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01 December 2018

Restrictive Covenants - discharge or modification under s.84 Law of Property Act 1925

Millgate Developments Limited & Anr v Bartholomew Smith & Anr [2018] EWCA Civ 2679

Summary

The Court of Appeal allowed the appeal against the Tribunal’s decision that modification of the covenants should be permitted under the second limb of ground (aa), i.e. on the basis that the covenants were operating contrary to the public interest. In the Court’s view, it is generally in the public interest that contracts should be honoured and not breached and that property rights should be upheld and protected. It emphasised that the Tribunal should not usually be inclined to reward parties who deliberately flout their legal obligations.

Facts

The applicant had completed a development of 23 social housing units including a block of flats, various terraced houses and bungalows.  Planning permission for the development was granted on the basis that it would enhance the character and amenity of the area and was sensitive to adjoining uses.  However, the development breached certain restrictive covenants imposed in a 1972 conveyance which prohibited the use of the land for building or for any purpose other than the parking of vehicles.  The applicant sought the modification of the covenants under grounds (aa) and (c) of s.84 LPA 1925.

The key objector to the application was a trust which owned immediately adjoining land which was being developed into a hospice for sick children.   The roofs of the applicant’s bungalows were visible over the boundary fence with the hospice land and the upper floor bedrooms of the houses overlooked the hospice grounds.  The other sides of the hospice land were surrounded by fairly open countryside except for a small light industrial estate on one side. 

The trust contended that its carefully planned calm and peaceful environment for the hospice – particularly the outdoor areas – would be seriously compromised by the presence of new housing so close to its boundary. 

Issues

(1) Whether the Tribunal should exercise its discretion to modify the restriction under s.84(1)(aa) LPA 1925, i.e. on the basis that it impeded a reasonable user of land.  (Under s84(1A), modification is permitted where the Tribunal is satisfied that: (a) 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 (b) that the restriction is contrary to the public interest.  For the purposes of section 84(1A), consideration also has to be given as to whether money is adequate compensation for the loss or disadvantage to the beneficiary as a result of the modification of the restriction.)

(2) Whether the Tribunal was satisfied that the modification would not injure the persons entitled to the benefit of the restriction, in accordance with s84(1)(c).

Decision at first instance

It was accepted that the housing redevelopment was clearly a reasonable use of the land and the Tribunal focused on considering the various practical benefits which the hospice claimed to enjoy from the restrictive covenants.  The primary alleged practical benefits considered were:  

Preservation of views: The Tribunal did not necessarily accept this as a practical benefit but noted that the only views worth preserving from the hospice land would be unaffected by the state of the application land. 

Preventing loss of privacy: The Tribunal noted that the bedrooms and indoor facilities of the hospice had been located looking towards the open countryside.   However, it accepted that the impact of the applicant’s development would be more apparent from the carefully designed grounds and outdoor facilities provided by the hospice, so that the children and their families would have a less private and less attractive environment than would have been the case if the covenants had been observed.  The Tribunal was therefore satisfied that practical benefits had been lost by the hospice land in the form of enhanced privacy and seclusion. 

Freedom from noise: The Tribunal agreed that the ordinary noise from the gardens of the houses and a children’s park on the application land would be audible at times in the hospice grounds, although it expected this to be muffled to some extent by the boundary fence and maturing trees there.  Nonetheless, the Tribunal accepted that the special context of the hospice meant that protection from the ordinary and otherwise unobjectionable noise of adjoining gardens and play areas was a practical benefit for the hospice.  It rejected the hospice’s suggestion that the covenants provided any significant protection from noise nuisance attributable to pets. 

No light pollution:  The Tribunal disagreed that this was a practical benefit secured by the covenants and did not consider that the use of ordinary domestic lighting could properly be described as pollution.  In any event, it did not expect the intrusion of light from the upper floors of the houses to be significant.

Substantial value or advantage?

Following the Tribunal’s conclusion that the covenants secured practical benefits for the hospice land by enhancing privacy and seclusion, it moved onto consider whether these benefits were of substantial value or advantage to the objectors. 

It was noted that the desired level of privacy and seclusion which the hospice was seeking to achieve would now require a different approach to the landscaping of the grounds.  It considered various solutions put forward by the parties in this regard in order to assess the value of the covenants in monetary terms and noted that the likely costs would be between £37,000-£70,000, concluding that the practical benefit was therefore one of substantial value or advantage.  Using the simpler route of assessing how the loss of privacy and seclusion would affect the service which the hospice was seeking to provide, the Tribunal was also “entirely satisfied” that the contribution which the covenants would have made to the privacy and environment within the hospice grounds would have been a real and substantial  advantage. 

In light of this conclusion, the Tribunal had no power to modify the covenants under the first limb of ground (aa).  For the same reasons, the application under ground (c) also could not be made out because the modification would injure the trustees as owners of the hospice land. 

Public interest?

In considering the alternative question under ground (aa) of whether impeding the applicant’s proposed use of the application land was contrary to the public interest, the Tribunal noted the importance of balancing the public interest in efficient use of land and the private rights over the same land. 

The Tribunal agreed that the grant of planning permission for the housing use of the application land was a material consideration, as was the fact that the social housing was intended for occupation by tenants who were likely to have been waiting for accommodation for some time.  It therefore concluded that the covenants were clearly operating contrary to the public interest given that it was not in the public interest for the houses to remain empty and was satisfied that this was sufficient to justify the exercise of the Tribunal’s power under section 84(aa) to override the objector’s private rights. 

