It is unusual for a restrictive covenant case to reach the Supreme Court, but in November Alexander Devine Children’s Cancer Trust v Housing Solutions Ltd [2020] UKSC 45; [2020] PLSCS 20 – a case concerning a housing development next to a hospice – did just that.
Seeds of dispute
A farmer sold some of his land (the application land) to the owners of an adjoining industrial unit in 1972. The conveyance included restrictive covenants which provided that no building or structure would be built on the application land, and it would not be used other than as a car park. In due course, the respondent hospice trust acquired a parcel of farmland next to the application land for the construction of a children’s hospice.
In 2013, a housebuilder, Millgate Developments, acquired the site of the industrial unit and adjoining car park (together known as the Exchange House site). Although Millgate was aware of the restrictive covenants, it then applied for planning permission to build 23 affordable houses on the Exchange House site, including nine houses and four bungalows on the application land.
The proposed development was linked to a much bigger and more valuable housing development elsewhere at a site called Woolley Hall: a section 106 agreement prevented the Woolley Hall housing from being sold until the social housing on the application land had been sold. Planning permission was granted and Millgate began construction. Thirteen of the homes were built on the application land, despite objections. These houses overlooked the hospice’s planned gardens and wheelchair walk.
Millgate then agreed to sell the development to the appellant in this case, Housing Solutions. It was only after Millgate completed the development, in July 2015, that Millgate applied to the Upper Tribunal seeking modification of the restrictive covenants, pursuant to section 84 of the Law of Property Act 1925. The hospice trustees objected.
The issues
This case raised a fundamental conflict. On the one side, the applicant developer was urging the tribunal not to allow 13 new affordable homes to go to waste. On the other, the respondent hospice was seeking to enforce its property rights and guarantee the privacy of its grounds for the benefit of terminally ill children and their families.
Section 84 of the 1925 Act gives the discretionary power to modify or discharge a restrictive covenant if one or more of five grounds are made out. The exercise of this power has two stages. First, the tribunal must ask whether one of the grounds is made out (the jurisdictional stage). Second, if it is, the tribunal must consider whether to exercise its discretion to discharge or modify the restrictive covenants (the discretionary stage).
The relevant ground in this case was the public interest ground set out in sections 84(1)(aa) and 84(1A)(b): were the restrictive covenants, in impeding a reasonable user of land, contrary to the public interest?
The tribunal allowed Millgate’s application to modify the restrictive covenants, on the condition that it paid £150,000 compensation to the respondent (being an estimate of the cost of planting and maintaining a screen of trees).
The members of the tribunal had undertaken a site inspection: they were impressed by the quality of the completed housing that they found and were struck by the fact that the housing was standing empty.
The tribunal also heard evidence that, had Millgate chosen to do so, it could have constructed a different scheme of 23 flats on the non-burdened land.
The tribunal held that the “public interest limb” of ground (aa) was made out. The covenants were impeding the use of 13 units which were otherwise immediately available to be used as social housing. At the discretionary stage of the enquiry, Millgate’s conduct was relevant but ultimately the public interest outweighed all other factors in this case. It would be “an unconscionable waste of resources” for the units to remain empty.
The Court of Appeal overturned the tribunal’s decision. It held that the conduct of Millgate was relevant at both the jurisdictional stage and the discretionary stage of section 84. At the first stage, the public interest ground had an important procedural dimension in which the conduct of an applicant was highly relevant. At the second stage, the tribunal’s exercise of its discretion had been wrong in law. The application should have been refused to reflect Millgate’s “deliberately unlawful and opportunistic conduct”.
Millgate appealed, but the Supreme Court dismissed the appeal, although for different reasons. At the outset of its judgment, the Supreme Court identified the main issue in the appeal as being the consequences of Millgate’s high-handed conduct. It adopted the term “cynical breach” as “a useful shorthand description of the conduct of Millgate in deliberately committing a breach of the restrictive covenant with a view to making profit from so doing”, thereby giving a strong steer as to the outcome of the case.
The Supreme Court agreed with the tribunal that Millgate’s deliberate and cynical breach of the restrictive covenants was not relevant at the jurisdictional stage. The “contrary to the public interest” ground required a narrow interpretation. The ground necessitated the resolution of a land-use conflict which involved the weighing of the public interest in 13 affordable housing units not going to waste against the public interest in the hospice providing a sanctuary for children dying of cancer. The good or bad conduct of the applicant was irrelevant at this stage of the test.
