How restrictive? Modifying restrictive covenants

Covenants restricting how land can be used – most notably by preventing building – can exist indefinitely, and the court has no inherent power to declare them unenforceable for obsolescence. But Parliament, recognising the need for some mechanism to lift this type of restriction on appropriate occasions, passed section 84 of the Law of Property Act 1925. This section gives the Lands Chamber of the Upper Tribunal (“the UT”) a discretion to modify or discharge a restriction on building or use which is obsolete, impedes a reasonable use of the land (“ground (aa)”), has been agreed, or causes no injury. This article primarily discusses ground (aa), which is engaged where:

“the continued existence [of the restriction] would impede some reasonable user of the land for public or private purposes … in any case in [where] the restriction, in impeding that user, either—

(a) does not secure to persons entitled to the benefit of it any practical benefits of substantial value or advantage to them; [“the first limb”] or (b) is contrary to the public interest; “[“the second limb”]

and [where] money will be an adequate compensation for the loss or disadvantage.”

The UT recently considered ground (aa), and the proper approach to exercising the discretion that arises, in two cases before it in September 2016. The discussion gives practitioners valuable insight.

The UT recently considered ground (aa), and the proper approach to exercising the discretion that arises, in two cases before it in September 2016. The discussion gives practitioners valuable insight.

Millgate Developments Ltd v Smith & The Alexander Devine Children’s Cancer Trust [2016] UKUT (LC) (18 November 2016)

The first case involved two plots of land used for two worthy but conflicting causes: one, a hospice providing end of life care to terminally ill children which naturally valued its privacy; the other, affordable social housing intended for tenants likely to have been waiting a very long time for accommodation but which intruded on the hospice’s privacy.

A restrictive covenant over the acre or so of application land next to the hospice prohibited its use for anything other than parking vehicles. The owner of the applicant land (“Millgate”) built 13 properties on the land for a registered provider of social housing. The hospice objected to the development: arguing that the new development right on the hospice’s boundary would compromise its carefully planned environment. An additional complication was that Millgate had knowingly breached the restriction. Did this complicate the exercise of the UT’s discretion?

In a ground (aa) application the proper approach is to ask the seven questions set out in Re Bass Ltd’s Application (1973) 26 P&CR 156 at 158-159. There were four issues: first, whether impeding the use of the applicant land for building secured practical benefits for the hospice; second, whether any benefits were of substantial value or advantage; third, whether impeding the proposed use was contrary to the public interest; and fourth, whether money would be adequate compensation.

The UT stressed, generally, the need to focus on the benefit of the restrictive covenant to the dominant tenant at the time of the hearing, rather than when the restriction is created or breached. As to the first issue, the UT rejected the contention that the only effect of the restriction was to permit the existence of a vehicle park, which was not beneficial. The “significance of the covenants is not in what they permit but in what they prohibit” (para 58). The hospice had lost, so the UT held, the practical benefit of a prohibition on intruding its privacy and seclusion.

Then there was expert evidence as to the value of the loss, which the UT found was in a bracket from £37k to £70k – the cost of a boundary hedge. But there was a simpler way to address the question: to consider how the loss of privacy and seclusion affected the “service provided to individual children … for each of whom, individually, the trustees wish to provide facilities of the very highest quality for a short period as they approach death” (para 95). The UT found that privacy and seclusion gave the hospice a real and substantial advantage in providing that service.

Moving onto the third issue, the UT considered the purpose behind ground (aa): “to facilitate the development and use of land in the public interest [and] provide a fair balance between the needs of development in the area, public and private, and the protection of private contractual rights,” Shephard v Turner [2006] 2 P&CR 28. The UT also cited a warning from Brightman J that developers who develop in breach of restrictions “may be in for a rude awakening”, Wrotham Park Estate Co Ltd v Parkside Homes Limited [1974] 1 WLR 798 at 811. But in that case the judge had “unhesitatingly” refused to order the demolition of houses breaching the restriction. And the UT had regard to Lord Sumption’s criticism of an “overly moralistic approach to disputes” behind the courts’ traditional reluctance to sanction a wrong by permitting a defendant to pay, Lawrence v Fen Tigers [2014] AC 822.

Importantly, the UT accepted that planning permission is a material consideration under ground (aa). Permission generally means conclusively that the proposed use is reasonable, but it is also an “objective assessment of appropriate land use which fully takes into account the public interest” (para 102). Why should a landowner be permitted to insist on restricting a use of land that planning authorities consider reasonable?

In the present case Millgate breached the covenant by building social housing. The local planning authority clearly thought the provision of affordable housing important, and the housing would sit empty unless the application succeeded. This “highly material consideration” (para 104) led the UT to find that the restriction was not in the public interest. The UT also found – the fourth issue – that money would be an adequate compensation, and so ground (aa) was satisfied.

