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In this post, Dominic Pugh, an associate in the Real Estate Disputes team at CMS, comments on the decision handed down earlier in November 2020 in Alexander Devine Children’s Cancer Trust v Housing Solutions Ltd [2020] UKSC 45.

On 6 November 2020, the UK Supreme Court handed down judgment in a landmark case concerning the application of Law of Property Act 1925, s.84. S.84 concerns the discretion of the Lands Tribunal to discharge or modify a restrictive covenant. This case was about the public interest ground in s.84(1)(aa) and 84(1A)(b)). The court was required to consider the proper application of this ground as well as the relevance of a party’s conscious breach of a restrictive covenant. It is the first time that this legislative provision has been considered by the UK’s highest court and is therefore of great interest to property lawyers and developers alike.

The facts of the case, set out in further detail below, concerned a fundamental land use dilemma between a development company’s planning law obligations to provide affordable housing and the private law rights of a charity seeking to secure the privacy of children in a hospice.

In summary, the Supreme Court held that the “cynical” conduct of the development company was relevant, but only at the second ,“discretionary”, stage of the s.84 assessment and that the first instance decision to discharge the covenant erred in law by failing to take into account two specific factors relating to conduct. The decision provides much needed guidance on the application of the public interest limb of s.84, although on the facts left open the delicate issue regarding the future of the 13 houses, some of which were occupied by residential tenants, built in breach of the restrictive covenant.

Background

The case concerns a piece of land situated in Maidenhead (referred to in the judgement as the “Application Land”) which in 1972 was sold by a farmer to a development company who already owned neighbouring land, together forming a wider plot referred to as the “Exchange House Site”. As part of the conveyance, the development company covenanted by deed that, inter alia, no building would be built on the Application Land.

The farmer’s son then inherited the adjacent land and gifted this to the Alexander Devine Children Cancer Trust (the “Trust”) for the construction of a children’s hospice, with the benefit of the restrictive covenants over the Application Land.

A development firm known as Millgate Developments Ltd (“Millgate”) then acquired the Exchange House Site and applied for planning permission to build, including the construction of 23 affordable houses further to an agreement under the Town and Country Planning Act 1990, section 106. Under the chosen scheme, 13 of the affordable houses would be constructed on the Application Land and consciously in breach of the restrictive covenants. It should be noted that, under the planning consent, all the houses could have been built on a part of the Exchange House Site which wasn’t the Application Land and thereby in compliance with the restrictive covenants. However, and for presumably commercial reasons not concerned by / submitted to the court, this did not happen.

In full knowledge of the restrictive covenants and despite opposition from the farmer’s Son and the Trust, Millgate proceeded with the development. Following correspondence between the parties’ legal representatives, Millgate then applied to the Upper Tribunal seeking modification of the restrictive covenants pursuant to s.84.

The first instance decision

The Upper Tribunal (Millgate Developments Limited and Housing Solutions Limited -v- Bartholomew Smith and the Alexander Devine Children’s Cancer Trust [2016] UKUT 515 (LC) allowed Millgate’s application to modify the restrictive covenants and, in turn, ordered £150,00.00 of compensation to be paid to the Trust, with the compensation intended to compensate the Trust for its loss of amenity and to contribute towards the construction of fencing.

The Tribunal took a holistic approach to the question of public interest, looking at the character of the Exchange House Site generally and its impact vis-à-vis the grounds of the Trust’s land. Heavy reliance was also placed on the fact that planning permission had been obtained for the scheme notwithstanding the knowing breach of the restrictive covenants. The Tribunal noted that whilst planning permission is not decisive when assessing competing private law rights, it did reflect an objective assessment of appropriate land use which considers the public interest.

The Tribunal did not consider the conduct of Millgate to be of significant weight. Although it did mention the issue of whether the egregious nature of the breach of covenant should lead to a denial of the application so as to punish Millgate, it ultimately did not give decisive weight to it.

The Court of Appeal decision

The Court of Appeal in The Alexander Devine Children’s Cancer Trust v Millgate Developments Ltd & Anor [2018] EWCA Civ 2679, led by Lord Justice Sales, found the tribunal to have erred in law by failing to take into account, at the “contrary to the public interest” stage, the “deliberately unlawful and opportunistic” conduct of Millgate and its decision to press ahead with breach of the covenant without first seeking negotiation with the Trust or a s.84 application.

Further, Lord Justice Sales found that the Upper Tribunal had placed too much weight on the grant of planning permission and emphasised that planning law cannot trump private law rights. Lord Justice Sales focused on the fact that the s.106 agreement, pursuant to which Millgate was obliged to construct the affordable houses, had subsequently been varied to permit an alternative solution if the covenant could not be discharged. The decision of Millgate to act despite this was relevant.

