Getting away with a deliberate breach of covenant (subject to compensation)

It is usually the case that deliberate, unlawful conduct (for example, a wilful breach of a restrictive covenant, or the deliberate interference with an easement) is likely to be punished in judicial proceedings. However, this was not the outcome in the recent case of Millgate Developments Ltd & others v Smith & The Alexander Devine Children’s Cancer Trust [2016] UKUT 515 (LC).

In this case, a house-builder company applied to the Upper Tribunal (Lands Chamber) under section 84 of the Law of Property Act 1925 to modify restrictive covenants which affected a development site in Maidenhead, and which the house-builder had already knowingly breached a year earlier when it had commenced the construction of nine houses and four bungalows. These units formed part of a new development of affordable housing. The covenants affecting the site prohibited use of the land for building, or for any purpose other than the parking of vehicles. Hence, the construction on the land of affordable housing was a clear breach of covenant. The benefit of the covenants was attached to neighbouring land owned by the two objectors to the house-builder’s application: Smith, and The Alexander Devine Children’s Cancer Trust.

The house-builder, Millgate Developments, applied to modify the covenants under sub-section (aa) of section 84(1) LPA 1925. Under section 84(1), a freehold covenant which is restrictive of the use of land (or a similar leasehold covenant, where the lease is for more than 40 years, and 25 years have elapsed) can be extinguished or modified on application to the Tribunal. Sub-section (aa) authorises the extinguishment or modification of restrictive covenants which impede a reasonable user of the land for public or private purposes. However, to succeed under sub-section (aa), the Tribunal needs to be satisfied that the covenant, in impeding that user, either does not secure to those entitled to the benefit of it any practical benefits of substantial value or advantage, is contrary to the public interest, and that, in either case, money will be an adequate compensation for the loss or disadvantage suffered from the discharge or modification. The Tribunal is required to take into account the local development plan, and any declared or ascertainable pattern for the grant or refusal of planning permissions in the relevant area, together with and any other material circumstances.

The main objector, the Trust, owned adjoining land that was intended for use as a children's hospice for terminally ill children, with private and secluded outdoor amenities. The Trust objected to the house-builder’s application on the basis that its planned intended use would be seriously compromised by the presence of a new housing development so close to the boundary. The Tribunal agreed that the covenants secured practical benefits for the Trust’s land in terms of affording privacy and seclusion. The Tribunal also agreed that the practical benefit for the Trust was of substantial value since, to recover sufficient privacy, the Trust would need to incur considerable expenditure to create screening at the boundary. However, a material consideration was that the land had the benefit of planning permission. Further, permission was for development consisting of the provision of affordable housing. The need for affordable housing provision to satisfy local needs was a major consideration. Hence, the Tribunal decided that, in this case, subject to payment to the Trust of compensation in the sum of £150,000 (which Millgate Developments had already offered in return for a release from the covenants), the public interest in satisfying a pressing need for affordable housing was sufficient to justify the exercise of the Tribunal's discretion to modify the covenants to permit the development. This was so even though the house-builder had knowingly breached the covenants.

Normally, one expects a court or tribunal to punish a wilful offender. In Re George Wimpey Bristol Ltd & Gloucestershire Housing Association Ltd [2011] UKUT 91 (LC) (another case in which a house-builder constructed houses in knowing breach of covenant) the Tribunal Judge said that: “if ground (aa) [no practical benefit] had been made out, it is unlikely that I would have exercised the discretion that I have to modify the covenant. This is because I find on the evidence that the extensive works which Wimpey Homes have carried out on the application land were not an inadvertent action resulting from the discovery of the covenant at a late stage in the development programme. Rather, they were the result of a deliberate strategy of forcing through the development on the restricted land in the face of many objections from those entitled to the benefit of the restriction, to the point where they had so changed the appearance and character of the application land that the Tribunal would be persuaded to allow them to continue with the development. It is appropriate for the Tribunal to make it clear that it is not inclined to reward parties who deliberately flout their legal obligations in this way.”

In the current case, however, the Deputy Chamber President said that “the discretion conferred on the Tribunal is to be exercised judicially, and not with a view simply to punishing a covenant breaker.” The Tribunal considered that the public interest in allowing the application outweighed all other factors. It stated that it would be “an unconscionable waste of resources for those houses to continue to remain empty.” Further, the Tribunal gave a reminder that an award of compensation to a disappointed objector was designed to represent compensation for the loss or disadvantage suffered by the objector in the loss of the practical benefit conferred by the covenant. It was not intended to represent a share in the profits which the applicant might make from its development of the application land. In Winter v Traditional & Contemporary Contracts Ltd [2007] EWCA Civ 1088, the Court of Appeal confirmed that compensation awards under section 84 LPA 1925 should normally be based on the diminution in the value of the objector’s property, and should reflect the objector’s loss, rather than the applicant’s financial gain. It stated that “authorities binding on us establish that compensation under section 84 is based on the impact of the development on the objectors, not on the loss of the opportunity to extract a share of the development value.”

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