the position in relation to public interest". 

This sends a very clear message to developers that they should consider the timing of an application to modify a restrictive covenant carefully. This case demonstrates that the Court has a wide discretion under section 84(1)(aa) and it will take the developer's conduct into account when considering whether to grant an application to modify a restrictive covenant. The developer in this case obtained planning permission and commenced building knowing that this would be in breach of the restrictive covenant burdening the land. Despite the fact that the development would deliver much needed social housing the Supreme Court ruled that it was wrong to allow the developer to successfully modify the restrictive covenant in the face of its cynical breach of covenant.

Background

The developer, Millgate, had obtained planning permission for a housing development which included the provision of affordable homes. Under the terms of the associated section 106 agreement Millgate commenced construction of thirteen social housing units on a plot of land which Millgate knew was burdened by a restrictive covenant. The covenant prevented building on the land and use of the land for anything other than a car park. The land benefitting from the covenant lay adjacent to the development and had been donated to the Alexander Devine Children’s Cancer Trust for use as a children’s hospice.

After completing the development, Millgate made a retrospective application to the Upper Tribunal to have the restrictive covenant modified. Under section 84(1)(aa) of the Law of Property Act 1925, the Upper Tribunal has the discretion to discharge or modify a restrictive covenant if:

• the restrictive covenant does not secure any practical benefit of substantial value or is contrary to the public interest; and
• money would be adequate compensation to the benefitting landowner.

At first instance the Upper Tribunal accepted the developer's reasons for seeking to modify the restrictive covenant. The Upper Tribunal recognised that the restrictive covenant provided privacy and seclusion for hospital patients, which was a practical benefit to the trustees and had substantial value. However, the Tribunal decided that the public interest of social housing outweighed the private rights of the trustees. The developer was directed to pay £150,000 to the trust which would cover the cost of planting a boundary between the development and the hospice.

The Court of Appeal decision

The Court of Appeal reversed the Upper Tribunal decision saying that it placed too much significance on the grant of planning permission. Whilst the grant of planning permission provides a strong indication that the development is in the public interest, the Court stated that this should not necessarily trump private property rights. The trustees were entitled to assert their rights and it made no difference that the trustees had not objected during the planning approval process.

The Court of Appeal also placed significance on the fact that the developer's section 106 agreement had been varied to provide for an alternative solution if the covenant could not be discharged, namely payment of a commuted sum of £1.6 million for the local authority to provide equivalent social housing elsewhere within the borough. Therefore the social housing could still have been delivered elsewhere in the public interest whilst preserving the benefit of the restrictive covenant for the trustees.

Crucially, however the Court of Appeal placed great significance on the developer's conduct. The Court of Appeal refused to exercise its discretion in favour of Millgate because of its "deliberately unlawful and opportunistic conduct", which was "directed to subverting the proper application of section 84 without good reason". 

The Supreme Court decision

The Supreme Court also rejected the developer's appeal, although its reasoning differed slightly to that of the Appeal Court. 

The Supreme Court found that by applying for planning permission and starting to build before seeking to modify the covenant, the developer had fundamentally altered the position in relation to public interest. 

Furthermore the Upper Tribunal had erred in law when exercising its discretion because it failed to take account of the fact that:

• Millgate could have built on an alternative site; and
• Millgate would have been unlikely to satisfy the “contrary to the public interest” ground had it applied to modify the restrictive covenants prior to building.

The Supreme Court could not get away from the fact that the developer could have discharged its planning obligation by providing the social housing on an alternative site or by paying the commuted sum to the Local Authority. This would have delivered the public benefit without interfering with the trustees' private rights. Just because the developer had obtained planning permission did not give it an automatic right to modify the restrictive covenant on the grounds that the restrictive covenant was contrary to the public interest. Whether or not an application to discharge or modify a restrictive covenant will be granted is always subject to the discretion of the court. Ultimately the developer's conduct in this case weighed heavily against it.

Conclusion

This sends a very clear message to developers that they should consider the timing of an application to modify a restrictive covenant carefully. A developer should not be able to take advantage of its breach by completing construction and presenting the Upper Tribunal with a fait accompli. In some instances, planning permission for development which provides a public benefit, such as much needed social housing may persuade a court to modify a restrictive covenant that impedes such development. However, a local planning authority which is aware of the restrictive covenant may provide for an alternative approach which could undermine the developer's argument for the lifting of the restriction.

The facts of this case prove that the grant of permission alone is unlikely to be enough and the court will take the developer's actions preceding the application for modification seriously when exercising its discretion to modify or discharge a restrictive covenant. However each case will turn on its facts. It was particularly relevant in this case that the developer could have built the social housing elsewhere. This will not always be feasible and it seems very likely that the courts will continue to be faced with the difficult task of balancing public interest against upholding private rights.