Dangers of wilful breach of a restrictive covenant

Those who believe they can deliberately breach a restrictive covenant affecting land and not follow the necessary procedures should think twice.

A restrictive covenant is an agreement by a landowner to restrict the use of its land for the benefit of another person’s land – and it can be a potential nightmare for a prospective buyer of the burdened land.

Depending on the wording of the covenant, it could prevent the property from being used for residential purposes, prevent a particular trade being carried out or indeed prevent any building work at all.

Whilst this can prove problematic to a would-be buyer, there are ways of dealing with a restrictive covenant:

Options

1. Indemnity insurance – if the restrictive covenant is enforced a policy can cover the costs of the insured in dealing with the claim, the loss in market value of the property and, in a worst case scenario, the cost of demolition if a development cannot proceed. Whilst this course of action is usually the most cost and time-effective solution, it is not always available or appropriate.
2. Express release by the person with the benefit of the covenant. The parties whose land the covenant benefits and burdens can negotiate the release or variation of the covenant, usually in return for a payment. This can be expensive and if negotiations break down option 1 would not be available.
3. An application can be made on certain grounds to the Upper Tribunal (Lands Chamber) to modify or discharge the restrictive covenant^[1]. This can be a time consuming and costly course of action.

What is not favoured by the Courts is a party disregarding a covenant and knowingly breaching it, as is evidenced in a recent Court of Appeal decision^[2].

Facts

Millgate Developments Ltd is a development company which had applied to the Upper Tribunal to modify restrictive covenants which it had already breached 12 months earlier. It had erected a number of properties, some of which were built on land burdened by restrictive covenants that prevented the land from being used for any purpose other than the parking of vehicles. Despite being aware of the covenants and the objections to the development by adjoining owners with the benefit of the covenants, Millgate proceeded with the development.

Millgate applied to the Upper Tribunal to modify the covenants on the grounds that they impeded a reasonable user of the land for public or private purposes as they did not secure any practical benefit of substantial value or advantage or were contrary to the public interest.

The properties already constructed formed part of a wider development of affordable housing. There was a clear need to provide this and it was on this basis that Millgate approached the matter.

Issue

The question was whether the covenant was contrary to the public interest because its effect would be to prevent the construction of much needed affordable housing.

Decision

Despite Millgate being in deliberate breach, the Upper Tribunal agreed it was in the public interest to provide affordable housing and permitted modification of the covenant. The Court of Appeal however, did not agree and overturned this decision, concluding it was also in the public interest to enforce contractual property rights.

The Upper Tribunal should have considered whether there was an opportunity for Millgate to negotiate a waiver of the covenant or seek a modification under the statutory procedure before breaching the restrictive covenant. It was clear that there was an opportunity for Millgate to have followed the correct procedures and the Court of Appeal was satisfied that it was not contrary to the public interest to maintain the covenant.

The Court of Appeal agreed with the view that had been expressed in a previous Tribunal case^[3] that even if a ground for modification was established, the Tribunal should not reward parties who knowingly defy their legal obligations.  If a developer is aware of a restrictive covenant which impedes its development, it has the opportunity to try to modify or discharge the covenant. The Court will not look favourably on such parties failing to follow the correct procedures without a valid excuse.

^[1] Section 84 Law of Property Act 1925

^[2] The Alexander Devine Children’s Cancer Trust v Millgate Property Developments Ltd & Others [2018] EWCA 2679

^[3] Re George Wimpey Bristol Ltd & Gloucestershire Housing Association Ltd [2011] UKUT