Q&A: Modifying a restrictive covenant – a realistic prospect?

Question

I have recently bought a dilapidated office block in a city centre and have converted it into a new residential development including some social housing. The property is subject to a covenant restricting the use of the property to office purposes only. The conversion had the necessary planning permission. None of the neighbours objected to the development before or during the conversion but they are now complaining and I am concerned that their threats of legal action might deter purchasers. Could I try to protect my position by applying to the Upper Tribunal for the restriction to be modified to allow this use?

Answer

Much will turn on the evidence concerning the impact of the residential development on the neighbours. However, your application will not be helped by the fact that you converted the premises prior to making an application. Planning permission alone – even for social housing – will not justify modification or discharge. The objectors’ inactivity is unlikely to be held against them.

Explanation

The Upper Tribunal (Lands Chamber) has the power to modify or discharge a restrictive covenant under section 84(1) of the Law of Property Act 1925 if certain grounds are proved, including:

(a) by reason of changes in the character of the property or the neighbourhood or other material circumstances of the case, the restriction ought to be deemed obsolete;

(aa) the continued existence of the restriction would impede some reasonable user, money would be adequate compensation for the loss or disadvantage (if any) which the objector will suffer from the proposed modification and either (i) the person who is entitled to the benefit of the restriction does not secure any practical benefits of substantial value or advantage from it; or (ii) the restriction is contrary to the public interest;

(c) the proposed discharge or modification will not injure the persons entitled to the benefit of the restriction.

Ground (a) is notoriously difficult to satisfy. The application in Berkeley Square Investments Ltd v Berkeley Square Holdings Ltd [2019] UKUT 384 (LC); [2020] PLSCS 236 – to modify a covenant allowing only office use to permit a private members’ club – recently failed on this ground, despite the fact that demand for office property of the size and type of the subject property was limited. The applicant had made no attempt to market the premises as offices.

Ground (c) is also difficult to meet and is unlikely to be applicable where ground (aa) is not satisfied.

Practical benefits

Most successful applications are made on the first limb of ground (aa) – where there are no practical benefits of substantial value or advantage to the objector. The UT will look closely at the likely impact on objectors’ properties in the event that the covenant is modified. Your objectors may identify the following as practical benefits of the covenant, as they did in Shaviram Normandy Ltd v Basingstoke and Deane Borough Council [2019] UKUT 256 (LC); [2019] PLSCS 184 (which concerned modifying a user covenant in a long lease of a purpose-built office block to permit a residential conversion):

• protecting the value of their property interests;
• the prosperity and amenity of the wider neighbourhood; and
• the “thin end of the wedge” argument.

The UT will examine the alleged practical benefits closely. For example, in Shaviram, the UT concluded that the evidence did not support the assertions regarding the practical benefits secured by continued office use or the possibility of a permitted change in use influencing the outcome of future applications.

Breach of covenant

The fact that your conversion has already happened, in breach of the covenant, will not help your application. In Alexander Devine Children’s Cancer Trust v Millgate Developments Ltd [2018] EWCA Civ 2679; [2019] EGLR 7 the Court of Appeal held that generally it was in the public interest that contracts should be honoured and not breached and that property rights should be upheld and protected.

In that case, the developer had built 13 affordable houses on the application land in breach of a restrictive covenant. The Court of Appeal held that the public interest test (the second limb of (aa)) would not be satisfied simply because the social housing had already been constructed and refusing the application would thereby waste resources. It found that the UT ought to have given greater weight to the fact that the developer had proceeded without making an application first. The developer’s conduct was relevant both to satisfying the conditions of ground (aa) and to the exercise of the UT’s discretion.

Existence of planning permission

Similarly, the existence of planning permission (or permitted development rights) for the residential use does not equate to the restriction being contrary to the public interest.

Millgate Developments also indicates that objectors’ failure to object to either the planning permission or to make an interim injunction application is unlikely to be held against them or restrict their ability to object to modification. The court acknowledged that there may be many legitimate reasons why a person might not wish to proceed with an interim injunction.

Please click here for the decision of the Supreme Court in this case, which was handed down in November 2020.

This article was first published in Estates Gazette on 9 September 2020 and was written by partner Emma Humphreys at Charles Russell Speechlys LLP and barrister Miriam Seitler at Landmark Chambers. For more information, please contact Emma on +44 (0)20 7203 5326 or at emma.humphreys@crsblaw.com.