Allyson Colby analyses a landmark Supreme Court ruling on restrictive covenants.
Key points
- The highest court in the land has considered the operation of section 84 of the Law of Property Act 1925 for the first time
- A cynical breach of covenant by a developer was not relevant to the question of whether the provision of affordable housing was in the public interest
- But it was relevant when the tribunal was considering whether to exercise its discretion to modify covenants to facilitate the retention and use of such housing
The “public interest” is an abstract notion. The phrase is generally used to justify policies that interfere with the actions of private individuals, or in support of decisions to refrain from interfering, for our common good. But, when public interests clash, identifying which should prevail is no easy task.
The Supreme Court faced a dilemma in Alexander Devine Children’s Cancer Trust v Housing Solutions Ltd [2020] UKSC 45; [2020] PLSCS 201. The trustees of a newly constructed hospice were seeking to enforce a restrictive covenant to enable terminally ill children to enjoy privacy in the sanctuary of its gardens – which had been compromised by the construction of affordable housing, with windows overlooking the gardens, on land burdened by the covenant.
The developer had acquired a site adjoining the hospice, which included the land burdened by the covenant, in order to provide affordable housing to satisfy obligations in a section 106 agreement relating to a bigger and more valuable housing development nearby. It was fully aware of the covenant requiring it not to construct buildings on the land in question, but it pressed on anyway, despite objections, even though other options were available. The developer could have designed the development to comply with the covenant. Or it could have paid the local authority £1.64m to provide affordable housing elsewhere.
First instance
The developer completed the development and then issued an application under section 84(1)(aa) of the Law of Property Act 1925, which enables the Upper Tribunal (Lands Chamber) to modify or discharge restrictions that impede reasonable uses of land “contrary to the public interest” if it is satisfied that landowners with the benefit of the restrictions can be adequately compensated, in money, for any loss or disadvantage suffered. The UT took a dim view of the developer’s behaviour, which it described as “egregious”, “high-handed” and “opportunistic”. But it decided that the conditions in section 84(1)(aa) had been met.
The UT noted that the housing was immediately available to meet a pressing social need and thought that it would be an unconscionable waste of resources if the properties were to stand empty or were to be demolished. Consequently, it felt able to decide that the public interest in the provision of social housing justified the exercise of its discretion to modify the covenant, subject to the payment of £150,000 to cover the cost of screening the hospice grounds and as compensation for loss of amenity.
Appeal
The Court of Appeal overturned the decision. It explained that the public interest requires contractual and property rights to be respected. This meant that the developer’s behaviour was relevant at the jurisdictional stage, when determining whether the statutory conditions for modifying or discharging a covenant were satisfied. So the UT had erred by postponing consideration of the developer’s conduct until deciding whether or not to exercise its discretion to modify the restriction.
The discretion had not arisen. Furthermore, had it done so, it would be contrary to the public interest to allow the developer to circumvent the covenant by presenting the UT with a “fait accompli” and daring it to make a ruling that might result in the affordable housing being demolished.
The decision was followed by an exchange of correspondence, indicating that the trustees intended to issue proceedings for injunctive relief. But the developer chanced its arm again, by appealing to the Supreme Court, which had never previously considered the operation of section 84.
Supreme Court
The court explained that section 84(1)(aa) applies where a restriction impedes a reasonable use of land and is “contrary to the public interest” – which must be narrowly interpreted. At the jurisdictional stage, the court is concerned with the merits of competing land uses and not with the wider question of whether, in all the circumstances of the case, it would be contrary to the public interest to preserve a restrictive covenant.
So the fact that a landowner has flagrantly flouted legal obligations is not relevant when deciding whether the statutory conditions for modifying a covenant are satisfied. But the UT can consider a landowner’s behaviour at the discretionary stage, while considering whether restrictive covenants should be modified or discharged. The court was sorely tempted to agree that a cynical breach of covenant should outweigh what would otherwise be in the public interest in modifying or discharging a restrictive covenant. But it decided that such a principle would be too rigid and would inappropriately fetter the legitimate exercise of the discretion conferred by section 84.
Discretion
It is unusual for an appellate court to interfere with a discretionary decision of a specialist tribunal. But the Supreme Court decided to do so in this “exceptional” case because the UT had erred by paying only lip service to two important factors.
First, the developer could have designed the development to comply with the covenant. And, secondly, it could have invoked section 84 before development commenced. The trustees of the hospice could then have argued that it would not be contrary to the public interest to uphold the restriction because planning permission was available for affordable housing elsewhere on the site. Consequently, the developer’s cynical breach of covenant had fundamentally altered the position in relation to the public interest.
So the Supreme Court set aside the UT’s decision and ruled that the application to modify the covenants should be refused – which, it acknowledged, will strengthen the hands of the hospice trustees in relation to any settlement of the dispute.
Allyson Colby is a property law consultant
