Upholding property rights

In November 2020 the Supreme Court unanimously decided in Alexander Devine Children’s Cancer Trust v Housing Solutions Ltd [2020] UKSC 45 that the housing association who had taken a transfer of housing from a developer, who had knowingly built in breach of a restrictive covenant, was not entitled to secure its release or modification under section 84 of the Law of Property Act 1925. Despite the pressing need for affordable housing, the Court held that the developer should not be rewarded for presenting the Tribunal with a fait accompli.

What happened in this case?

Around 5 years ago, Millgate Developments Limited ("Millgate") built a high-end residential scheme in Maidenhead. As part of obtaining planning consent for this scheme, Millgate was obliged to provide some affordable homes. It decided not to build these at Woolley Hall and instead bought a site called Exchange House. Some of the site is affected by a restrictive covenant against building on the land. This covenant benefits the adjacent land, on part of which a children's hospice has been built.

The planning agreement specified that Millgate would not sell more than 15 units at Woolley Hall until the affordable homes at Exchange House had been built and transferred to a social housing provider. The affordable housing comprised a block of flats on the part of the land that was not affected by the covenant (the "unaffected land"), and 13 houses on the land that was affected by it (the "covenanted land").

In July 2015, after having completed building work, Millgate applied to the Upper Tribunal for the modification of the covenant pursuant to section 84 of the Law of Property Act 1925 (the "LPA").

What does section 84 say and how does it work?

Section 84 of the LPA enables the Upper Tribunal to order the whole or partial discharge or modification of a restriction where it is satisfied that one or more of the following applies:

(a) Obsolescence - the character of the property or the neighbourhood has changed, or there are other material circumstances, which mean that the restriction ought to be deemed obsolete; or

(b) Impediment to a reasonable use of the property - the continued existence of the covenant would impede a reasonable use of the land for public or private purposes. This can only be considered where the restriction does not give the beneficiary any practical benefits or substantial value or advantage, or is contrary to the public interest, and money would be an adequate compensation for the loss of the covenant. This ground has been the most commonly utilised by developers in recent years.

(c) No detriment - The proposed discharge or modification would not be detrimental to the persons entitled to the benefit of the restriction.

The Upper Tribunal can also award compensation to the person entitled to the benefit of the restriction either a sum to make up for any loss or disadvantage suffered by that person in consequence of the discharge or modification; or to make up for any effect which the restriction had, at the time when it was imposed, in reducing the consideration then received for the land affected by it.

The Upper Tribunal's decision in 2016

It emerged during the tribunal hearing that Millgate knew about the covenant and decided to build in breach of it without attempting to obtain a discharge or negotiate a release beforehand. It may also have been able to obtain planning consent for a different layout at Exchange House whereby all 23 affordable units were built on the unaffected land; for instance by building a larger block of flats instead of a small block plus some houses. It had not investigated this. Alternatively, it could have built affordable housing on the more valuable Woolley Hall site but chose not to do so, in order to increase its own profit.

The Tribunal also learnt that Millgate had obtained a variation of its planning arrangements in 2016 so that, if it was not successful in the Upper Tribunal or if the affordable housing had not been transferred to the social housing provider by 30 September 2017, it could pay £1.6m to the local planning authority ("LPA") to be released from provision of this affordable housing. The LPA could use these funds to build affordable housing elsewhere in the area.

The Tribunal:

accepted that it had no power to modify the covenant under the Law of Property Act 1925 s84 (1A) (1aa) (a) because it secured a practical benefit of substantial value or advantage to the hospice;
determined that the covenant could be discharged because it was contrary to public interest pursuant to s84 (1A) (1aa) (b); and
awarded the charity £150,000 compensation to pay for remedial planting and landscaping to screen the hospice garden from the housing estate, plus damages for loss of amenity.

The judge commented that the existence of planning permission for the use of the land for housing is significant when the applicant argues that a covenant operates contrary to public interest. In reaching its decision, the Tribunal noted that it was highly material that breach involved the construction of social housing intended for occupation by tenants who had been waiting for a very long time. It said the houses were attractive, well-made and were currently standing empty because of the restriction imposed by the covenant.

