The Court of Appeal says: Discharge restrictive covenants first, then develop the land

Under the current law (Section 84 of the Law of Property Act 1925), a developer can make an application to the Upper Tribunal (Lands Chamber) to discharge or modify covenants if the court is satisfied that the covenant impedes some reasonable use of the land, such as it being contrary to public interest.

Recently, the Court of Appeal in Alexander Devine Children’s Cancer Trust v Millgate Developments Ltd and others, sent a clear message to developers that they should first discharge any restrictive covenants before building. Otherwise, they risk a substantial financial loss as the court held that an application to modify the covenants should be made before starting work and not after the buildings have been constructed, even the developer argues that the covenant is made contrary to public interest.

What is the case about?

Millgate was the developer of nine two-storey houses and four bungalows, which it built in breach of restrictive covenants. The restrictive covenants provided that no buildings or other erections should be built on the land and the land should not be used for any purpose other than an open space for parking of motor vehicles.

In order to satisfy a planning obligation imposed by the Royal Borough of Windsor and Maidenhead (the Council), Millgate sold the houses to a provider of social housing, Housing Solutions, for use of affordable housing. This allowed it to build a much bigger and more profitable development in the vicinity.

The land that benefited from the restrictive covenants was donated to the Trust for the construction of a hospice for children with serious illnesses and life-limiting conditions. The plans for the hospice were developed to ‘make use of the hospice land, including with recreational areas and a pleasant wheelchair path around its circuit’.

Millgate was aware of the restrictive covenants and Mr Barty Smith, the donor of the land, objected to the development. Despite this opposition and the fact that Millgate also had an option to make a payment of £1,639,904 to the Council if its application to the Upper Tribunal to discharge or modify the covenants was unsuccessful, it proceeded with the development.

After the buildings were constructed, Millgate made an application to the Upper Tribunal to modify or remove the restrictive covenant. The ground upon which it relied was that the covenant impeded the reasonable use of the land for social housing, which was contrary to the public interest.

The Upper Tribunal agreed with Millgate and modified the restrictive covenants allowing the buildings to remain. It stated:

‘…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 Trust appealed.

The appeal

The Court of Appeal overturned the Upper Tribunal’s decision. The court stated that well before significant harm had been caused to the hospice, Millage knew or deliberately shut its eyes to the possibility that the restrictive covenants applied for the benefit of the hospice land. Indeed, it had been specifically warned to desist building in breach of those covenants. If Millgate wished to act lawfully, it was required to make the relevant application for modification or removal of the restrictive covenants rather than just act in violation of those covenants.

The court also noted that Millgate could have built all the housing units on a land unaffected by the restriction or made the payment to the council.

The Court of Appeal held that the Upper Tribunal could not have been properly ‘satisfied’ that it was contrary to the public interest for the restrictive covenants to be maintained in place. It added that ‘As a result it is appropriate and in conformity with the public interest that it should bear the risk that it may have wasted its own resources in building the 13 housing units on the application land.’

The court said that in general terms, it is in the public interest to honour contracts and not breach them. Property rights should be upheld and protected.

It further ruled that it is contrary to the public interest for the usual protections for a person with the benefit of a restrictive covenant to be circumvented by a developer. The court stated that the developer was presenting itself to the tribunal with a ‘fait accompli’. It has constructed buildings on the affected land without following the proper procedure and then in effect dared the tribunal to make a ruling which might have the result that those buildings have to be taken down.

What does this mean?

The Trust now has the power to seek to enforce the covenant, which would mean that Millgate may be required to demolish the housing units or be required to pay the Trust substantial damages.

This case clearly sets out the court’s intention. If the developer carries out works without first discharging the restricting covenants, its application to the court to modify or remove them will most likely fail. The court also clearly stated that the fact that the planning permission is granted does not mean that the developer is permitted to commence development without first ensuring that the private property rights will not be breached.

The court commented that the grant of a planning permission does not generally have any impact on private property rights. It added that it is merely a decision taken regarding what development of a particular site can be regarded as acceptable in planning terms, with reference to the public interest rather than a permission to build.

This means that developers should first discharge any restrictive covenants and not assume that payment of compensation and use of statutory provisions to modify covenants will allow them to develop property, which they would otherwise be unable to develop.