Build first, ask later? At your peril!

The Court of Appeal has issued a sharp warning against developers building knowingly in breach of restrictive covenants, then applying to modify or release those covenants. A recent decision has made clear that a retrospective application will generally be unsuccessful, since it is in the public interest for private contractual and property rights to be respected. The decision also makes clear that the grant of planning permission does not mean that impeding development is against the public interest (Alexander Devine Children’s Charity Cancer Trust v Millgate Developments Ltd and another [2018] EWCA Civ 2679)).

Social housing built in breach of covenant

The land in question (the “Site”) was green belt land subject to restrictive covenants not to build on the land or use it other than for parking. The covenants benefited an adjacent plot, which had been gifted to a charity (the “Trust”) with the aim of constructing a hospice for life-limited children.

Planning permission was granted to a developer (“Millgate”) to build affordable housing on the Site, together with adjoining land not subject to the covenants (the “Unencumbered Land”). A section 106 agreement prevented Millgate from disposing of a more valuable nearby development until it had built and transferred the affordable housing to a social housing provider.

Millgate was aware of the covenants and was warned that building in breach of them would seriously impact the Trust’s aim to create tranquil gardens where children could end their days in peace. Undeterred, Millgate built nine two storey houses and four bungalows right up to the boundary overlooking the intended hospice garden area, then applied to the Upper Tribunal to modify or discharge the covenants, since the sale of the Site to a social housing provider was conditional on there being no reasonable risk of injunctive relief being ordered.

The Upper Tribunal modified the covenant to avoid wasting the social housing

The Upper Tribunal (Lands Chamber) ordered that the covenants should be modified to allow the development to remain, by virtue of section 84 subsections(1)(aa) and (1B)(b) of the Law of Property Act 1925, on the basis that impeding the occupation of social housing was contrary to the public interest and that money would be an adequate compensation to the Trust. “The unconscionable waste” occasioned by preventing the occupation of much needed affordable housing was the fundamental justification for the exercise of the Tribunal’s discretion. Compensation of £150,000 was awarded to the Trust, to cover the cost of screening the development and for loss of amenity.

The Tribunal accepted that the grant of planning permission for the Site indicated that the restrictive covenants operated contrary to the public interest.

Planning permission does not mean that opposing development is against the public interest

On appeal, the Court of Appeal disagreed with the weight that the Tribunal had attached to the grant of planning permission. The planning authority may not have taken private rights into consideration: it is assumed that a developer will resolve these through negotiation or the courts. Whilst the grant of planning permission demonstrates that a proposed development is not against the public interest, this does not mean that enforcing private rights which impede the development is against the public interest. However, planning permission will be more persuasive in nuisance cases, where the court will balance competing interests to decide whether a party has acted reasonably in the circumstances.

The Court of Appeal also made clear that there is no obligation on a right-holder to object to planning permission – a party is entitled to wait and rely on its private contractual rights if permission is granted. Equally, the fact that the Trust did not apply for an injunction (which would have required a cross-undertaking for what could be substantial damages if the development was delayed) did not prevent the Trust from opposing an application to discharge the covenants.

Assessment of the developer’s conduct: enforcing private rights is in the public interest

The Court of Appeal made clear that there is a strong public interest in having private contractual and property rights respected in dealings between private entities. One important factor when considering whether the covenants impede the public interest is whether the applicant had tried to negotiate a release of the covenants or applied to modify or release them prior to commencing works in breach of covenant.

Millgate could have satisfied the public need for affordable housing either by paying an agreed sum of £1.6 million to the Council or by building only on the Unencumbered Land. Either of these options would have satisfied the section 106 agreement without breaching the covenants and the payment option could have resulted in social housing being available more quickly by purchasing existing stock. When assessing whether a covenant is impeding a reasonable user of land against the public interest, it is therefore necessary to consider whether the public interest could be served in another way.

Bad news for the developer's profits

The outcome of the case is that Millgate’s development of the Site is in breach of covenant, and it risks an injunction being ordered to tear down the housing (and the special circumstances of the Trust’s interest in the land and the cynical nature of Millgate's conduct mean that an injunction would be a likely remedy), or much more extensive damages being ordered for breach of covenant. These could include an amount that the Trust might have negotiated for release of the covenant, which could be as much as 50% of Millgate's development profits.

Commercial implications

Developers should consider any restrictive covenants impeding development at the very outset. The available options include negotiating a release, relying on insurance (to cover the losses associated with the development being delayed or prevented by legal challenge) or applying to the Upper Tribunal to modify or release the covenants. Applying to the Upper Tribunal should now only be considered prior to commencing works, although there may be cases where a developer has failed to identify the covenants without fault, or had good reason to believe that the covenants would be waived.