A “cynical breach” and the “resolution of a land-use conflict”
Can a property developer get away with knowingly carrying out a development in breach of a restrictive covenant and then subsequently applying for the covenant to be modified or discharged?
The Upper Tribunal, the Court of Appeal, and the Supreme Court all contended with this question in a dispute between a developer and provider of affordable social housing and a children’s hospice in Maidenhead. The Supreme Court’s judgment in Alexander Devine Children’s Cancer Trust v Housing Solutions Ltd [2020] UKSC 45 was handed down on 6 November 2020 – the first time the highest Court has been asked to rule on this point. The housing provider’s appeal was dismissed, leaving an uncertain future for the 13 houses built in breach of covenant.
What happened?
In 1972, Mr Smith, a farmer, sold a section of his agricultural land (the “Encumbered Land”). The purchaser agreed (in the conveyance) to observe and perform restrictive covenants for the benefit of Mr Smith’s retained land which provided that no building, structure, or other erection should be built or placed on the Encumbered Land and that the Encumbered Land would not be used for any purpose other than an open space for parking vehicles (the “Restrictive Covenant”). The purchaser then incorporated the Encumbered Land into adjoining land it already owned (not encumbered by the Restrictive Covenant), thereby creating a larger rectangular plot of land (the “Exchange House Site”).
The rest of Mr Smith’s agricultural land was eventually inherited by his son, Mr Barty Smith. In 2012, Mr Barty Smith made a gift of a piece of land adjoining the Encumbered Land to the Alexander Devine Children’s Trust (the “Trust”) so that they could build a hospice for children seriously ill with terminal cancer (the “Hospice”).
In 2013, Millgate Developments Ltd (“Millgate”) applied for planning permission to build a large number of housing units on nearby land for commercial sale. The local authority approved the plans on the condition that Millgate would also build 23 units of affordable social housing on the Exchange House Site.
Millgate proposed to build 13 of these units on the section of the Exchange House Site which formed the Encumbered Land, and the local authority granted planning permission on this basis. When Millgate acquired the Exchange House Site in 2013, it was aware of the presence of the Restrictive Covenant.
Millgate proceeded to prepare construction of the affordable homes on the Exchange House Site in 2014. A few months later, when Mr Barty Smith was flying over the Exchange House Site in a light aircraft, he noticed the construction in progress. He wrote to Millgate’s solcitors stating that their development was in breach of the Restrictive Covenant and requesting for the development works to be stopped, including the explanation:
“In 2012 I donated land worth £500,000 to the charity [the Trust] to build the hospice as a peaceful place for children with terminal cancer to end their days in calm and dignity with access to private country gardens. Now your client [Millgate] seeks to build multiple units with windows and open areas facing directly into hospice land. That is regrettable”.
Millgate’s solicitors responded to Mr Barty Smith, disputing the enforceability of the Restrictive Covenant, and despite Mr Barty Smith’s objection, construction by Millgate continued. In May 2015, Millgate agreed to sell the development (once it was completed) to Housing Solutions Ltd, a social housing provider, pending a successful modification of the Restrictive Covenant.
In July 2015, Millgate issued an application to the Upper Tribunal seeking modification of the Restrictive Covenant pursuant to section 84 of the Law of Property Act 1925, so as to allow the now completed 13 houses to remain on the Encumbered Land and to be occupied as residential properties. Mr Barty Smith and the Trust objected to Millgate’s application.
Section 84 of the Law of Property Act 1925
Section 84 gives the Upper Tribunal a power to discharge and modify restrictive covenants. It can do so if it is satisfied that the continued existence of the restrictive covenant “would impede some reasonable user of the land for public and private purposes” (section 84(1)(aa)), such an impediment is “contrary to the public interest”, and damages are an adequate compensation for the loss of the benefit of the restrictive covenant (section 84(1A)).
In considering section 84(1A), the Upper Tribunal needs take into account “the development plan and any declared or ascertainable pattern for the grant or refusal of planning permissions in the relevant areas, as well as the period at which and context in which the restriction was created or imposed and any other material circumstances” (section 84(1B)).
Importantly, the Upper Tribunal’s power is discretionary, even if the conditions in section 84 are met by the applicant.