The next question was whether the UT, where Millgate had knowingly breached the restriction, ought to exercise its discretion and allow the modification. Too great a readiness to modify covenants after breach would undermine the protection that restrictive covenants offer, and the UT expressly “refute[d] any suggestion that a landowner who is in deliberate breach of covenant … can confidently assume that the Tribunal’s discretion will be exercised in favour of modification or discharge” (para 114). They added that exercising the discretion would have been far more difficult under the first limb of ground (aa) than the second.

But the discretion should be exercised judicially, not punitively, unless the conduct in question was egregious and unconscionable (para 116). The UT considered that the public interest – the notional 13 families waiting for housing – outweighed all the other factors: “[i]t would indeed be an unconscionable waste of resources for those houses to continue to remain empty” (para 120).

Interestingly, the UT was influenced by Milllgate’s open offer during its deliberations to pay the hospice £150k and costs for consenting to the modification. The open offer was an interesting tactical move by Millgate – and one that in the event may have worked – but it carried a sting in the tail. Rather than order compensation equal to the loss of amenity, the UT held Millgate to the offer, noting that the offer was made openly with “the clear intention of influencing our decision” (para 126).

The UT reiterated, generally, that the proper measure of compensation under section 84 is the objector’s loss not the applicant’s gain, Winter v Traditional & Contemporary Contracts Ltd [2008] 1 EGLR 80, [28]. This introduces an interesting tension: a deliberate covenant breaker acting for commercial gain will have to pay an objector the value of their loss, but will be entitled to hold onto any profits (in Millgate’s case a lucrative development contract). The former will usually be smaller than the latter and so there is a financial incentive towards breach. But, on the other hand, one landowner will not be able to block another’s development in the public interest by holding out for a share of the profits.

Re Ben Lynch [2016] UKUT 488 (LC) (23 November 2016)

The second case was more parochial, and probably more typical. The application land was located in a wholly residential neighbourhood and burdened by a restrictive covenant that prevented building. The applicant bought the land, with notice of the restriction, which only had a small dilapidated garage and was otherwise overgrown, for £88k. No doubt the potential value of developing the land was far higher.

The application was brought under ground (aa), and also for obsolescence. The latter failed; the applicant’s argument – that the restriction had become obsolescent when the application land, previously a garden connected to a house, became a single discrete plot – failed.

The ground (aa) application proceeded in accordance with the Re Bass questions. The UT found that the restriction did give a practical benefit; it gave the objector an ability to resist development that could lead to cramping, and prevent new property being “shoehorned” into the neighbourhood (para 65).

The UT then considered the value and advantage of the practical benefits. There was little evidence from the objectors but the UT, as an expert tribunal, formed its own view: the adjoining properties would decrease in value by just 2.5 and 1.5 per cent respectively, down from around £1m. This did not constitute a substantial value or advantage and was clearly something that could be compensated by money. The UT did not indicate what percentage diminution of a property’s value would be considered substantial; each case will continue to be decided on its own facts. In the present case, the small diminution fell, from the objectors’ perspective, on the wrong side of the line.

In granting the application, the UT was also clearly affected by the fact that planning permission had been granted with conditions that “adequately protect[ed] the amenity of the immediately neighbouring objectors.” The objectors had previously objected to the planning application, but it is not clear how developed or strenuous their objections were.

In response to the objectors’ ‘thin end of the wedge’ argument, the UT stated that any subsequent applications would be considered on their own merits; the decision was not to be taken as a precedent for the neighbourhood. Given the point made in Millgate – that practical benefit is to be judged as at the time of the decision – this must be right. But it does leads one to wonder whether successful successive applications could render the restriction obsolete without the thin end of the wedge argument ever carrying much weight.

Six lessons for practitioners

• When considering a restrictive covenant focus on what it currently prohibits and how that benefits the objector;
• Whether or not a practical benefit is of substantial value is not necessarily a question of money; rather, it might be a question of how services provided by a landowner are affected;
• A commercial trend is arguably developing, moving away from enforcing proprietary rights and towards permitting restrictions to be breached if the covenant breaker can afford to pay for the breach. Landowners benefitting from restrictive covenants maybe becoming less likely to be able to insist on their strict rights;
• Planning permission is important. Section 84 applicants should do their best to obtain permission; objectors should fight the proposal on the merits at the planning stage;
• Egregious and unconscionable conduct by the applicant that weighs against a section 84 application might be counterbalanced by a well timed, generous open offer. Practitioners, given that the UT usually reserves judgment, might even delay an offers until they see how the hearing has progressed.
• Finally objectors need to remember the value of injunctive relief. The outcome in Millgate v Devine might have been very different if the UT had not been faced with the distasteful prospect of social housing sitting empty Applicants will often be in a better position if they can present the UT with a fait accompli.