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Contractual rights outweigh public interest in restrictive covenant case

The Court of Appeal has sent a firm message to developers who seek to cut corners by knowingly breaching restrictive covenants. A recent decision means that 13 units of social housing, constructed on land on which building was prohibited, may now need to be torn down.

What happened?

Millgate was a developer that owned land subject to a restrictive covenant which prevented any use of the land other than as a car park. The Alexander Devine Children’s Cancer Trust owned a neighbouring property which benefitted from the covenant. It was building a hospice for terminally ill children on the site and planned to have a peaceful wheelchair path around the perimeter of its gardens.

Millgate built 13 affordable housing units in order to meet planning obligations which would allow it to market a high-value development nearby. It built the homes close to the boundary with the Trust’s land, in deliberate breach of the covenant, and then applied to the Upper Tribunal to modify the covenant. The case was first heard by the Upper Tribunal in 2017.

The Upper Tribunal found that the housing development had a significant impact on the hospice land and also noted that Millgate had not acted in good faith. However, it held that the public interest in making the affordable homes available immediately to people who had been waiting for social housing was sufficient to justify modifying the covenant. The decision saved the developer almost £1.6 million.

The Appeal

The Court of Appeal overturned the Upper Tribunal’s decision. The public interest in allowing the social housing units to remain did not outweigh the public interest in protecting the Trust’s contractual rights. The Court noted that it would have been possible for Millgate to build all of the housing units on land unaffected by covenants, while still meeting its affordable housing requirement. Alternatively, Millgate could have paid a contribution to provide social housing on an alternative site nearby, which could have been ready quickly.

When exercising its discretion, the Court of Appeal also considered Millgate’s conduct. Millgate had acted in a way that was “deliberately unlawful” and it should not be entitled to rely on its own unlawful conduct in having built the social housing in breach of covenant as a factor justifying the modification of the covenant. While the Court of Appeal made clear that the judgment was not intended to be a punishment, it emphasised that it would not incentivise law breaking.

What does the decision mean?

Should the Trust now seek to enforce the covenant, Millgate may be required to demolish the new houses or to pay the Trust substantial damages to compensate it for the breach of the covenant.

The judgment sends a clear message that buying cheap land subject to restrictive covenants and then deliberately breaching these will not be rewarded. A developer who wishes to build on land subject to restrictive covenants should try to reach an agreement with the person who benefits from the covenants, or should make an application to release or modify the covenants before starting construction.

Case: The Alexander Devine Children’s Cancer Trust v Millgate Developments Ltd and others [2018] EWCA Civ 2679