UK Supreme Court rules developer’s ‘cynical’ behaviour outweighs public interest

In the first judgment on the issue by the UK’s highest court, the Supreme Court refused to modify a restrictive covenant over an area of land which had been built on in breach of a covenant which prevented development on it.

The appeal to the Supreme Court was brought by the owners of land in Maidenhead, which had been sold in 1972 by a farmer to SSPC, a company that already owned the neighbouring plot. SSPC covenanted that no structure would be built on the land it was buying, and it would only be used for car parking.

The farmer’s son later inherited the adjacent land, and gifted part of it to the Alexander Devine Children’s Cancer Trust for the construction of a children’s hospice.

Soon after this, a development company, Millgate Developments, acquired the land owned by SSPC and applied for planning permission to build 23 affordable houses on the site. Although Millgate knew of the restrictive covenants, it nonetheless planned to build 13 houses on the burdened land, some of which would overlook the hospice’s planned gardens and wheelchair walk.

Construction began in July 2014 and a year later, after the development was complete, Millgate applied to the Upper Tribunal seeking a retrospective modification of the restrictive covenants. The Tribunal allowed the application on the basis that it was in it was in the public interest that the social housing be provided, notwithstanding the deliberate breach of the covenants by Millgate.

The Court of Appeal overturned that decision and the Supreme Court also refused to modify the covenant.

The Supreme Court unanimously held that the Upper Tribunal had failed to consider two relevant factors at the discretionary stage of its decision-making process. It said that Millgate could have built on the land unencumbered by the covenants, and that if it had applied to modify the restrictive covenant prior to building it would have been unlikely to satisfy public-interest considerations on which it sought to now have the covenant modified.

Property dispute resolution expert Richard Bartle of Pinsent Masons, the law firm behind Out-Law, said the Supreme Court had principally addressed technical legal issues, including at which stage of the process for considering an application the Tribunal can consider a developer’s conduct.

Bartle said there were still two key takeaway points for developers in the decision.

“Firstly, the Supreme Court has approved the principle that a cynical breach by a developer can outweigh what would otherwise be the public interest in discharging or modifying a restrictive covenant, and also emphasised the importance of deterring developers from committing such cynical breaches,” Bartle said.

“If a release of the covenant cannot be negotiated, developers should be aware that their right to modify or discharge the covenant may be lost entirely if the application to modify or discharge has to be made retrospectively,” Bartle said.

Bartle said the decision also reinforced the fact that developers should usually consider all of their development options for a site, including potentially development of nearby land that they own, before applying to modify or discharge a covenant.

“If the developer could obtain a planning consent for a similar scheme nearby, then that may make it more difficult for the developer to succeed on an application to modify or discharge because it may not be able to prove that the covenant is contrary to the public interest,” Bartle said.

Bartle said there were compelling public policy reasons which underpinned the right of developers to seek the modification or discharge of a restrictive covenant:

“It is not clearly not desirable that a covenant restricting what can be done on land remain in place if certain circumstances change, and more generally private interests should not impede development which may benefit the wider community,” Bartle said.

However, Bartle said that whilst the jurisdiction of the Upper Tribunal to modify or discharge a covenant conferred a “powerful benefit” on developers whose land is burdened by one or more covenants, the Tribunal had nonetheless repeatedly made it clear that it will refuse developers’ applications to modify or discharge as a matter of general discretion, even where based a developer can satisfy one or more of the jurisdictional tests for modifying or discharging a covenant, if the developer has behaved badly.

“Bad behaviour in this context has generally been characterised as ‘high-handed’ conduct and attempting to evade the jurisdiction of the Tribunal. That is usually by developers proceeding with a development in knowledge of the covenants and despite objections – in practice, by deliberately failing to make an application to modify or discharge, commencing building works and thereby ‘stealing a march’ on those entitled to enforce the covenant,” Bartle said.

“In this case, the Supreme Court characterised such conduct as a ‘cynical breach’. Developers have previously been warned that they will be in for a 'rude awakening' if they deliberately commence building works in breach of a restrictive covenant. This Supreme Court decision strongly reinforces that warning,” Bartle said.