Developers faced with a covenant that restricts the use of land often insure against any attempt to enforce the covenant. However, insurance is not always available if the beneficiaries of the covenant can be identified and they oppose development. In these circumstances, the developer can either negotiate a release from the covenant or apply to the Lands Tribunal (LT) for the modification or discharge of the covenant under section 84 of the Law of Property Act 1925.
Applications to the LT are generally thought to be cumbersome, time-consuming and expensive and the outcome is never guaranteed. However, an application to the LT may be the only practical way of dealing with widespread opposition from numerous objectors that have the benefit of the covenant. In addition, LT awards are often lower than the sums that landowners demand for releasing restrictive covenants that impede development.
The recent decision in Winter v Traditional & Contemporary Contracts Ltd [2007] EWCA Civ 1088; [2007] PLSCS 219 highlights the different considerations that apply when: (i) assessing damages at common law for breach of a restrictive covenant; and (ii) making a compensatory award for the modification or discharge of a restrictive covenant.
Recent case law has shown that the courts are increasingly willing to base common law awards of damages for breach of a restrictive covenant upon a hypothetically negotiated share of the enhanced development value of the land affected by the covenant (buy-out damages). Awards vary but can be sizeable, since they are based upon the strength of the objector’s financial bargaining position.
By contrast, compensatory awards under section 84 of the 1925 Act are based upon the effect of the development upon objectors. Compensatory awards are often considerably lower than buy-out damages because they are based upon the diminution in the value of the amenities enjoyed by the objector.
In Winter, the Court of Appeal confirmed, once again, that compensatory damages under section 84 should reflect the objector’s loss, rather than the applicant’s gain. The court compared previous cases and sought to explain apparent differences of approach by saying that there is no hard and fast rule as to the methods used to assess damages for the diminution in value of the objector’s property. The “negotiated share” approach is a permissible tool that can be used if a simple estimate of the diminution in value of the objector’s property is unlikely to be a fair reflection of the objector’s loss but, where it is used, the share of development value awarded must bear a reasonable relationship to the actual loss suffered by the objector.
The court agreed that the objectors’ claim for compensatory damages of £50,000 was too high. Their original claim of £5,000 was more realistic, but the LT had not made any error of law that would enable the Court of Appeal to overrule the its decision that the objectors had suffered no compensatable lost. It will be interesting to see whether the number of applications to the LT increases as a result of this decision.
Allyson Colby is a property law consultant
