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Will a developer get away with a cynical breach of a restrictive covenant?

  • Legal Development 26 November 2020 26 November 2020
  • UK & Europe

The Supreme Court has, for the first time, decided an appeal relating to the discharge of a restrictive covenant under s84 of the Law of Property Act 1925.

Will a developer get away with a cynical breach of a restrictive covenant?

This is a jurisdiction of increasing significance particularly for housebuilders.

The central issue in Alexander Devine Children's Cancer Trust v Housing Solutions Ltd [2020] UKSC 45 was the relevance of the "cynical breach" of a housebuilder who deliberately opted to breach a restrictive covenant with a view to making a profit from so doing.

What led to the litigation?

Millgate acquired a site for residential development in order to fulfil a planning obligation to provide 23 affordable homes.  The developer was aware that part of the site was burdened by a restrictive covenant prohibiting use other than parking on open land.  The planning application for the site included a block of flats with ten units located on the unencumbered land and four bungalows and nine houses on the encumbered land.   However, Millgate could have changed the layout of the site by building a larger block of flats comprising 23 affordable homes on the unencumbered land and it was accepted that this revised scheme would have been approved by the local planning authority.

Some of the land which benefitted from the restriction had been donated to a charity for use as a hospice for seriously ill children with terminal cancer. It was an important part of the hospice design that the children would have access to gardens which they could use in privacy.

Millgate ignored objections made by the previous owner of the land who became aware of the development when the building work started.  Only after the dwellings had been completed did Millgate apply to the Upper Tribunal under s84 to have the restriction lifted.  Shortly afterwards, Millgate sold the site to Housing Solutions Limited, which took its place in the s84 litigation.

The upper floors of the houses built by Millgate on the encumbered land overlook the hospice site and the roofs of the four bungalows are visible from it.    

What was the legal basis for the application to lift the restriction?

Millgate applied for the restriction to be discharged under s84 on the ground that its continued existence would impede some reasonable user of the land and that impeding that user would be contrary to the public interest.

It was common ground that use of the encumbered land to provide 13 out of the 23 affordable homes was a reasonable user of the land

What did the Supreme Court decide?

Giving judgment, Lord Burrows identified a two-stage test:  if at the "jurisdictional stage" one of the prescribed grounds in s84 is made out, the Upper Tribunal can go on to decide at the second "discretionary stage" whether to exercise its discretion to modify or discharge the restriction.

When considering whether the prescribed ground was made out, Lord Burrows was clear that the meaning of "contrary to public interest" required a narrow interpretation.  The only question which should be asked was whether the impeding of the reasonable user of the land by the continuation of the restriction was contrary to the public interest.   It was not correct to consider the point in the context of "all the circumstances", such as the good or bad conduct of the parties.

On the facts, it was contrary to the public interest for the 13 out of the 23 affordable homes built by Millgate not to be used.   The jurisdictional stage test was satisfied.

Millgate's bad conduct was relevant at the second discretionary stage where two factors led the Supreme Court to refuse the s84 application.  The first was that the developer could have applied for planning permission on the unencumbered land, in which case there would have been no need for the s84 application and the hospice would have been unaffected. 

Lord Burrows stated that it was especially important to deter cynical conduct where the land use conflict and dispute could have been avoided altogether by submitting an alternative plan.

The other key factor was that Millgate had presented the Upper Tribunal with a fait accompli. If it had respected the rights of the hospice by applying under s84 before starting to build it would probably not have satisfied the public interest jurisdictional ground.  The application would have been met with the objection that planning permission would be granted for all 23 affordable homes on the unencumbered land so that the upholding of the restriction would not be contrary to the public interest.   Millgate's cynical conduct altered fundamentally the position in respect of the public interest.

The developer's s84 application was refused.

What happens next?

The Supreme Court's judgment is limited to Millgate's application for the discharge of the restriction.  It will be for another court to decide on the appropriate remedy for the breach of the covenant if the parties are unable to come to an agreement.

Comment

The repeated references to “cynical conduct” and “cynical breach” in the judgment send a strong message that developers should not seek to rely on their own wrongdoing in order to obtain a retrospective release from binding legal obligations.   However, it leaves open the possibility that in other circumstances the public interest – use of the encumbered land for affordable homes (or some other meritorious use) – might have trumped the needs of the hospice patients.  But, what if the development site could not have been reconfigured, for example, or approval would not have been given for a re-designed scheme?

Even the risk of refusal of a retrospective s84 application may not put off a cynical developer who is willing to chance it that the court will not grant an injunction to the injured land owner and also able to fund a claim for damages.

It is perhaps frustrating that the Supreme Court has not grasped the opportunity for a wider root and branch review to issue wider guidance in this increasingly significant jurisdiction.

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