We are regularly asked to advise clients on how those restrictions may be overcome, or how a breach may be enforced. Where negotiation is not appropriate, attention will inevitably turn to Section 84 of the Law of Property Act 1925.
Section 84 empowers a landowner to apply to the Upper Tribunal for an order discharging or modifying a covenant. A successful outcome will remove the restrictions and allow it to proceed with its plans – a common example is a restriction against erecting new buildings.
Landowners who can prove they benefit from the covenant are entitled to object to the application with minimal risk – they may be entitled to compensation if the application succeeds.
Timing and Tactics
A breach of covenant can lead to a claim for injunctive relief, damages and/or costs against the burdened landowner. If proposed development works are certain to breach the covenant, a Tribunal application is usually made before the works are undertaken.
In the first Section 84 case to reach the Supreme Court in 95 years, the opposite was true. What is the effect of a landowner purposefully breaching a covenant to bolster its Tribunal prospects? Are there any lessons to be learnt for developers and landowners faced with similar restrictions?
The Scope of Section 84
Section 84 permits modification or discharge under five grounds. One ground is that the restriction impedes the reasonable use of the land and is contrary to the public interest
The Tribunal must first consider whether the ground has been satisfied – the “jurisdictional stage”. If satisfied, the Tribunal may still choose to grant or refuse the application – the “discretionary stage”. If an application passes both stages, the covenant is modified/discharged, and compensation may be payable to objectors.
Alexander Devine Children’s Cancer Trust (“the Trust”) enjoyed the benefit of a covenant restricting development and use of land adjoining its hospice for any purposes other than a car park. The Trust’s land had been gifted by a neighbouring landowner and was used by terminally ill children.
The applicant was Housing Solutions Limited (“the Landowner”). The Landowner’s predecessor in title (“Millgate”) successfully applied for planning permission to build houses, including 13 affordable units on the restricted land. In breach of covenant and in the face of objections from a neighbouring landowner, work began and the 13 affordable units were built.
Millgate only then applied to the Tribunal seeking modification of the covenant. The late application was tactical – building the units was described as a “cynical breach”. Millgate argued it would be against the public interest to demolish affordable homes which were built, ready for occupation and which served a social need.
The Trust objected – they argued the purpose of the covenant was to ensure the Trust’s children, visitors and staff could enjoy their grounds with privacy – this was undermined by the houses.
The Tribunal granted the application, awarding compensation to the Trust to cover screening and loss of amenity. Millgate’s conduct was termed “high-handed and opportunistic”, but public interest arguments still outweighed all other concerns. The Tribunal remarked that “it would indeed be an unconscionable waste of resources for those houses to continue to remain empty”.
This appeared to completely vindicate the “cynical breach” – despite criticism, it had achieved exactly Millgate’s aim. Millgate sold the land to the Landowner, very shortly before the Trust appealed to the Court of Appeal.
The Court of Appeal overturned the Tribunal’s decision. The Tribunal had not properly considered Millgate’s cynical breach when addressing public interest arguments. The Tribunal should have exercised its discretion and refused the application “in part to deter others” from employing similar tactics. The Landowner appealed to the Supreme Court.
The Supreme Court Appeal
The Supreme Court had to consider four grounds, of which two were key:
- Did the Tribunal make an error of law by ignoring Millgate’s cynical breach at jurisdictional stage?
The Tribunal was only required to decide whether the continued restriction against using the units as housing was against the public interest, weighed against the Trust’s own arguments. It was, as the Supreme Court termed it, a “land-use conflict”.
- Did the Tribunal fail to properly consider the cynical breach at discretionary stage?
Firstly, Millgate could have applied for planning permission on other unencumbered land but chose not to. If it had, the covenant would not have been breached and the Trust land would be unaffected.
The alternative land was also relevant to the timing of the application. If the application had been made prior to building the units, it would have been unlikely to satisfy the public interest ground – the objector would have pointed to the availability of alternative land, meaning the public interest could be upheld through building elsewhere. Millgate had put itself in a better position through a purposeful breach of covenant.
The Supreme Court said it was important to “deter a cynical breach under Section 84, but it is especially important to do so where…that cynical conduct will directly reward the wrongdoer by transforming its prospects of success under the “contrary to public interest” ground.”
The appeal was dismissed, and the Supreme Court refused the application – the covenant would not be modified, exposing the Landowner to a claim by the Trust for breach of covenant.
The Supreme Court has made it clear that the Tribunal should exercise its discretion carefully where cynical tactics have been employed in Section 84 applications. Where purposeful breaches place an applicant in a better position than it would otherwise have been, the Tribunal should be slow to grant an application.
This sounds a warning for developers who may have considered employing this tactic in the past. Until recently, the Tribunal’s first instance decision appeared to vindicate this tactic, but there is now guidance from the highest Court which suggests such conduct may severely undermine an applicant’s position, even where modifying or discharging the covenant might otherwise be in the public interest.
As ever, the case is fact-specific and has some unusual elements. The Tribunal retains its discretionary powers but will have regard to this decision in similar cases. The availability of other land and the decision to proceed with the burdened land was the decisive factor here. Without that, the Landowner may still have succeeded. The case does not mean that all cynical tactics will be treated equally. The Trust has not applied for an injunction in this matter and a commercial settlement may still be the most likely outcome.
Hägen Wolf regularly advises parties on dealing with restrictive covenants of this nature, whether they wish to overcome those restrictions or enforce a breach.