Court of Appeal finds against developer who ignored restrictive covenants

In Alexander Devine Children’s Cancer Trust v Millgate Developments Ltd and another company [2018] EWCA Civ 2679,  the Court of Appeal has sent a strong message to developers not to build on land in breach of a restrictive covenant or even to ignore it.

Summary

To defeat the restrictive covenant, some developers have been building on land then presenting the court with a fait accompli, urging the judge not to order demolition but to compensate the frustrated covenant-holder instead. The Court of Appeal urged all developers to invoke the discharge and modification procedure under Section 84 of the Law of Property Act 1925  at the proper time and in the proper manner.

The Court also accepted that local authorities need only consider planning issues when presented with a planning application, and that they are not required to take account of restrictive covenants affecting the land, as these are private property rights. The Court went on to hold that local authorities are entitled to expect such rights will be the subject of separate negotiations outside of the planning process.

In this case, the court ordered the developer to demolish a block of 13 affordable flats, which, given there is a shortage of housing in the UK, is a surprising decision. Understandably, the developer has sought and been granted permission to appeal by The Supreme Court so I will report further when their decision is out.

Background

The developer had a high GDV project on land not affected by the restrictive covenant. A condition of the planning permission for this project however was to provide some affordable housing. The developer decided to satisfy this condition on land burdened by the restrictive covenants, as this land was situated on the edge of the main development site. The beneficiary of the covenant did object to the developer but the developer dismissed those objections, stating that the covenants did not benefit the land adjoining the land on which the affordable housing units were built. The adjoining land was bare agricultural land at the time.

After completing the build of the housing units, the developer applied to modify the covenants. By this point, the owner of the adjoining land had changed and the land was now owned by a children’s hospice, who wanted the land on which the housing units were built to stay vacant – to provide a tranquil setting for terminally ill children and their families to enjoy their final months together. The hospice was planning the layout and landscaping of the hospice at the time prior to the affordable housing units being constructed so they naturally objected quite strongly against the developer.

To rub salt to the wound, the condition in the Section 106 Agreement specified that no sale of the full market value houses could be completed until the social housing was in the hands of a registered provider. Fortunately, the local authority agreed to vary the Section 106 agreement but on the basis that a commuted sum of £1.6M was paid by the developer to the local authority so that they could build equivalent social housing elsewhere within the borough.

In 2016, the Upper Tribunal (Lands Chamber) had bowed to pressure applied by the developer, deciding that public interest (shortage of housing) was best served by allowing the already built social housing to remain and for the developer to pay for a significantly enhanced landscaping features on the hospice’s land to protect it from the effects of the development.

The hospice was unhappy about this and appealed to the Court of Appeal. They raised four main grounds of appeal and won on all four grounds.

In the Tribunal, the developer had argued that the grant of planning permission was strong evidence that discharge or modification of the covenant was in the public interest. The Tribunal had accepted this argument but as mentioned above, the Court of Appeal ruled that this put the significance of planning consent much too high on the consideration scale. They said it took no account of the private property interests of those who had the benefit of the restrictive covenant. In my view, this is a good decision, otherwise, we could well see the situation where private property rights is always defeated by the ‘public interest’ argument, which could be detrimental to private property owners.  The Court went on to state that there was at least the public interest in having private property rights respected in dealings between private persons. On that analysis, the Court said, the fact that the beneficiaries of the covenants had not objected during the planning application process was irrelevant – they were entitled to simply and legitimately rely on their private rights.

The Court of Appeal Decision

The Court observed that, when assessing the public interest point, it was necessary to look at how the situation arose. The developer was aware of the covenant and could have tried to negotiate a release of the covenants with the beneficiaries of the covenants, who were easily identifiable. Alternatively, the developer could have applied under Section 84 of the Law of Property Act 1925 for them to be discharged or modified before it started construction. The Court’s view was that the developer’s choice to present the Upper Tribunal with a completed block of social housing during their consideration under Section 84 weighed heavily on their thought process, which was inappropriate.

The availability of an alternative solution, namely the commuted payment, the Court ruled, had also not been given enough attention by the Upper Tribunal. The Court reasoned that the public interest argument could be served by the local authority accepting the commuted payment to provide social housing elsewhere, which would thus have enabled the private property rights exercised through the restrictive covenant to be safeguarded.

In the round the Court ruled that the public interest test must be passed first before a judge could consider whether or not to exercise the statutory discretion to discharge or modify a covenant and that the public interest was not a factor in that part of the decision. The Court of Appeal ruled that the developer had not passed this test so the exercise of judicial discretion whether to discharge or modify the restrictive covenant did not kick in.

Interestingly, the Court of Appeal went further and said, even if the public interest test had been satisfied by the developer, the Court would have ruled against the discharge or modification of the restrictive covenant because of the developer’s ‘deliberately unlawful and opportunistic conduct’ which was ‘directed to subverting the property application of [Section 84 of the Law of Property Act 1925] without good reason’. It had ‘acted in a high-handed manner by proceeding to breach the restrictive covenant without any justification or excuse’.