However, to make an order on that basis, the Tribunal had to be satisfied that money would be an adequate compensation for the loss or disadvantage which the trustees were going to suffer as a result of the modification of the covenant.  In line with its consideration of the extent to which additional planting could mitigate the loss of privacy and seclusion, the Tribunal decided that an award of money sufficient to provide the additional planting required for this purpose would constitute adequate compensation to the hospice trustees. 

The Tribunal noted that it retains discretion whether to order the discharge/modification of a restriction under section 84(1) even where one of the prescribed grounds is made out.  In this context, it considered the applicant’s conduct in undertaking its development in breach of the covenants.  The applicant acknowledged that it had been aware of the covenants when it acquired the application land.  From the evidence given to the Tribunal, it seemed that the developer had either taken no steps to establish the identities of the beneficiaries of the covenants or had known the identities and chosen not to raise the issue of the covenants before beginning its redevelopment. 

The Tribunal noted that it did not wish to reward parties who flout the law or undermine the protection offered by restrictive covenants.  However, it noted the need to exercise its discretion judicially and not simply with a view to punishing a covenant breaker.  The Tribunal took account of an open offer made to the hospice by the applicant after the conclusion of the Tribunal hearing, offering a payment of £150,000 to the trust and to pay the trustees’ costs in return for the modification of the covenant.  (This sum reflected the hospice’s assessment of the cost of additional planting required together with an additional sum to reflect “hassle” and other intangible factors.)  The Tribunal considered this to be a constructive proposal and regretted that it had not been accepted by the objectors.

The Tribunal explained that it would have found it more difficult to exercise its discretion in the applicant’s favour if it had only succeeded in its case on the basis of the first limb of ground (aa).  However, it felt that the public interest of the parties who were waiting to be housed outweighed all other factors and that it would be an unconscionable waste of resources for the houses to continue to remain empty.  The Tribunal therefore exercised its discretion to modify the covenants to permit the applicant’s development.

In assessing the financial compensation for the modification of the covenant, the Tribunal rejected the suggestion that the hospice should enjoy some share in the developer’s profit from the development of the application land.  Instead, it was persuaded by the level of the applicant’s open offer, particularly since it considered that the applicant had sufficient experience and resources to assess an appropriate level of compensation and could have designed an alternative landscaping scheme at a lower level but had chosen not to.

Court of Appeal Decision

The trust appealed against the Upper Tribunal’s decision and this was allowed by the Court of Appeal, which reinstated the covenants.

The judgment of the Court included the following points of note:

  • The trust’s failure to seek an interim injunction to restrain the applicant from building in breach of the restrictive covenants should not have any significant bearing on the issues for decision under s.84.       The Court also noted that the applicant was aware (or recklessly shut its eyes to the possibility) that the restrictive covenants benefited the hospice land and had been warned not to build on the relevant land. Similarly, the Court felt that the trust was not required to have objected to the grant of planning permission as a condition for being able to enforce the restrictive covenants.
  • In applying s.84, it is necessary to bear in mind that the removal/modification of a private contractual right against the objection of the right-holder is not something which should “occur lightly or without very good reason”.   In order for an application to succeed under the second limb of ground (aa) (i.e. where the restriction is contrary to the public interest), it must be shown that that interest is “so important and immediate as to justify the serious interference [which discharge or modification under section 84 would involve] with private rights and sanctity of contract.”
  • Granting planning permission for a proposed use of land is not the same as saying that a restrictive covenant which impedes a reasonable use of land is contrary to the public interest. Furthermore, there “is a public interest in having private contractual and property rights respected in dealings between private persons”.
  • In assessing the application of the second limb of ground (aa), the Upper Tribunal should have regard as to whether the applicant has made fair use of the opportunities available for negotiating a waiver of the restrictive covenant or, if necessary, testing the public interest arguments by making a s.84 application before acting in breach of the covenant. In considering the applicant’s conduct which led had to the development being completed, the Court felt it had “deliberately circumvented” the proper procedures for testing and respecting the trust’s rights under the restrictive covenants.
  • It was acknowledged that there may be reasons why it was not possible or practical for a developer to apply under s.84 before building in breach of a restrictive covenant, e.g. where a developer failed to identify the existence of a covenant beforehand despite reasonable diligence. In such cases, it may well be legitimate in an assessment of whether the enforcement of the covenant is contrary to the public interest to have regard to the waste of resources which may be involved if the covenant is not modified and is later enforced. However, in general terms, it was felt to be in the public interest that contracts should be honoured and that property rights should be upheld and protected.      
  • The Tribunal should have taken account of the fact that there were alternative options for the applicant which would have avoided the need to build social housing on the relevant land.
  • In exercising its discretion, the Tribunal had failed to attach sufficient weight to the “deliberately unlawful and opportunistic conduct of Millgate in the circumstances of this case, which was directed to subverting the proper application of section 84 without good reason.” The Tribunal should not usually be inclined to reward parties who deliberately flout their legal obligations and no public interest factor of sufficient weight had been identified to justify any departure from this approach.

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


This article was written by Emma Humphreys, for more information please contact Emma on +44 (0)20 7203 5326 or emma.humphreys@crsblaw.com

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