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Property Law Update

Breach of restrictive covenants – a cautionary tale for developers

The Court of Appeal has ordered the demolition of a development of affordable homes, which were built in breach of a restrictive covenant preventing residential development.

Background

Millgate Developments intended to develop a plot of land, and they obtained planning permission with an obligation to provide social housing. The development land was affected by a restrictive covenant in favour of a neighbouring children’s hospice (“Hospice”) preventing residential development.

Despite the restrictive covenant and objections from the Hospice, Millgate completed the development, which consisted of 13 affordable homes, with the intention of dealing with the restrictive covenant afterwards. They agreed to sell the development to a social housing provider following completion of the development.

The legal issues

Under section 84 of the Law of Property Act 1925 (“Act”), a party with an interest in land can apply to the Upper Tribunal for an adverse restrictive covenant to be discharged or modified. An application can be made at any time, but only using certain grounds that are prescribed by the Act. If an application is successful, the applicant is required to pay compensation to the beneficiary of the restrictive covenant.

Millgate went ahead with the development, then made a retrospective application to the Upper Tribunal to discharge the restrictive covenant, after construction was completed. In order for Millgate’s application to be successful in its application, they had to show that:

• Money would be adequate compensation for any loss or disadvantage caused by discharge or modification of the covenant and that either the restriction:

o Does not secure to the beneficiaries any practical benefits of substantial value or advantage; or

o Was contrary to the public interest.

The decision

Millgate argued that the social housing development was in the public interest, and the fact that planning consent had been granted strongly support this assertion. Millgate was successful in this argument in the Upper Tribunal.

However, the Court of Appeal disagreed with the weight given by the Upper Tribunal to the planning consent, and strongly disapproved of the fact that before the development was commenced, Millgate did not:

• Make a section 84 application to discharge or modify the restrictive covenant; or

• Enter into an agreement with the hospice to waive the restrictive covenant.

The Court stated that the proper use of the section 84 procedure is for a developer to ask the Upper Tribunal to determine whether the development is in the public interest before construction is initiated.

Since Millgate took the risk of undertaking the works without the support of a section 84 application, they should expect to bear the risk of the huge level of wasted costs, should a retrospective application fail.

Practice points

Following the ruling of the Court in this case, developers should be strongly encouraged to ensure that they appropriately deal with restrictive covenants before commencing development works either by:

• Negotiating with the beneficiary; or

• Making a section 84 application to the Upper Tribunal.

It’s important that developers understand the severe risks associated with commencing or continuing their development, in breach of any enforceable obligation. It’s therefore essential to determine as early on as possible what covenants (if any) remain enforceable.

For more information, speak to our expert George Cohen.


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