Key points
• A developer has made a successful application to modify restrictive covenants, even though it knowingly broke them
• The public interest in the provision of affordable housing trumped the private rights of landowners entitled to the benefit of covenants against building
It is a general principle that a person ought not to be able to profit from his or her wrong. In property law, this has been reflected in cases such as HXRUK II (CHC) Ltd v Heaney [2010] 3 EGLR 15, in which the court ordered a developer to remove part of a newly built office block to protect a neighbour’s right to light.
The Upper Tribunal (Lands Chamber) has also indicated its willingness to apply the principle when dealing with applications to modify or discharge restrictive covenants under section 84(1) of the Law of Property Act 1925. Although there were no grounds to modify or discharge the covenant in Re George Wimpey Bristol Ltd and another’s application [2011] UKUT 91 (LC); [2011] PLSCS 146, the judge criticised the developer’s strategy, which had been to send the bulldozers in and press on with the construction of 17 dwellings despite opposition from landowners with the benefit of a covenant against building. The judge indicated that he would not have exercised his discretion in the developer’s favour, had there been grounds to do so, as the tribunal “is not inclined to reward parties who deliberately flout their legal obligations in this way”.
Legal wrangle
So what are we to make of Re Millgate Developments Ltd’s application [2016] UKUT 515 (LC); [2016] PLSCS 339? The case concerned affordable houses built in breach of covenant in order to comply with a section 106 agreement relating to a residential development on another site. The agreement prevented the developer from disposing of units on the site until it had built affordable homes and transferred them to a social housing provider.
The affordable homes were now ready for occupation, but were situated on land that was subject to restrictive covenants that prohibited building. So the developer’s hands were tied, unless and until the covenants were modified or discharged.
Were the developer’s application to modify the covenants to fail, the developer had negotiated an alternative arrangement with the local authority, but it was not cheap. The developer would have to pay £1.64m to facilitate the provision of affordable housing elsewhere.
Practical benefits
Under section 84(1)(aa), the tribunal can discharge or modify the restriction if the covenant impedes some reasonable use of the land and that, in doing so, the restriction:
(i) does not secure any practical benefit of substantial value or advantage, or is contrary to public interest; and
(ii) money would be adequate compensation to anyone suffering loss or disadvantage from the discharge or modification of the restriction.
The tribunal accepted that the scheme would reduce privacy and seclusion in the grounds of a children’s hospice, which was being constructed on land that enjoyed the benefit of the covenants, and that noise from the new properties would carry. The cost of planting trees along the boundary to counteract these effects could reach £70,000. Consequently the tribunal concluded that, although they impeded a use of the land that was reasonable, the covenants secured practical benefits of substantial value or advantage by inhibiting the erection and use of the buildings.
Public interest
Could the tribunal apply section 84(1)(aa) on the ground that the covenants were contrary to the public interest instead? The tribunal decided that it could. The existence of planning permission for the construction of affordable housing to meet a pressing social need was a highly material consideration.
It did not follow that private rights could necessarily be overridden. However, the tribunal was satisfied that the public interest outweighed all other factors in this case and was sufficiently important and immediate to justify it exercising its powers under section 84(1)(aa).
Knowing breach
The developer had one last hurdle to clear. It had been made aware of the restrictions when it acquired the land and had chosen to build in breach of them, despite being requested not to do so. In other words, it had deliberately flouted its legal obligations.
The tribunal noted that the developer’s behaviour had been opportunistic and was not keen to foster the idea that it might be easier to modify covenants where a development has been completed, since this might encourage contract breakers to ignore objectors. However, the tribunal was also conscious of the effect that its decision would have on individuals on the waiting list for new homes and considered that it would be an unconscionable waste of resources for the units to remain empty.
Furthermore, the tribunal’s discretion was to be exercised judicially, and not with a view simply to punishing a covenant breaker. Consequently, it exercised its discretion to modify the covenants and ordered the developer to pay the hospice £150,000 for any loss or damage caused.
In Re George Wimpey, seven of the 17 units being built in breach of covenant were earmarked for social housing. Would the tribunal’s approach have been any different if, as in Re Millgate, all the units had been earmarked for affordable housing instead? Or does Re Millgate mark a change in judicial approach?
The tribunal warned that its decision should not be interpreted as signalling that it might be easier to modify restrictive covenants if a development has been completed and advised anyone who believes this to be the case to “think again” or risk a “rude awakening”. Nonetheless, the decision does suggest that the tribunal might be more forgiving in cases where the public interest is engaged.
Allyson Colby is a property law consultant