The Court of Appeal's decision

The charity appealed to the Court of Appeal, which agreed that:

The Tribunal should not have assumed that the grant of planning consent indicated that the development was in the public interest. The process by which a planning application is determined is very different from the process of deciding whether to uphold a restrictive covenant. The Court identified that it was in the public interest that contracts should be honoured not breached and that property rights should be upheld and protected.
The Tribunal should have taken into account the fact that Millgate chose to build on the covenanted land rather than pay the LPA the commuted sum or seek to build the affordable housing entirely on the unaffected land.
The application should have been refused because Millgate had acted without proper regard to the rights of the Trust and with a view to circumventing the proper consideration of the public interest under section 84. The Court of Appeal decided Millgate's conduct was "deliberately unlawful and opportunistic".

The Supreme Court's decision

The social housing provider that now owns the affordable homes appealed to the Supreme Court, which narrowed the arguments down to a consideration of what they regarded as being the central issue in the case – what was the relevance of Millgate’s cynical breach of the covenant?

The Court considered the jurisdictional argument as to what the Tribunal could take into account when assessing if the covenant's continued existence was contrary to the public interest. The Court decided that the LPA requires a narrow interpretation of what is meant by “contrary to the public interest”, and that they therefore had to ask themselves whether or not it is in the public interest for the restrictive covenant to continue in place not the wider question of whether in all the circumstances of the case it would be contrary to the public interest to maintain the restrictive covenant. In this case, the user of the land for social housing was reasonable and it was contrary to the public interest for the 13 housing units not to be able to be used. Against that was the public interest in the hospice providing a sanctuary for children dying of cancer without being overlooked by neighbouring homes. This involved the resolution of a land-use conflict. The wider public interest question of whether this might reward Millgate's cynical behaviour or encourage other developers to build without attempting to deal with restrictive covenants were not relevant to this jurisdictional argument. The Supreme Court decided that the Upper Tribunal was correct in determining that Millgate had succeeded on this point.

They agreed with the Court of Appeal, however, that the Tribunal had failed properly to consider, at the discretionary stage, Millgate’s cynical conduct. In particular it had made an error of law in failing to consider that (i) Millgate could have built on the unaffected land, not the covenanted land; and (ii) Millgate would have been unlikely to satisfy the “contrary to the public interest” ground had it applied to modify the restrictive covenants before building the houses.

This decision means that the restrictive covenants still stand and the 13 affordable houses have been built in breach of them. If the charity wants them to be demolished then it will need to start a new claim to seek an order requiring their demolition. LJ Burrows commented that if the charity were to choose to pursue damages instead of an injunction to remove the houses then this judgment would strengthen its hand in any financial settlement.

What does this decision mean for developers and landowners in the future?

For developers: The decision emphasises that developers who know that a site is affected by a restrictive covenant which impedes development should either try to negotiate a release of the covenant or make an application under Section 84 to see if it can be modified or discharged before building out a scheme.

This decision may make it more difficult or more expensive to obtain insurance against the loss resulting from breach of a restrictive covenant, as the requirement to notify covenantees about their development plans is unlikely to be acceptable to most insurers.

However, the Court disagreed with the Court of Appeal's reasoning that an applicant who has committed a cynical breach of the type committed on these facts should have its application refused on the basis of a matter of principle whereby a cynical breach such as that committed in this case outweighs what would otherwise be the public interest in discharging or modifying the restrictive covenant. The Court felt that this would be too rigid a principle and that without discretionary qualifications to cater for exceptions, it would inappropriately fetter the Upper Tribunal’s discretion.

The rationale for refusing the developer's application in this case rested on the Tribunal's failure to take into account the ways in which the developer could have taken steps to have avoided a land use conflict. This implies that if a developer obtains planning consent, if there is no alternative way in which their scheme can be structured, and if they have behaved openly, then they might be able to avoid an injunction and instead be required to pay a relatively insignificant award of damages.

What a court will regard as cynicism will vary depending on the facts. A deliberate breach of a restrictive covenant for the purpose of commercial gain, without any genuine attempt to contact the beneficiaries to obtain a release, is likely to be regarded as cynical.

For landowners: Landowners can take some comfort from the Court's assertion that the Tribunal should in future cases weigh up a developer's conduct when exercising its discretionary powers. However, the judgment did not give any reassurance about the protection of private rights over land when faced with claims regarding the public interest. The significance that the Court gave to whether or not a scheme had been granted planning consent means that beneficiaries of restrictive covenants should be ready to object to any planning applications which seek to obtain consent for proposals that would breach those covenants.

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