Restrictive covenants: to modify or not to modify, that is the question

Restrictive covenants are an uncomfortable fact of life for anyone planning to develop land. How they can be resolved (or avoided) is rarely a one size fits all approach. In the case of covenants which date back many years it is often the case that the only way to ‘deal’ with them is to purchase a title indemnity policy and hope for the best. If nothing else the policy can act as a ‘litigation defence fund’ in the hopefully unlikely event that someone comes forward claiming the benefit of the covenant and seeking to prevent or delay the prospective development. But what can be done where the covenant is more recently imposed; is the best course to try and negotiate a way out of it, or to take a more ‘nuclear’ option? A couple of recent cases give some clues as to the approach the courts might take if the matter finds its way before them.

‘The thin end of the wedge’

Where a restrictive covenant does prevent a particular development going forwards it is possible for the affected landowner to apply to the courts for an order to modify or release the covenant (known as a ‘s.84 application’ referring to the relevant section of the Law of Property Act 1925). One of the common grounds of objection from neighbouring landowners is that if the release is allowed (and the applicant will still have to show that the covenant meets a threshold test that it is obsolete or otherwise does not secure benefits of real value) then this will push open the door to a multitude of claims from adjoining landowners, all claiming that the covenant affecting their land should be similarly released. In recent times the courts have been more ‘pro-development’ in their approach to this argument where they feel that an affected landowner could be adequately compensated for the loss of amenity to their property caused by the development. In these cases¹pay-outs ranged from as low as £2,000 up to £25,000. However, to illustrate that the court can reach the opposite conclusion, another covenant came up for consideration in the recent Court of Appeal decision in Stafford-Flowers v Linstone Chine Management Co Ltd_². Here the property owner in question occupied a holiday home on the Isle of Wight. As is quite common in such schemes the property was subject to a restriction, both on the titles to the plots and in a planning consent, prohibiting year round occupation of the properties as a dwelling. Nonetheless in breach of this the owners remained in permanent occupation. After a number of years passed they applied to, and obtained from, the local authority a certificate of lawful use for planning purposes. They then relied on the planning ‘release’ as a ground to modify the restrictive covenant affecting the plot itself, the application being opposed by the management company which operated the holiday village. Interestingly, the Court of Appeal upheld the first instance judgment not to allow the modification. They found that the ‘thin end of the wedge’ argument held good here, and that to allow the modification in this case could lead to other owners coming forward to modify their own restrictive covenants. Over time this would lead to a fundamental change in the character of the development from a holiday park to a housing estate which the court considered unacceptable.

‘Develop and be damned’

It’s fair to say that it might be considered more high risk to take this approach, but it is one that has been used, especially by larger housebuilders with deadlines to meet and sales targets to reach. Rather than wait for a court determination they have ploughed on with development and then waited to see what comes out of the woodwork later on. Perhaps no one will notice, or objectors won’t really have the stomach for a court battle. Ultimately it seems likely this will come to court at some point, though the results may surprise.

In Re: George Wimpey Bristol Ltd.’s Application³ a housebuilder began development of an estate in the face of open objections from adjoining owners claiming the benefit of covenants against building which affected part of the site that Wimpey had acquired. By the time the matter came before the court substantial works had been carried out. On the facts the court was satisfied that there were significant benefits to the affected properties by retaining the covenants in place (a depreciation effect of between 7-15% on the most directly affected properties) and so it refused to order a modification, thereby preventing Wimpey (and a housing association which would be acquiring the affordable element of the proposed development scheme) from completing the works. In the words of the Judge “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.” But contrast this with the recent decision in Re Millgate Developments Ltd’s application⁴ . Here another developer had obtained planning permission for the development of a residential scheme on a former commercial property. Part of the site (a car park) was similarly affected by a ‘no development’ covenant relating to part of it. The beneficiaries of the original covenant were a local farmer who still had land in the vicinity and a charity which had developed a children’s hospice on land immediately adjacent to the affected site. Whilst there had been negotiations for the formal release of the covenant, discussions had broken down and the developer had continued building out its scheme in breach of the covenant. The residential properties were substantially complete but because the neighbouring owner had started proceedings the developer was unable to discharge its s.106 obligations to transfer the properties to another housing association as they (rightly) refused to take a transfer whilst the covenant issue remained unresolved. On the face of it the case looks startlingly similar to the George Wimpey one, and yet the Tribunal was able to come to quite the opposite conclusion about allowing the modification of the original covenant. Here it found that (tucked away in s.84) was wording to the effect that a covenant could be overridden where it both impeded ‘some reasonable user of the land for public or private purposes’ and that that impediment ‘is contrary to the public interest⁵’. Here the tribunal found that the public interest in providing affordable housing for the local community was such an overriding issue that it justified modifying the covenant, even where there were identifiable (and valuable) benefits to the hospice site.

However, the release did come at a cost; the developer has had to pay compensation of some £150,000 to the affected landowner to compensate their loss of amenity and to undertake mitigation works to plant trees to screen out the properties and maintain the privacy of the hospice grounds.

We hope these cases illustrate that there are no easy answers to the opening question. Careful consideration must be given to all the facts of a given situation to determine the impact of a covenant on proposed development, and the likelihood (and cost) associated with trying to work around it.

For further information please contact Bhargav Trivedi or a member of Birketts’ Commercial Real Estate Team.

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¹ See for example Re Perkins [2012] UKUT 300 (LC), Re Laav [2015] UKUT 448 (LC) and Re Lynch [2016] UKUT 488 (LC)
² [2017] EWCA CIV 202
³ [2011] UKUT 91 (LC)
⁴ [2016] UKUT 515 (LC)
⁵ See s.84(1)(aa) and s.84 (1A)