Lawbite: The Supreme Court takes a dim view to “cynical breach” of restrictive covenants

• United Kingdom

• Litigation and dispute management
• Real estate
• Real estate litigation - LawBite

02-12-2020

Alexander Devine Children's Cancer Trust (Respondent) v Housing Solutions Ltd (Appellant) [2020] UKSC 45

The Supreme Court unanimously dismissed the appeal in this case where it had to consider whether the Court of Appeal (“CA”) was correct in overturning an earlier Upper Tribunal (“UT”) decision and refusing to allow a property developer to modify a set of restrictive covenants. 

In July 2013, a developer (Millgate), applied for planning permission to build 23 affordable housing units on land known as Exchange House. Part of Exchange House was burdened by restrictive covenants benefitting land that had been donated to the trustees of the Alexander Devine Children's Cancer Trust (the “Trust”) for the purpose of building a hospice to accommodate terminally ill children.

Millgate obtained planning permission for the development and building on the site was commenced. In July 2015 (when 13 of the units had already been built) Millgate applied to the UT seeking modification of the restrictive covenants pursuant to section 84 of the Law of Property Act 1925.  This provision gives the UT the power to modify or discharge a restrictive covenant if one of 5 grounds is made out.  The prospective purchaser, the appellant, Housing Solutions, was noted on the application.

Millgate was successful at the UT and secured the desired modification (with compensation being awarded to the Trust).  However, the CA overturned the decision on all four grounds of appeal put forward by the Trust, finding that the UT had made errors of law in reaching its findings.

Housing Solutions (now owner of the land encumbered by the restrictive covenants) took the matter to the Supreme Court (“SC”) who unanimously dismissed the appeal.

The SC considered the four grounds put to the CA but focused on whether the UT had properly taken into account Millgate’s “cynical breach” of the restrictive covenants (1) at the jurisdictional stage (that is, when deciding whether one of the 5 grounds under s84 were made out) and (2) at the discretionary stage.

The SC determined (disagreeing with the CA on this point) that the manner of the breach was irrelevant at the jurisdictional stage.  However, it felt that it did have a place at the discretionary stage when the UT did make an error of law.  The appeal was dismissed on this ground alone.

Crucial to its findings was that:

1. Millgate could have avoided all the conflict by building the housing on unencumbered part of the Exchange House land and used the encumbered land as a car par (which was allowed by the restrictive covenant)
2. had Millgate submitted its s84 application before commencing works it is unlikely that it would have made out one of the 5 grounds

The SC decided that it should re-make the decision rather than remit it to the UT mainly to give the parties certainty given the long running nature of this dispute.  It further recognised that the decision will strengthen the Trust’s negotiating position towards any financial settlement of this dispute

Key points

• this is the first time that these provisions have been directly considered by the SC (or by the House of Lords)
• developers should note the risks of proceeding with developments in breach of covenants even where they have planning permission, particularly where there are strong objections from those benefiting from the covenants
• the SC was unwilling, however, to suggest that it was an unqualified principle that an applicant who had committed a “cynical breach” such as in this case should have its application refused