The Upper Tribunal’s decision was therefore overturned, and the s.84 application refused.

The Supreme Court decision

The Supreme Court, led by Lord Burrows, with whom the other four Justices concurred, agreed with the Court of Appeal that the Upper Tribunal decision erred in law, but concluded so through different reasoning, specifically in relation to the stage of the analysis at which conduct should be considered.

Is Millgate’s conduct relevant to the “jurisdictional stage”?

Lord Burrows saw that there was a two-stage test under s.84.

The first stage, found within s.84(1)(aa) and (1A)(b) is a “jurisdictional ground” and requires the owner of the burdened land to prove that the continued existence of the restriction would “impede some reasonable user of the land” and that the restriction impeding such user is “contrary to the public interest”.

This jurisdictional ground should be interpreted “narrowly” and focus on whether the impediment to the use of the land is contrary to the public interest, rather than whether in all the circumstances of the case it would be contrary to the public interest to maintain the restriction. In this case then, the question was whether it was in the public interest for the 13 affordable housing units to be used.

Lord Burrows held that the Upper Tribunal did not err at this stage and that, on the facts, the restriction on Millgate’s use of the Application Land was indeed contrary to the public interest at this stage of the analysis.

However, at this jurisdictional stage of the assessment of Millgate’s application, the Supreme Court found that contrary to the analysis of Sales LJ in the Court of Appeal, Millgate’s conduct is not relevant.

Is Millgate’s conduct relevant to the “discretional stage”?

The second element of s.84 is the Upper Tribunal’s discretion to, having satisfied itself that the restriction impedes a reasonable use of the land contrary to the public interest, modify or discharge the restriction. This, in Lord Burrow’s judgment, is where Millgate’s conduct must be considered and ultimately, on the facts, means that such a discretion should not have been exercised.

Lord Burrows found that the Upper Tribunal had erred in law by failing to consider the two following factors relating to Millgate’s conduct:

  1. If Millgate had respected the rights of the Trust and applied for planning permission avoiding the Application Land, there would have been no need for a section 84 application. It is important to deter conduct which creates a land use conflict that would reasonably have been avoided altogether by an alternative, viable plan.
  2. If Millgate had respected the rights of the Trust by applying under section 84 before starting to build, it would likely not have been able to satisfy the jurisdictional ground. Instead, permission would have been granted for the affordable housing on the rest of the Exchange House site so that upholding the restriction would not be contrary to the public interest. In other words, the developers should not be rewarded for presenting to the Upper Tribunal a fait accompli.

Analogy with the tort of private nuisance

The Court also considered the application by the Upper Tribunal of the “contrary to the public interest” test in the law of private nuisance, as set out in the leading case of Lawrence v Fen Tigers Ltd [2014] UKSC 13, particularly of Lord Sumption’s analysis. It was held that contrary to the Court of Appeal’s reasoning, the Upper Tribunal had not erred in law by not giving due regard to Lord Sumption’s comments in Lawrence v Fen Tigers Ltd [2014] UKSC.

Ability of appellate court to re-make the Upper Tribunal’s decision

Lord Burrows also confirmed that s.84 does permit an appellate court to “re-make” the Upper Tribunal’s decision, and, in doing so, gave weight to the need for certainty between the parties given the amount of time that had passed since the initial section 84 application.

Future of the 13 houses built in breach

Lord Burrows ended by confirming that this judgment does not impact how a lower court may decide any prohibitory injunction application by the Trust against Millgate, save for commenting on the range of other financial remedies that could be available to them (including, for example, an account of profits) and the significant increase in the Trust’s bargaining position with Millgate regarding a financial settlement.

Conclusion

The case brings some much needed guidance on the legitimate scope of s. 84, as well as the extent to which a professionally-advised owner of burdened land’s conduct in consciously acting in breach of a restrictive covenant is relevant to the assessment of whether or not the covenant should subsequently be discharged or modified by the tribunal. However, it has confirmed that such conduct is relevant at the “discretionary” stage only and that, if the “jurisdictional” stage cannot be satisfied by the applicant, conduct will simply not come into the analysis.

Developers should be mindful of this ruling when conducting their initial due diligence on a development site and considering tactics for dealing with restrictive covenants and potential agreements with neighbouring landowners. The Supreme Court has made clear that private law restrictions on the use of land can only be unilaterally discharged through s.84 in exceptional circumstances. In other words, restrictive covenants are not to be ignored and may present significant, potentially very expensive, obstacles to a development strategy.