Modifying restrictive covenants – a potential life-line for developers?

Overview

Whenever a housing development (or indeed any development) is in the offing, one of the first questions the developer has once it has found a potential site is whether there are any restrictive covenants against the site which could prevent it from proceeding with the development.

However, the existence of such a covenant is not necessarily fatal to the development. Restrictive covenants can be modified or removed altogether with the agreement of the party who has the benefit of them, usually in return for a monetary payment.

If no agreement can be reached, the courts have discretion to modify or remove a restrictive covenant if it is in the public interest to do so. This involves a balancing act between the rights of the beneficiary in maintaining the restrictive covenant and the public interest in modifying/removing it.

This was the focus of the recent decision of Millgate Developments Limited v Smith (2016).

Facts

Millgate was (and is) a property developer which proposed to develop a housing estate on land owned by Smith and on land which Smith had donated to a cancer charity (collectively “the Development Site”).

There were restrictive covenants against the proposed Development Site which prevented it from being used for buildings or for any other purpose other than a car park. Proceeding with the development without dealing with the restrictive covenants would therefore put Millgate knowingly in breach of them.

Millgate decided to proceed with the development anyway and 13 social houses were built on the Development Site in breach of the restrictive covenant.

Millgate approached Smith and the charity and offered £150,000 plus costs if they would agree to modify the restrictive covenants to allow the development. They both refused so Millgate applied to court (upper lands tribunal) for the restrictive covenants to be modified.

Decision

Notwithstanding that Millgate knew of the effect of the restrictive covenant before the development began, the tribunal agreed with Millgate that the restrictive covenants should be modified to allow the social housing to be occupied.

This decision was particularly important to Millgate because Millgate was not permitted to sell other non-social housing on its development without the social housing being occupied first.

The tribunal decided that:

·       the charity did have a substantial right in maintaining privacy for its patients and that preventing the development by refusing to modify/remove the restrictive covenant was a means of achieving this privacy;

·       the charity’s right was trumped by the public need for social housing and in particular the fact that in this case those who would occupy the social housing had been waiting for a long time;

·       the loss of privacy by modifying/removing the restrictive covenant could be dealt with by Millgate paying £150,000 to the charity. The charity could then use part of this money to plant a boundary to maintain some privacy;

·       the charity was not allowed to share in Millgate’s profits, only compensation for the loss of the restrictive covenant.

Conclusion

This decision appears to offer a way-out to developers who find themselves in a situation where restrictive covenants could prevent development. This is so even where the developer proceeds in the full knowledge that it is in breach of restrictive covenants.

However, the limits of this decision should be recognised:

·       the tribunal was at pains to say that it was not inclined to reward parties who deliberately flout their obligations, as Millgate had done in proceeding with the development knowing it was in breach;

·       the tribunal said it was “highly material” to its decision to modify/remove the restrictive covenant that the buildings built on the Development Site in breach of the restrictive covenants were intended to be social housing;

·       the fact that, before the application was made, Millgate had offered £150,000 to Smith and the charity was also important in the tribunal’s decision.

Accordingly, this decision may be seen as the exception rather than the rule but it will offer a life-line to developers particularly where the houses to be built, or which have been built, in breach of a covenant are social houses.

Short Richardson & Forth have acted, and continue to act, on a range of housing developments both in the North East and nationally. For further information please contact Paul Earnshaw, Head of Commercial Property atpaul.earnshaw@srflegal.co.ukor Chris Morgan atchris.morgan@srflegal.co.uk, a solicitor in the property department, for further information.