UK: How Restrictive Is A Restrictive Covenant?

Last Updated: 12 September 2017
Article by Tim Foley and Sarah Brimacombe

Millgate Developments Limited and another v Smith and another [2016] UKUT 515

The pressure to deliver much needed housing means that developers frequently wish to obtain modification or the release of restrictive covenants. In this dispute between a residential developer in breach of a restrictive covenant and the owner of an adjoining children's hospice, the Upper Tribunal had to consider the balance between public interest and private rights over the development land.

Modification of restrictive covenants under section 84 of the Law of Property Act 1925

Under section 84 of the Law of Property Act 1925, the Tribunal has discretionary powers to modify or discharge a restrictive covenant. Section 84(1)(aa) provides that the Tribunal may modify or discharge a restrictive covenant where it impedes some reasonable use of the land and that, in doing so, the restriction:

  1. Does not secure to persons entitled to the benefit of it any practical benefits or substantial value or advantage to them;

    or
  2. Is contrary to the public interest.

In addition, money must be adequate compensation for loss or disadvantage which anyone may incur as a result of the discharge or modification.

Note that, even if the above requirements are satisfied, the Tribunal has discretion as to whether to exercise its power to discharge or modify the restriction.

Facts

Millgate Developments (M) obtained planning permission for and commenced construction of 23 new social housing units (the Development) that it was required to provide alongside a new development of 47 market sale properties on another site. Part of the land for the Development was burdened by a restrictive covenant prohibiting the land from being used for any building or for any purpose other than a car park.

The restrictive covenant benefitted land owned by Mr. Smith (S) that he had donated to the Alexander Devine Children's Cancer Trust (the Trust) for building a new children's hospice (the Hospice). S objected to M's construction works and requested an undertaking from M to stop the works in order to comply with the restrictive covenant. S argued that, once built, the Development would overlook the Hospice's garden and that this would compromise the carefully planned environment of the Hospice and its outdoor space. The restrictive covenant was vital to protect the amenity and privacy of the Hospice and thereby its suitability for patients.

M did not stop its construction work. Instead, the Development was completed but the part of the Development situated on the burdened land, comprising 13 units, was not transferred to the housing association for social housing and remained unoccupied. The upper floors of some of the units overlooked the Hospice land and their gardens backed onto the boundary with the Hospice.

M applied to the Upper Tribunal for the restrictive covenants to be discharged to allow the 13 completed units to be occupied.

The Trust focused on three key benefits conveyed by the restrictive covenant, namely the protection of privacy, noise and light, to argue that the restrictive covenant retained a valuable practical benefit (see (a) above) and that therefore the Tribunal should not order modification or discharge of the restriction. Conversely, Millgate focused on the public benefit test (see (b) above) to argue for removal of the restrictive covenant, emphasising the importance of social housing in light of the ongoing nationwide housing shortage.

Held

The Tribunal found, in favour of Millgate, that the restrictive covenant should be modified to permit the occupation and use of the 13 social housing units as there was a clear public interest in providing this new housing. It exercised its discretion to award compensation of £150,000 to the Trust to compensate for loss of the restrictive covenant.

The Tribunal commented on each element of s.84(1)(aa) as follows:

  1. As argued by S, the restrictive covenant did convey a clear practical benefit to the land. Therefore it could not apply the practical benefit element of s.84(1)(aa) (see (a) above) to discharge or modify the restriction.
  2. However, as argued by M, it was not in the public interest for the 13 new units to remain empty as this would be an 'unconscionable waste of resources'. Therefore the public interest element of s.84 (1)(aa) (see (b) above) was satisfied. The fact that the Development was social housing, as opposed to commercially marketed property, was 'highly material' as was the fact that the housing was for tenants who would have been waiting for accommodation for a long time.
  3. A monetary award to the owner of the benefitted land would be sufficient compensation for the loss of the benefit of the covenant. In this case, the Trust could use money to offset the loss of privacy and seclusion by planting hedges along the Hospice's boundary with the Development. The Tribunal rejected the Trust's claim that they should be entitled to a share of the developer's profits.

Comment

This decision cannot be relied upon to assume that the Tribunal will discharge or modify restrictive covenants where a development has been completed in breach. Indeed, the Tribunal qualified its decision with a warning to developers who may interpret this decision as judicial tolerance for disregard of restrictive covenants that such behaviour would risk a 'rude awakening'. However, if social housing is involved, it does appear that the chances of success may be higher.

It is worth noting that the Tribunal was influenced in its decision by Millgate's conduct prior to the hearing where it had already offered to pay the Trust £150,000 as well as its costs in return for consent to removal of the restrictive covenant. The Tribunal regarded this offer highly and deemed it 'regrettable' that it did not 'elicit a positive response' from the Trust.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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