Upper Tribunal
The Upper Tribunal approved Millgate’s application to modify the Restrictive Covenant. It did so on the basis that the impediment caused by the Restrictive Covenant to the occupation of the 13 housing units (i.e. the reasonable user) on the Encumbered Land was contrary to the public interest, and that damages would be adequate compensation.
The Upper Tribunal agreed that existence of planning permission for the houses on Encumbered Land was a “material consideration” under section 84(1B) (drawing a parallel with a similar assessment by Lord Sumption in the context of a private nuisance case in Lawrence v Fen Tigers [2014] AC 822).
The fact that Millgate could have built the affordable housing elsewhere was not considered relevant. In February 2016, the section 106 agreement between Millgate and the local authority was varied to permit Millgate to make a payment of £1.6 million to the local authority if Millgate’s application to the Upper Tribunal was not successful, so as to allow the local authority to provide equivalent social housing elsewhere.
It was also established in evidence that had Millgate proposed to build the affordable housing units wholly on the unencumbered part of the Exchange House Site, the local authority would have very likely granted planning permission for such a development. However, Millgate had presented the Upper Tribunal with a case in which the houses had already been erected on the Encumbered Land.
The Tribunal recognised that the satisfaction of the conditions under section 84 gave rise to the Tribunal’s discretion to modify or discharge the Restrictive Covenant. The Tribunal acknowledged, at this stage, Millgate’s “highhanded and opportunistic” conduct in knowingly breaching the Restrictive Covenant and its own aversion of rewarding parties who deliberately flout their legal obligations.
Ultimately the Tribunal considered that the public interest of maintaining 13 units of affordable social housing outweighed “all other factors in this case”, stating that “it would be an unconscionable waste of resources for those houses to continue to remain empty” and it therefore approved Millgate’s application to modify the Restrictive Covenant.
The Tribunal ordered Millgate to pay £150,000 to the Trust as compensation. This sum related to the cost of planting trees and landscaping works to screen the Hospice from the houses on the Encumbered Land and an element of compensation for loss of amenity. At the same time, the Tribunal accepted that additional boundary planting would not insulate the Hospice from all of the adverse consequences of the use of the Encumbered Land.
Following Millgate’s successful application at the Upper Tribunal, Millgate transferred the 23 houses on the Exchange House Site to Housing Solutions on 15 February 2017. The very next day, Millgate received notice of the Trust’s application for permission to appeal.
Court of Appeal
The Court of Appeal overturned the decision of the Upper Tribunal and refused Millgate’s application to modify the Restrictive Covenant. It drew heavily in its reasoning on Millgate’s bad conduct. The Trust brought its appeal under four grounds:
- the Upper Tribunal erred in applying the guidance of Lord Sumption in the Lawrence v Fen Tigers case (and thereby concluding that the existence of planning permission for the houses on Encumbered Land was a “material consideration” under section 84(1B));
- the Upper Tribunal erred in treating as a highly relevant factor the fact that 13 units of social housing had already been built by the time of Millgate’s application;
- the Upper Tribunal failed to have regard to a material circumstance, namely Millgate’s ability to satisfy the planning obligation by provision of affordable housing elsewhere;
- the Upper Tribunal erred in the exercise of its discretion by failing to attach appropriate weight to the fact that Millgate had deliberately and knowingly breached the Restrictive Covenant by proceeding with the development on the Encumbered Land;
The Court of Appeal approved all four grounds. Considering grounds (i) and (ii) together, the Court did not find the Lawrence v Fen Tigers particularly helpful in the context of private property rights. The Court adopted a wide interpretation of the “contrary to public interest” test under section 84(1A) which went significantly beyond the existence of planning permission.
The Court did not think that it would be contrary to the public interest for the Restrictive Covenant to impede Millgate’s user of the Encumbered Land in a situation where Millgate had not made fair use of opportunities available to it to respect the property rights of the Trust such as seeking to develop the houses on unencumbered land (which, it was shown, would have been perfectly acceptable to the local authority).
