Room with a View – Restrictive covenants and lessons for developers

Restrictive covenants are an area of law that inevitably find themselves before the courts on a regular basis. They have to walk a tightrope between balancing the interests. On the one hand the landowner affected by the covenant cannot do something with their land – however reasonable that might be.

On the other, a benefiting landowner is trying to protect themselves and enjoy their own land ownership, unimpeded by what their neighbour might want to do next door. Whilst disputes are common, it is surprising that the issues in these cases have been brought before the highest court in the land for the first time this year. The case brings into conflict a housebuilder wanting to deliver affordable housing, with the operators of a children’s hospice seeking to preserve the peace and tranquillity of their grounds (see Alexander Devine Children’s Cancer Trust v Housing Solutions Limited [2020] UKSC 45).

Background

A developer purchased two parcels of land comprising industrial units and a car park in 2013. The car park land was subject to specific covenants not to build or to use it otherwise than as a car park.

The developer obtained planning for 23 units spread across the whole of the site, 13 of which were to be built on the encumbered land. The site was being developed exclusively for affordable housing as part of the requirements for another residential site the developer was building elsewhere. After works began, an adjoining landowner became aware that works were being carried out on the car park land and began objecting. Another landowner (the hospice) became involved when they realised their gardens (which abutted the car park land) would be overlooked by the new houses. The developer continued work and subsequently sold the site to an affordable housing provider.

The court process

After completion of the construction works, the developer applied to the Upper Tribunal (Lands Tribunal as was) for an order to modify the covenant using section 84 of the Law of Property Act 1925. From this point, the decisions (and their reasoning) are complex. To oversimplify: 

• the Upper Tribunal decided that the developer’s argument that there was a “public interest” in allowing social housing was reasonable and allowed the modification application. But the Tribunal also said an applicant should not breach first and seek an order afterwards. That should be punished in damages (to the tune of £150,000 to cover the costs of screening off the development from the hospice plus a compensatory element)
• the Court of Appeal decided that the Upper Tribunal had misdirected itself on the law, and that it should have considered the developer’s deliberate act as going to the heart of whether the tribunal had jurisdiction to even consider the claim in the first place. The appeal court decided they did not, so it overturned the first decision and denied the modification
• the Supreme Court has now decided the Upper Tribunal got the jurisdiction point right and reversed the Court of Appeal’s logic. But, it agreed with the Court of Appeal that it should not allow the developer’s application. It explained that the modification process goes through two stages:

1. The jurisdiction stage – is it appropriate for the application to be brought, in the sense that the applicant has met the threshold set out in the legislation?
2. If the threshold is met then the Tribunal can consider whether it should exercise its discretion. This is an exercise in looking at all the circumstances (including the behaviour of the parties) to decide whether modification is appropriate. Here the court agreed with the Court of Appeal (albeit for different reasons) that the developer’s conduct should not be ‘endorsed’ by allowing the modification.

So the modification has been refused and potentially the objector may be entitled to an injunction (or, in the author’s opinion), more likely substantial damages.

What can we learn?

Despite the complexity of the judgements a few key points surface: 

• Watch your design. It was apparent that the developer could have designed the scheme with the same number of houses and by not building on the car park. This proved to be a crucial point counting against them on the application – they did not need to override the covenant at all. Of course that doesn’t answer a myriad of other possibilities (what if you can’t avoid it, or can only partly avoid doing so?). That will no doubt be the subject of further litigation on another day. But expect that you will have to show that you have considered relevant covenants and do not assume that you can ignore them.
• Beware of the “public interest”. This is one of five possible routes to modification under the Act; that the covenant is preventing something which is in the public interest. The court noted that the developer seemed to have “contrived” this i.e. it built the affordable housing and then argued that preventing their use was against the public good. The court was clearly not impressed – if the developer had tried to apply to modify before the houses were built there was a good prospect the application would not have passed the jurisdiction stage.
• Once you have an issue with a restrictive covenant you need to deal with it. There are references in the judgements to the developer’s “cynical breach” of the covenant. This is not so much about the act of breaching the covenant – after all you may not know who has the benefit of the covenant (although there is a suggestion that the developer and their advisers may not have looked too hard). More it was about the ‘what happened next’ when an objection is raised. If there is reasonable evidence of the benefit attaching to land and that the objection has some substance, then ploughing on with the development regardless is a high-risk strategy.
• Indemnity insurance is a mixed blessing. Often the easy answer to a restrictive covenant issue is to buy a defective title insurance policy. These do not (and cannot) fix issues with restrictive covenants. They will provide a “litigation defence fund” if a covenant issue becomes live, but like any other insurance policy, the price of cover is a loss of freedoms. We can only speculate, but often these policies are issued on a “no engagement” basis. Understandably insurers do not want to encourage pay-outs (a bit like not admitting that a car accident is your fault). So that can mean deliberately not engaging with potential beneficiaries of covenants. There is a suggestion in the judgments that making open offers of settlement which you can bring to the court’s attention to demonstrate that you are acting reasonably might help your cause. No such evidence was put before the court though it seems unlikely that both sides did not try to reach a compromise rather than end up in court. A good due diligence exercise coupled with open dialogue with the insurer may help you to achieve a “better” outcome rather than being forced to take a line which conflicts with other commercial interests. We do know that the developer agreed a variation to the S.106 relating to its open market site which it was unable to develop further whilst these affordable units were not available for occupation whilst the litigation continued. The variation came at cost (both in time and the amount of money which the developer might have to pay the council for alternate provision), which might have been avoided with a freer hand to negotiate.

Conclusion

Restrictive covenants have been with us for over 170 years already and there are no signs that they are going away any time soon. A balance will still have to be found, and those coming to land with the intention of breaching a covenant will need to be both well-prepared, and ready to negotiate robustly and quickly to achieve the best outcomes. At the same time, they will need to pay attention both to how they act, and how those actions might be interpreted with the benefit of hindsight. Certainly there are few of us who would like to appear in the same sentence with ‘cynical’ and ‘egregious’. For more information of some of the options to consider when confronted with restrictive covenants you might also want to consider this piece, which explores some of the possible alternatives.

This article is from the winter 2021 issue of Room with a View, our newsletter aimed at professionals within the property industry. To download the latest issue, please visit the newsletter section of our website. Law covered as at January 2021.

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