The Upper Tribunal (Lands Chamber) ruled that the public interest in allowing the new homes to be used was sufficient to outweigh all other factors in the dispute (27-page / 1.7MB PDF). It ordered the developer, Millgate Developments, to pay £150,000 to the trustees of a children's hospice, under construction nearby, to reflect the loss of "enhanced privacy and seclusion" caused by the construction of the housing.
Property law expert Tom Johnson of Pinsent Masons, the law firm behind Out-Law.com, said that the tribunal's decision was a "surprising result" at first sight, given that the houses had already been built. The tribunal "usually takes a dim view of developers who profit by disregarding the rights of others", he said.
"The tribunal acknowledged that the beneficiary derived real benefit from the restrictive covenant in question, and the fact that this was then outweighed by the public interest need for social housing shows just how overwhelming that need is currently seen to be," he said. "The political momentum to deal with the housing delivery issues is also underlined by the imminent 'white paper' on housing, now expected in the new year, which the local government secretary Sajid Javid promises will set out 'radical' plans to boost housing supply."
"Unfortunately, however, the case does not consider whether the outcome would have been the same if the application had been made before the houses were built, when the developer may have had the option to build the affordable housing on other land, which could be seen to weaken the public interest argument. Clearly, building and then 'asking for forgiveness' is a high-risk strategy," he said.
Johnson said that developers needed to "think carefully about how they deal with such covenants before they put spades in the ground".
"It appears from the case that the developer had tried to negotiate with the beneficiary and had offered £150,000 for the modification, which was the amount of compensation the tribunal then awarded," he said.
"The case is a reminder to developers that they should not go into such negotiations on the understanding there is no alternative – this case shows that there is," he said. "However, developers also need to remember that, by starting negotiations, title indemnity insurance will not then be available, so the strategy for dealing with such development constraints must be considered early doors," he said.
Restrictive covenants are restrictions affecting how an owner can use a piece of land. The 1925 Law of Property Act allows the tribunal to modify or discharge a covenant on request, provided that certain conditions are met. These are that the covenant must either have become obsolete or it impedes a reasonable user of the land; if the party with the benefit of the covenant agrees to the modification or discharge; or the party with the benefit of the covenant would not be badly affected by the modification or discharge.
Millgate had applied for a modification on the reasonable user ground, which required it to show either that the covenant was of no practical benefit to the hospice or that the covenant was contrary to the public interest. To be successful on the public interest ground, adequate monetary compensation should be available. The developer failed on the first ground, but was successful on the second.
"The local planning authority clearly considered that the provision of affordable housing was an important part of the balancing of interests which led to Millgate being granted planning permission for its more profitable residential development at [nearby] Woolley Hall," the tribunal said in its judgment. "The houses which have been built are attractive and well built, and are currently standing empty because of the restriction imposed by the covenants."
"The question for the tribunal is whether in impeding the occupation of the houses which now stand on the application land, and which are otherwise immediately available to meet a pressing social need, the covenants operate in a way which is contrary to the public interest. We are satisfied that they clearly do because it is not in the public interest for these houses to remain empty and the covenants are the only obstacle to them being used," the tribunal said.
The tribunal also used its judgment to "refute any suggestion that a landowner who is in deliberate breach of covenant, but who can show one of the statutory grounds, can confidently assume that the tribunal's discretion will be exercised in favour of modification or discharge". If this was the case, it would "undermine the protection which restrictive covenants afford", the tribunal said.