However, at the second discretionary stage, something had “gone fundamentally wrong”. A discretionary decision could only be overturned if there was an error of law. Here, such an error of law was present. The tribunal had failed to consider two relevant factors, namely that Millgate could have constructed 23 units on the unencumbered land and that therefore a prospective section 84 application would never have succeeded.
The Supreme Court added that it was not in the public interest that a person who deliberately breaches a restrictive covenant should be able to secure the modification of the covenant in reliance on the state of affairs created by their own deliberate breach. By going ahead without first making a section 84 application, Millgate had put itself in the position of being able to present the tribunal with a fait accompli. It was important to deter a cynical breach under section 84 and especially important to do so where the cynical conduct would directly reward the wrongdoer by transforming its prospects of success before the tribunal.
Practical consequences
What are the key messages that emerge from the case?
First, the “public interest” ground remains narrow. The statement by Douglas Frank QC in Re Collins’ Application (1975) 30 P&CR 527 still stands, namely that for an application to succeed under this ground it must be shown that the public interest is “so important and immediate as to justify the serious interference with private rights and the sanctity of contract”.
This test has been slightly reformulated by the Supreme Court in terms of evaluating a land-use conflict. But it will still be for the applicant to demonstrate the important public interest that would be served by allowing the development of the burdened land. In the case of a prospective application (which is more usual), this will involve an explanation of why the housing or other development needs to be built on the particular land and why it could not be built elsewhere. There are a number of historic tribunal decisions in which an application has failed at this hurdle.
Second, in the case of retrospective applications, an applicant’s conduct will be highly relevant at the discretionary stage. Cynical conduct (ie a deliberate breach undertaken with a view to making a profit) will not be tolerated. This probably extends not merely to financial profit but other forms of gain too.
The outcome of the case is entirely consistent with a number of other property cases where the courts have refused to allow legal rights to be created by a claimant’s deliberate wrongdoing. For example, Henley v Cohen [2013] EWCA Civ 480 where an enfranchisement claim was disallowed because the conditions for the claim had only come about as the result of a deliberate breach of covenant; and Welwyn Hatfield Borough Council v Secretary of State for Communities and Local Government [2001] UKSC 15; [2001] 2 EGLR 151 where the dishonesty of an applicant for planning permission, in pretending his house was a hay barn and then applying for permission for a change of use, was held to disentitle the applicant from obtaining a certificate of lawful use. The underlying rationale in each case is the public policy in deterring deliberate wrongdoing. Although these cases were cited to the Supreme Court, they are not referred to in the judgment.
In future, applicants making retrospective applications will likely have to rely on some form of mistake or misunderstanding. And the prospects of success will be slim unless the application would have succeeded if made in advance. As for example, in Re Trustees of Green Masjid and Madrasah’s Application [2013] UKUT 355 (LC); [2013] PLSCS 243 where the trustees converted a building into a mosque in breach of covenant, in part as the result of a misunderstanding, and probably would have succeeded with a prospective application anyway.
There remained a number of issues that were not decided:
- the court did not give any steer as to how the courts would approach any claim by the hospice for a prohibitory injunction to prevent the housing units from being occupied or a mandatory injunction ordering the removal of the units;
- nor did the Supreme Court comment on whether the appropriate measure of damages would be restitutionary damages (as per AG v Blake [2001] 1 AC 268) or negotiating damages (as per Morris-Garner v One Step (Support) Ltd [2018] UKSC 20; [2018] EGLR 26);
- the Supreme Court did not comment on the disparity in the jurisdiction to award damages that exists between the courts and the tribunal, given that section 84(1)(i) does not appear to allow awards of restitutionary damages or negotiating damages; and
- no guidance was given to whether any damages award should reflect Millgate’s profits from its more valuable Woolley Hall development.
These are all matters for future litigation. However, the Supreme Court observed that it was only realistic to recognise that the hospice’s hand had been strengthened in relation to any financial settlement of the dispute.
Emily Windsor, led by Stephen Jourdan QC, appeared for the successful respondent