The Court also considered that it was contrary to the public interest for a developer to circumvent the protections afforded to the Trust by the Restrictive Covenant and then present the Upper Tribunal with a prospect of having to make an order which could result in the houses being demolished. In other words, the issue of how the situation arose was highly relevant to the “contrary to the public interest” test.
The Court agreed that the factor stated in ground (iii) was plainly relevant and ought to have been considered by the Tribunal before exercising its discretion. In respect of ground (iv), the Court held that the only proper response of the Upper Tribunal, on the findings made by it, should have been to refuse Millgate’s application. The Court was highly critical of Millgate’s behaviour, stating that Millgate acted in a high-handed manner, sought to evade the jurisdiction of the Upper Tribunal by building the houses before making an application, and acted without proper regard to the rights of the Trust.
Supreme Court
By the time the case reached the Supreme Court, now with Housing Solutions, the new owner of the Exchange House Site, as the appellant, five years had elapsed since the construction of the homes was completed and all 13 houses were now occupied by tenants.
The Supreme Court dismissed the appeal and refused Millgate’s application to modify the Restrictive Covenant although it held that only ground (iv) justified the Court of Appeal overturning the Upper Tribunal decision and did not agree with the other findings.
The central issue, according to the Supreme Court, was Millgate’s deliberate and opportunistic breach of the Restrictive Covenant (described by the Supreme Court as the “cynical breach”). However, this was relevant to the discretionary part of the test, and not the jurisdictional part (i.e. the strict elements of section 84).
The Court of Appeal was wrong, therefore, to consider Millgate’s conduct when assessing whether the condition in section 84 was met. The Upper Tribunal was in turn correct to assess, at this jurisdictional stage, only the competing uses of land which were “pitted against each other”, and it was correct in deciding that the “contrary to the public interest” test was made out on the facts.
The Supreme Court did agree with the Court of Appeal that the Upper Tribunal failed to take proper account of Millgate’s cynical breach at the discretionary stage, but for different reasons to the Court of Appeal. The Upper Tribunal’s failure to take into account two particular factors relating to Millgate’s cynical breach during the exercise of its discretion constituted an error of law.
The first factor was that had Millgate applied for planning permission on unencumbered land, there would be no need to apply to discharge the Restrictive Covenant. The Supreme Court considered it vital to deter not only cynical breaches but also those breaches which produce land-use conflicts which could be avoided altogether.
The second factor was that had Millgate applied to modify the Restrictive Covenant before building on the Encumbered Site, Millgate would have likely failed to satisfy the “contrary to public interest” test because, at that point, the option of building on the unencumbered land would have been open to it. Millgate’s cynical breach “fundamentally altered the position” in relation to the public interest to Millgate’s own benefit by increasing its prospect of success under this ground. To that extent, the Supreme Court pointed out that the Upper Tribunal’s decision would have the effect of encouraging developers to ignore restrictive covenants and to press on with developments in face of strong objections.
The Supreme Court was careful to say that nothing in its judgment was determinative of how the courts would decide any claim for an injunction by the Trust (either to stop the 13 houses on the Encumbered Land from being occupied, or to remove the houses altogether). It did, however, hint at a range of monetary remedies, going beyond conventional compensatory damages (e.g. based on account of the developer’s profits – which could be considerable here). No doubt all eyes will be on this case should the Trust decide to pursue further litigation here.
Reflections
The judgment of the Supreme Court is, first and foremost, a warning to developers who feel they can simply ignore inconvenient restrictive covenants in the interests of profit making and then hide behind the alleged utility or public interest of a development when confronted about a breach (which, in any case, is a ground that will usually only apply in exceptional cases).
An application to modify or discharge a restrictive covenant should be made before the commencement of a development in breach of a covenant – and the Supreme Court has sent out a clear message in that regard.
Perhaps more importantly and certainly more pragmatically, developers should explore any alternative design schemes or development plots which avoid clashing with restrictive covenants in the first place. Such an alternative was available to Millgate and so, as the Supreme Court said in its judgment, their application to modify or discharge the Restrictive Covenant would have failed in any event – even if it was submitted before the development commenced.
For more information on the topic, please contact Helena Davies or Oskar Musial.
This article was originally published in Property Law Journal in 2020.
