Building affordable housing in breach of restrictive covenants – a great leap forward?
The Upper Tribunal (Lands Chamber) has issued an important decision indicating that restrictive covenants will – in an appropriate case – be modified or discharged to permit housing developments where there is a demonstrable public interest, even where those covenants are knowingly breached.
Millgate Developments v Smith  UKUT 515 (LC) is one of the most encouraging cases in recent years for affordable housing providers and property developers. The case concerned the common situation where a property developer wishes to construct a new housing development and the development site is subject to restrictive covenants prohibiting the construction of buildings and the use of the land for housing.
In order to meet the local planning authority's affordable housing requirements, Millgate commenced the construction of 13 properties and intended to transfer them to a housing association for use as affordable housing. The land was subject to restrictive covenants prohibiting the construction of buildings and requiring the land not to be used other than for parking.
Millgate applied to the Upper Tribunal under section 84 of the Law of Property Act 1925, which empowers the Upper Tribunal to modify or discharge a restrictive covenant where certain conditions are met. The application was made under section 84(1)(aa), which provides that a restrictive covenant can be discharged or modified where the restriction:
- impedes a reasonable use of land; and
- either (1) the covenant does not secure any practical benefit of substantial value or advantage to the benefiting party; or (2) is contrary to the public interest; and
- money will be adequate compensation for the disadvantage suffered by the benefiting party as a result of the discharge or modification.
Part of the benefiting land was owned by a charity that was in the process of constructing a children's hospice. The charity objected to the covenants being modified or discharged, primarily on the basis of a loss of privacy and seclusion for the hospice land, which would be partially overlooked by the newly constructed properties.
The Upper Tribunal's decision
The Upper Tribunal found that the covenants secured a practical benefit of substantial value or advantage to the charity, because the construction of housing on the application land would cause the users of the hospice's services to have a more urban, less private, less secluded and less attractive environment than would have been the case if the covenants were observed. Accordingly, the application failed under the first limb.
Under the second limb, however, the Tribunal found that the restrictions were contrary to the public interest, because the housing in this case was social housing intended for occupation by tenants who were highly likely to have been waiting for such accommodation for a very long time. The Tribunal considered that the public interest outweighed all other factors in this case and that it would be an unconscionable waste of resources for those houses to remain empty.
The Upper Tribunal also considered that money would be adequate compensation for the injury caused to the charity. The Upper Tribunal therefore exercised its discretion to modify the restrictive covenants, on the condition that Millgate pay £150,000 compensation to the charity. This sum was based on an open offer that Millgate had made to the charity, taking into account the likely cost of appropriate landscaping to screen against the loss of amenity, plus a generous allowance for hassle and intangible consequences.
Implications for property developers
This decision is undoubtedly good news for those who develop land for affordable housing. Whilst the Upper Tribunal was at pains to discourage property developers from thinking that it will be easier to secure a modification by going ahead and building in breach of restrictive covenants before applying for a modification or discharge, that is one possible conclusion to draw from this case.
The Upper Tribunal has certainly demonstrated a greater willingness amongst the judiciary to permit property development that is considered to be in the public interest to proceed, even where that involves overriding an innocent third party's private contractual rights. However, every case is dependent on its particular facts and circumstances and it must be noted that the Tribunal retains the discretion to refuse to discharge or modify a covenant if the applicant's conduct is sufficiently egregious and unconscionable.
For these reasons, Millgate Developments v Smith should not be viewed as a green light to breach covenants or to proceed without undertaking full due diligence or considering insurance solutions, where appropriate. It does however represent an important shift in the balance of judicial attitudes towards favouring the public interest over private rights. This should enable property developers, affordable housing providers and insurers, to approach restrictive covenants with greater confidence that they are obstacles to be managed, but not complete barriers to development such as to prevent the delivery of much needed housing.