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Supreme Court ruling in restrictive covenant case: ignore covenants at your own risk

The Supreme Court has handed down judgment today in an eagerly awaited case on restrictive covenants and affordable housing. It is the first time that the Supreme Court has considered a case on the modification of restrictive covenants. In today’s judgment, the Court has sent a warning message to developers who knowingly breach restrictive covenants where other viable options are available. The Court has refused the developer’s application to modify the covenants.

What are the facts?

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 Supreme Court decision

The case has gone all the way to the Supreme Court. The Supreme Court disagreed with the Upper Tribunal’s decision. Although there was a strong argument that it was in the public interest to allow the much-needed social housing units to remain, ultimately this did not outweigh the public interest in protecting the Trust’s contractual rights. The Supreme Court noted that it would have been perfectly possible for the developer to build all of the housing units on land unaffected by the covenants, while still meeting its affordable housing requirement. Alternatively, it could have paid a contribution to provide social housing on an alternative site nearby, which could have been ready quickly. The arguments on both sides carried weight and, when exercising its discretion, the Supreme Court also considered the developer’s conduct. It had built the units knowing that the land was subject to the covenants and completely at its own risk. 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. Ultimately, it could not be rewarded for providing the Upper Tribunal with a fait accompli.

What does this decision mean?

As the Supreme Court noted, the dilemma imposed by the facts of the case was particularly sharp. On the one hand, a covenant protecting the privacy of a children’s hospice and, on the other, the prospect of having to demolish 13 affordable housing units. Two competing uses of the land are pitted against each other. The Supreme Court’s decision in favour of the hospice feels like the right one but it was not a foregone conclusion. In particular, the developer’s conduct in knowingly building the affordable housing in breach of the covenant would not in itself have been enough to overturn the original decision in favour of the developer but for the fact that they could have chosen to build the affordable housing on land not subject to the covenant (albeit at less profit). Had the developer applied to modify the covenant before building the affordable housing that argument would have scuppered its claim and it was not right for the developer to have improved its position as a result of its own breach. It seems that the message is that poor conduct will not always be fatal but those who skate on thin ice should not complain when they fall in.