A very recent Supreme Court case has given helpful guidance to property professionals as to how they should, or should not, deal with land that is the subject of a restrictive covenant.
In Alexander Devine Children's Cancer Trust v Housing Solutions Limited the Supreme Court has delivered its first ever judgment on the question of under what circumstances a person whose land is subject to a restrictive covenant can seek to have that restriction removed.
A restrictive covenant is a common feature of property ownership and acts like a type of private planning law. Subject to certain formalities, when a person sells off part of their land they are entitled to attach a restrictive covenant which can govern the future use of it. As such they can retain some control over the neighbouring land in future years even if it is then sold on a number of times.
However, by virtue of section 84 of the Law of Property Act 1925 someone who owns land which is subject to a restrictive covenant can apply to a property court (called the Upper Tribunal) to have the covenant modified or discharged. The circumstances in which the Upper Tribunal can discharge a covenant were the subject of the Alexander Devine case.
In 2011 a landowner in Maidenhead gifted land to a charity (Alexander Devine Children’s Cancer Trust (ADCCT)) for the purposes of building a hospice for the care of terminally ill children. In 2013 property developers, Millgate Developments Limited, bought land (the Exchange House site) next to the Trust's land in order to develop it as a housing estate. Millgate obtained planning permission to do so in July 2013.
Millgate knew when it bought the Exchange House site that part of it was subject to a restrictive covenant which could prevent that part of the land being developed. It knew, or could easily have found out, that the benefit of that covenant lay with ADCCT as the neighbouring landowner, but did not approach the Trust about that.
Millgate began developing its land, including the part subject to the restrictive covenant. Only once it had built out the site – with nine houses and four flats standing on the covenant land – did it apply to the Upper Tribunal to have the covenant discharged. The Tribunal determined that whilst Millgate's behaviour had been "high handed and opportunistic", it felt that it was bound to give more weight to the fact that Millgate had finished the houses, and that there were people waiting to move into them. The Tribunal therefore agreed to modify the covenant to allow the development, and to award ADCCT a payment of compensation instead.
The Trust appealed against the Tribunal's decision to the Court of Appeal. In November 2018 the Court of Appeal decided that the Tribunal was wrong on four grounds, and therefore overturned the Tribunal's decision and reinstated the restrictive covenant. Millgate had, in the meantime, sold the Exchange House site to Housing Solutions Limited, a social housing provider. Housing Solutions asked the Supreme Court to overturn the decision of the Court of Appeal and thereby to release the Exchange House site from the covenant once more.
The legal question for the Supreme Court
Section 84 of the LPA 1925 sets out the circumstances in which a covenant can be modified or discharged. Effectively there are five possible grounds for modification, but only one was 'in play' before the Supreme Court. That ground (sometimes called 'ground (aa)') is where: the restrictive covenant impedes a reasonable use of the land, and that the Tribunal is satisfied that either the covenant does not provide any practical benefit or is contrary to the public interest, and that payment of a compensation sum could make up for any loss suffered.
In all cases under ground (aa) the applicant has to establish that it meets the qualification requirements for an application (the jurisdiction test) and also that the Tribunal 'should' for good reason grant a modification (the discretion test).
The Supreme Court was concerned as to how the facts of this case should be considered under the two tests above. Specifically, how to balance the important competing factors that (a) planning permission had been granted (and therefore the development was likely to be 'in the public interest'), weighed against (b) the behaviour of Millgate in developing the land in knowing breach of covenant (the Supreme Court throughout its judgment described Millgate's actions as a "cynical breach").
The Supreme Court was asked to review was whether a consideration of Millgate's actions should form part of the jurisdiction test, or the discretion test, or both, and whether the Tribunal had applied those tests correctly.
Which legal test?
Housing Solutions argued that the jurisdiction test only required the Tribunal to ask whether maintaining or discharging the restrictive covenant was in the public interest (a narrow test), whereas the Trust submitted that the Court of Appeal was correct in its decision that the jurisdiction test required the Tribunal at that stage to look at all factors put before it, including the behaviour of a developer (a wide test).
On that question the Supreme Court agreed with Housing Solutions' legal case. It held that the test of what was in the public interest (where a planning permission had been granted) did not require the Tribunal to consider at that stage the behaviour of the applicant.
The Supreme Court also agreed with Housing Solutions' submissions on two other points where the Court of Appeal had said the Tribunal made a mistake, thereby overturning the Court of Appeal's findings on those issues.
However, the Supreme Court agreed with the Court of Appeal that the Tribunal had not carried out the correct legal exercise when reviewing Millgate's conduct at the 'discretion test' stage. The Supreme Court used different reasoning to that of the Court of Appeal, but the effect is that the restrictive covenant has been reinstated.
It is well established that an appeal court cannot overturn a Tribunal's discretionary finding simply because the appeal court might have reached a different decision. But in this case the Supreme Court decided that the Tribunal had not simply reached the wrong decision, but had ignored highly relevant things in reaching that decision. It described these as "omitted factors".
It was highly relevant that the omitted factors were evidence of Millgate's "cynical breach" which had been committed to allow Millgate to try to improve its legal case in the Tribunal. The Supreme Court felt that in building the houses on the covenant land before applying to release the covenant Millgate was trying to present the Tribunal with a fait accompli.
Because the Tribunal had not taken the omitted factors into account that was an error of law and a good reason to conclude that the covenant should not have been modified or released.
Lessons to learn
There are two key takeaways from the Supreme Court decision.
Firstly, the Supreme Court has given guidance about how the relevant tests under s84 should be applied, which should give parties to a restrictive covenant more certainty in the future.
Perhaps more importantly the Supreme Court has emphasised the importance of good conduct: even if a developer has what it believes to be a good legal case to overcome a restrictive covenant – and a good planning permission to support it – it must not simply proceed to develop without regard to the interests of a party that has the benefit of that covenant.
The Supreme Court quoted, with approval, the words of the ADCCT's counsel on this point to the effect that "It is not in the public interest that a person who deliberately breaches a restrictive covenant should be able to secure the modification of the covenant in reliance on the state of affairs created by their own deliberate breach."