Restrictive Covenants – Supreme Court’s First Consideration of s.84 of the Law of Property Act 1925: Alexander Devine Children’s Cancer Trust v Housing Solutions Ltd [2020] UKSC 45

Articles | Wed 25th Nov, 2020

Introduction

In Alexander Devine Children’s Cancer Trust v Housing Solutions Ltd [2020] UKSC 45, the Supreme Court was required (for the first time ever) to decide an appeal on section 84(1) of the Law of Property Act 1925 (“LPA 1925”). The provision in question was the public interest limb of section 84(1)(aa) and, in particular, how applications made pursuant to that ground should be analysed.

Legal context

A restrictive covenant affecting freehold land is effectively an agreement in a deed that one party will restrict the use of its land in some way for the benefit of another’s land. As well as being enforceable between the original contracting parties, the restrictive covenant may also be enforceable by one party’s successors in title against the other’s successors in title. It is this latter characteristic that is the predominant source of litigation in this area.

Under section 84 of the LPA 1925, as amended, a person interested in freehold land affected by any restriction arising under a covenant can apply to the Upper Tribunal to have the restriction discharged or modified. Parties can rely on any of the grounds specified at section 84(1)(a). In Devine, the appeal related to the proper application of section 84(1)(aa) and 1(A)(b), which provides that the UT may wholly or partially discharge or modify a restrictive covenant upon being satisfied —

(aa) that in a case falling within subsection 1(A) below the continued existence thereof would impede some reasonable user of the land for public or private purposes or, as the case may be, would unless modified so impede such user;

…

(1A) Subsection (1)(aa) above authorises the discharge or modification of a restriction by reference to its impeding some reasonable user of land in any case in which the Upper Tribunal is satisfied that the restriction, in impeding that user, either –

…

(b) is contrary to public interest;

And that money will be an adequate compensation for the loss or disadvantage (if any) which any person will suffer from the discharge or medication.”

In cases where one of these ‘jurisdictional grounds’ is made out, the UT has a discretion (“shall…have power”) under section 84(1)) as to whether or not to make an order for modification or discharge of the restrictive covenant. This is the ‘discretionary stage’ of the analysis. In other words, then, the analysis has two stages – the analysis at the ‘jurisdictional stage’ and, if jurisdiction is made out, the analysis at the ‘discretionary stage’ (see [33]).

Facts

The Respondent operated a children’s hospice in the green belt near Maidenhead. The Respondent’s land benefited from a restrictive covenant that prevented development of an area of open land (“the application land”) and ensured that the children could play in the grounds in privacy. Millgate Developments Ltd (“Millgate”) acquired the application land and then, with knowledge of the restrictive covenant, applied for planning permission to build 23 affordable houses, 13 of which were on the application land. The UT, however found that a permission could have been obtained in which all 23 affordable houses were built on unencumbered land and the application land was used as a car park.  Millgate’s application for the 23 affordable houses was linked to a separate application for a commercial development of 75 houses which it undertook “not to occupy” until the 23 affordable houses had been transferred to an affordable housing provider. Millgate completed its development of the affordable houses and transferred the land to the Appellant, a company involved in the provision of affordable housing. Shortly before the transfer of the land to the Appellant Millgate applied under section 84 of the LPA 1925 to modify the restrictive covenants, at which point the Respondent first became aware of its entitlement to the benefit of the covenants.

Decisions below

The UT originally allowed Millgate’s application to modify the restrictive covenants, albeit with the condition that it paid £150,000 to the Respondent as compensation. The UT’s reasoning was (in essence) three-fold. Firstly, the proposed use of the application land to provide 13 units of affordable housing was plainly a “reasonable user of the land”. Secondly, as regards the public interest, it was held that impeding the use of these already built houses would not be in the public interest. Finally, although the provision of significant additional boundary planting would not insulate the hospice land from any adverse consequences arising from the development, an award of money to allow for such planting could provide adequate compensation. The jurisdictional ground at section 84(1)(aa) and 1(A)(b) was thus met. As for the discretionary stage, the UT considered that Millgate had acted in bad faith and intended on forcing the hand of the beneficiary of the covenant. Nevertheless, it considered the public interest outweighed the opportunistic conduct of Millgate.

