Court warns developers not to take the law into their own hands

Posted by Ronan Daffey on
The Court of Appeal has sent a strong message to developers not to build on land in breach of a restrictive covenant and then present the court with a fait accompli and challenge the judge not to order demolition but allow them to compensate the frustrated covenant holder instead.

In the context of an acute housing shortage, and especially of social housing, the decision to order the developer to demolish a block of 13 affordable flats is both remarkable and resolute.

The background

Back in 2016, the Upper Chamber of the Lands Tribunal had buckled under the pressure applied by Millgate Developments, who had built the flats and then applied for the discharge of the covenant against building imposed in favour of the surrounding land, ruling that the public interest was best served by allowing the urgently needed accommodation to remain and for Millgate to pay for significantly enhanced landscaping features on the adjoining land to protect it from the effects of the development that overlooked it.

Unfortunately for Millgate the beneficiaries of the covenant, the trustees of a children's hospice charity who had been gifted the adjoining land by a local farmer who had also imposed the restrictive covenant on Millgate's land, took their duties seriously, and earnestly defended their mission to provide a tranquil setting for terminally ill children and their families to enjoy their final months together, and bravely decided to take their fight to the Court of Appeal.

The trustees won on all four of the grounds that Millgate had put to the tribunal to defend its actions and support its application for the discharge of the covenant under Section 84 of the Law of Property Act 1925, principally relying on the public interest ground. The Court of Appeal dismantled each in turn.

The facts

The factual position was that Millgate was carrying out a sizeable market value development on land unaffected by the covenant, but was required by its planning consent to provide some affordable housing as well, for which it earmarked the land burdened by the covenant as it was on the edge of the site. When it started building the block of flats, the farmer noticed, objected, and required Millgate to cease building. Millgate dismissed these objections, arguing that the covenant did not benefit the adjoining land as it was bare agricultural land, carried on with the construction of the building until it was finished, and then applied for the covenant to be discharged, by which time the trustees had been made aware of the covenant and its alleged breach - they were planning the layout and landscaping of their hospice at the time prior to its construction.

Due to the growing difficulty with the social housing, and in light of a restriction in the Section 106 Agreement preventing the sale of the full market value houses until the social housing was in the hands of a registered provider, Millgate's Section 106 Agreement was at this point varied to provide for an alternative solution if the covenant could not be discharged, namely payment of a commuted sum of £1.6 million for the local authority to provide equivalent social housing elsewhere within the borough.

Millgate's first argument was that the grant of planning consent was strong evidence that its development was in the public interest (a reason for allowing the discharge or modification of a covenant under Section 84), which the tribunal accepted, but the Court ruled that this put the significance of planning consent much too high – it took no account of the private property interests of those who had the benefit of a restrictive covenant. It made the point very strongly that there is an at least equal public interest in having private property rights respected in dealings between private persons. For this reason, the fact that the beneficiaries had not objected to the grant of Millgate's planning consent was irrelevant – they were simply and legitimately relying on their private rights.

The judgement

The Court further made the point that, when assessing the public interest, it was necessary to look at how the situation had arisen. Millgate had been aware of the covenant and could have sought a release or modification of the covenant from the easily identifiable beneficiaries or, alternatively, applied under Section 84 for it to be discharged or modified BEFORE it started building. It didn't, preferring to present the tribunal with a completed block of social housing which weighed heavily, but inappropriately, on its thought process.

The Court also ruled that the tribunal had paid insufficient attention to the availability of the alternative solution, the commuted payment, in assessing the public interest. If the tribunal had refused the discharge of the covenant, the commuted sum would have been paid and the social housing would have been delivered via that route, thus preserving the integrity of the restrictive covenant and satisfying the public interest in the provision of the social housing. That is the decision that the tribunal should have reached.

Crucially from the perspective of drawing wider conclusions from the Court's decision, it ruled that the public interest test must be passed BEFORE the judge considers whether or not he or she should exercise the statutory discretion to discharge or modify a covenant, the public interest is not a factor in that part of the decision. The Court ruled that, as Millgate had not passed that test, the exercise of judicial discretion did not apply.

To rub salt into Millgate's wounds, the Court's final flourish was that, if it had been required to exercise its discretion, it would still have found very much against Millgate because of its "deliberately unlawful and opportunistic conduct", which was "directed to subverting the proper application of section 84 without good reason". It had "acted in a high-handed manner by proceeding to breach the restrictive covenants without any justification or excuse".

Millgate's application was refused and the Court urged all developers to invoke the Section 84 procedure at the proper time and in the proper manner - developers be warned!

The Alexander Devine Children's Cancer Trust vs. Millgate Developments Ltd. and Housing Solutions Ltd. 2018 EWCA Civ 2679

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Ronan is responsible for keeping the firm’s Real Estate team fee earners up to date with legal developments.

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