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24 October 2019

Q&A: Considering covenants and compensation

Question

I am the director of a property development company that recently purchased a detached dwelling house with a large garden on a residential estate, which is subject to a “one house per plot” restrictive covenant. We have obtained planning permission for the demolition of the current dwelling and the erection of two new dwellings in its place. This was strongly opposed by numerous residents who benefit from the covenant and live close to the development site, because they believe it will reduce the value of their properties and spoil their views. Our in-house surveyor considers that the development would have no effect on the value of the surrounding properties, and that we can make an application to the Upper Tribunal (Lands Chamber) to modify the restrictive covenant under section 84(1)(aa) and/or (c) of the Law of Property Act 1925 in order to allow the development to proceed. Could the company succeed in this application without having to pay any compensation?

Answer

Whether or not the company could succeed with its application will depend on the precise circumstances and an order requiring the payment of compensation as a condition of any modification taking effect cannot be ruled out. If some loss or disadvantage would be suffered by any of the beneficiaries, then compensation is likely and together this could mount up. Even if presented with expert evidence suggesting that no loss would be suffered, the tribunal will consider all the circumstances for itself and determine whether any compensation is payable.

Explanation

To succeed in modifying the restrictive covenant, the company will have to persuade the tribunal that either the modification will not injure those entitled to the benefit of the restriction (ground (c)); or that it impedes some reasonable user of land and does not secure any practical benefits of substantial value or advantage to them, and that money would be adequate compensation for the loss or disadvantage (if any) (ground (aa)).

The tribunal has a discretionary power to direct the applicant to pay to any person entitled to the benefit of the restriction such compensation as the tribunal may think it just to award, (i) to make up for any loss or disadvantage suffered by that person in consequence of the discharge or modification; or (ii) to make up for any effect which the restriction had, at the time when it was imposed, in reducing the consideration then received for the land affected by it (but not both). In this case, the company is potentially facing the risk of compensation under limb (i) if it were to succeed in its application.

Ground (c)
The tribunal will consider the practical effects of the modification in the long-term and the value of any injury to the beneficiaries’ enjoyment of their properties. The company can only succeed on ground (c) if the tribunal is convinced that no injury will be caused by the modification.

For example, in Broadway Homes (Cambridge) Ltd v Marshall [2018] UKUT 264 (LC) ground (c) succeeded in relation to the properties belonging to objectors which would be no more affected by the modification of the covenant than the negligible effects on the estate as a whole, and/or which were situated quite far away from the development site on spacious plots that were screened by mature trees.
In that scenario, the question of compensation does not arise because, if there is no injury, then there is no loss or disadvantage to be compensated in the first place. However, here it seems some of the objectors live quite close to the site so, depending on all the circumstances, there might be some injury.

Ground (aa)
Ground (aa) is the ground which more commonly meets with success and in which the question of compensation often arises. This again depends on all the circumstances, so the company should not assume that it is bound to succeed. Nor should the company assume that it is immune from compensation, merely because the potential objectors may be acting in person, or because the company’s usual expert surveyor has a strong view that none of the objectors’ properties will diminish in value as a result of the development. Even if the objectors do not adduce expert evidence, this does not mean the tribunal will automatically accept the company’s evidence without question.

In Broadway Homes, the tribunal was critical of the applicant’s partisan expert evidence; so although it accepted that the covenant secured a practical benefit that was not of substantial value or advantage, it did not accept the expert’s assessment that there would be a nil diminution in value to the beneficiaries’ homes. Instead the tribunal arrived at its own expert determination that four of the objectors were entitled to compensation. £1,000 was awarded to the beneficiary who would suffer the smallest injury, and £24,000 to the most-affected beneficiaries, payment of which was a precondition to the modification taking effect.

It follows that, even if the company can show that the covenant does not secure any practical benefit of substantial value to any of the objectors, compensation may still be ordered and it may not be a paltry sum.

If the necessary compensation is too high, then ground (aa) would not be satisfied at all because this would show that the covenant did secure a benefit of substantial value. But substantiality is a subjective and relative concept. For example:

(i) In the earlier case of Re Snook [2015] UKUT 623 (LC); [2015] PLSCS 356, a reduction in value of £50,000, equating to a 13% to 15% diminution in value, demonstrated that the covenant did secure a practical benefit of substantial value, such that ground (aa) was not made out;

(ii) By contrast, in Lamble v Buttaci [2018] UKUT 175 (LC), a £50,000 diminution in value of a house worth £2.25m was not considered to be substantial. The covenant could therefore be modified, provided compensation was paid.

While the sum as a percentage of the beneficiary’s property may be low, depending on the number of beneficiaries affected, the aggregate of the compensation payable could soon mount up. The company should take formal and impartial valuation advice on diminution in value.


This article was written by Property Litigation Associate Megan Davies and Katrina Yates (Landmark Chambers). For more information please contact Megan Davies on +44 (0)20 7438 2263 or Megan.davies@crsblaw.com.

Questions on any topic can be e-mailed to egq&a@crsblaw.com and egq&a@landmarkchambers.co.uk

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