Applications to modify restrictive covenants

Section 84(1) of the Law of Property Act 1925 permits the Upper Tribunal (Lands Chamber) to discharge or modify restrictive covenants on four grounds. The most commonly encountered is ground (aa), which requires the applicant to demonstrate that:

• The covenant impedes some reasonable user of the land;
• Either confers no practical benefit of substantial value or advantage or is contrary to the public interest; andMoney would be adequate compensation to anyone suffering loss or disadvantage from the discharge or modification of the restriction.
• If the ground is established, the tribunal has a discretion. It must take into account all ‘material circumstances’ in deciding whether to grant the application.To what extent will it count against an applicant that it has built in conscious defiance of the terms of a covenant?

In George Wimpey Bristol Ltd v Gloucestershire Housing Association Ltd [2011] UKUT 91 (LC), Wimpey built 17 homes in breach of covenant and failed to establish ground (aa). NJ Rose FRICS added that, even if this ground had been made out, it was unlikely that he would have exercised the discretion to modify the covenant because the works which Wimpey carried out were ‘the result of a deliberate strategy of forcing through the development on the restricted land in the face of many objections from those entitled to the benefit of the restriction, to the point where they had so changed the appearance and character of the application land that the Tribunal would be persuaded to allow them to continue with the development. It is appropriate for the Tribunal to make it clear that it is not inclined to reward parties who deliberately flout their legal obligations in this way.’

Similar obiter remarks were made in Lee, Re Courtenay Gate [2012] UKUT 125 (LC).

These comments appeared to reveal a hardening judicial attitude towards developers who assumed they could build first and pay the compensation further down the line.

But a less stringent test was applied in Trustees of the Green Masjid and Madrasah v Birmingham City Council [2013] UKUT 355 (LC). Charitable trustees had, in knowing breach of covenant, brought a building into use as a place of worship. AJ Trott FRICS said: ‘I consider that the discretion of the tribunal to refuse the application should only be cautiously exercised. It should not be exercised arbitrarily and, in my opinion, should not be exercised as, effectively, a punishment for the applicants’ conduct unless such conduct, in all the circumstances of the case, is shown to be egregious and unconscionable. On balance I do not consider that the applicants’ conduct was so brazen as to justify my refusal of their application.’

In the recent case of Millgate Developments Ltd v Smith [2016] UKUT 515 (LC), the tribunal considered all these cases. Millgate had knowingly constructed 13 homes in breach of covenant, despite requests to stop. The homes were the ‘affordable housing’ component of a more valuable residential development elsewhere.

The tribunal concluded that although the covenants secured benefits of substantial value or advantage to the adjoining objector (a hospice), the public interest limb of ground (aa) was made out. In impeding the occupation of houses which were available to meet a pressing social need, the covenants operated in a way which was contrary to the public interest. It was no answer to say that the developer could have built its allocation of affordable housing on other land or that it could now buy its way out of the problem by paying an agreed sum to the local authority – because it would be wasteful for these houses not to be occupied.

The tribunal then considered, in exercising its discretion, whether the conduct of Millgate justified a refusal to modify the covenants. Millgate had knowingly breached the covenants on professional advice and in the face of objections.

The tribunal concluded: ‘Had we been persuaded of Millgate’s case for modification only under the first limb of ground (aa) [no practical benefit of substantial value or advantage] we would have found the exercise of our discretion much more difficult than in fact we do. But the ground on which we are satisfied is the alternative public interest limb, and our decision will have an effect not only on the parties but also on 13 families or individuals who are waiting to be housed in these properties if, and as soon as, the restrictions are modified. We consider that the public interest outweighs all other factors in this case. It would indeed be an unconscionable waste of resources for those houses to continue to remain empty.’

The fact that the developer committed a deliberate breach of covenant appears to be of little relevance, at least if the applicant establishes that the existing covenant is contrary to the public interest.

Stephanie Tozer, pictured, and Emily Windsor are barristers at Falcon Chambers

@FalconChambers1 www.falcon-chambers.com