The case of a cynical breach – a warning to developers
Ignoring restrictive covenants and going ahead with a development knowing that it will be in breach of them, is either brave or foolish and applying to modify or discharge these covenants after the event is also risky. This dilemma was highlighted in the recent case of Alexander Devine Children's Cancer Trust v Housing Solutions Ltd  when the court had to decide whether restrictive covenants should be modified after houses had been built in breach of them.
Developers frequently apply to the Upper Tribunal to alter or remove covenants under section 84 of the Law of Property Act 1925, but this is the first time an application under section 84 has been decided by the Supreme Court. So what can be learnt from this important case?
Facts of the case
In 1972, the land in question (Application Land) was sold to an adjoining landowner to form part of a larger plot of land known as the Exchange House site. As part of the sale, two restrictive covenants were imposed on the Application Land to benefit the retained adjoining land:
- No building or structure to be built on the land
- The land can only be used for car parking
In 2012, a parcel of land which had the benefit of the restrictive covenants, was gifted to the Alexander Devine Children's Cancer Trust (AD) in order for a children’s hospice to be built. Shortly afterwards, Millgate Developments bought the Exchange House site and obtained planning permission to build 23 affordable houses, 13 of which would be built on the Application Land in breach of the covenants.
After completing the development in 2015, Millgate applied to the Upper Tribunal (UT) for the modification of the restrictive covenants under section 84 of the Law of Property Act 1925. AD objected as the development would affect the privacy of the hospice as some of the houses would overlook the garden and wheelchair walk. The UT granted Millgate’s application on the basis that the covenants impeded a reasonable use of the land and such impediment was against the public interest. AD successfully appealed to the Court of Appeal. Millgate then sold the development to Housing Solutions Ltd who appealed to the Supreme Court.
Supreme Court’s decision
The Supreme Court dismissing the appeal, considered the relevant grounds in section 84 and held:
- Millgate could have avoided being in breach of the covenants if it had applied for planning permission for that part of the Exchange House site which excluded the Application Land. The court took the view that it is important to deter those who create unnecessary conflict when they could have used an alternative viable option.
- Millgate’s argument that upholding the covenants would be contrary to public interest as social housing was needed also failed. Had Millgate applied to the UT for modification of the covenants before it had started to build, it is unlikely that it would have satisfied the “contrary to the public interest” ground. In other words, the developer should not be rewarded for presenting the court with a fait accompli when it was aware that building the houses was a "cynical breach" of the covenants.
This case shows that the courts will take a dim view of developers who knowingly commit a breach and then try to profit from it. Although the Supreme Court did not go so far as to say that a “cynical breach” would always be regarded as outweighing the public interest ground in section 84, it will be a factor which the UT will take into account. Even the argument that the 13 social housing units which had already been built would “go to waste” if the covenants were not removed did not succeed.
Importantly, the ruling shows that covenants restricting the use of land can only be unilaterally discharged in exceptional circumstances and the fact that planning permission has been obtained will not automatically mean that this will happen.
A well-advised developer should carefully consider the likely impact of any covenants at an initial stage and whether they can be varied or released through negotiation with those having the benefit. If there is no option other than to apply to the UT then an application should be made sooner rather than later – depending on the circumstances, possibly before planning permission is sought but certainly before building commences.
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