The Court of Appeal overturned the UT’s decision on all four grounds of appeal advanced by the Respondent: 1) the UT incorrectly applied Lawrence v Fen Tigers Ltd [2014] UKSC 13 by analogy; 2) the UT failed to take into account Millgate’s cynical breach of the restrictive covenant at the ‘jurisdictional stage’ of the analysis; 3) the UT ignored Millgate’s ability to satisfy its planning obligation by making provision of all the affordable housing on the unencumbered part of the site; 4) Millgate’s cynical breach was not properly considered at the discretion stage of the UT’s analysis.

Judgment

Lord Burrows considered that the core issues were the second and fourth points – that is, the question of whether the UT properly considered the relevance of Millgate’s cynical breach at both the jurisdictional and discretionary stage of the section 84(1)(aa) and 1(A)(b) analysis.

As regards the relevance of the cynical breach at the jurisdictional stage, both parties’ submissions centred on whether a wide or narrow interpretation of the ‘public interest’ criterion was justified. Lord Burrows considered a narrow interpretation was justified: [42] and [45(i)-(iii)]. As for what the narrow interpretation entailed, Lord Borrows emphasized that the “question that has to be asked is not the wider one of whether in all the circumstances of the case it would be contrary to the public interest to maintain the restrictive covenant”, but rather the narrower question of whether the impediment to the reasonable user of the land, by continuation of the restrictive covenant, is contrary to the public interest [42]. Accordingly, the core question on the facts was whether the public interest in the 13 housing units going unused outweighed the public interest in the hospice providing a protected sanctuary for children dying of cancer. Lord Burrows found that this was the question that was focused on by the UT and that there had been no error in law in failing to consider Millgate’s cynical breach [43]. In other words, “the good or bad conduct of the applicant is irrelevant at this jurisdictional stage” [44].

As regards the relevance of the cynical breach at the discretionary stage, Lord Burrows agreed with the Court of Appeal that the UT had made an error of law in its analysis of the cynical breach at the discretionary stage, but disagreed with the reasoning. Sales LJ, giving the judgment of the Court of Appeal, held (in essence) that allowing Millgate’s application in light of its cynical breach would be contrary to principle (see para 84). Lord Burrows did not agree that such a principle should be introduced, as it would fetter the Upper Tribunal’s discretion [55]. Whilst it was clear that the UT had considered the cynical breach, it was also clear that “something has gone fundamentally wrong with the Upper Tribunal’s exercise of discretion on the particular facts of this case that one can say there has been a fundamental error of law” [57]. Lord Burrows considered this error of law could be pinpointed in the fact that the UT failed to consider two factors (both of which made this finding “exceptional”) relating to the planning authority’s indication that planning permission for 23 homes would have been granted on the unencumbered land. Those factors were as follows: 1) a satisfactory outcome could have been achieved by making such an application and there was therefore no justification at all for the cynical breach which had produced a land-use conflict that would reasonably have been avoided and 2) Millgate would have been unlikely to satisfy the public interest requirement had it applied to modify the restrictive covenants prior to building on the application land because it would have been met by the argument that the affordable housing could be built on the unencumbered land [57-62]. The failure to consider those factors at the discretionary stage, Lord Burrows held, was an error of law and the UT should have declined to exercise its discretion [62-63]. This was sufficient to dismiss the appeal.

Conclusion

The Supreme Court re-made the UT’s decision and disallowed Millgate’s application under section 84, an outcome that leaves it open to the Respondent to apply for prohibitive and/or mandatory injunctions.

The decision overall is a useful clarification of the scope of the analysis under the public interest limb of section 84(1aa). The key point is that the public interest criterion must be interpreted narrowly and by reference to whether the impediment to the reasonable user of the land caused by the restrictive covenant is contrary to the public interest.

As regards the relevance of the parties’ conduct, this falls to be considered at the discretionary stage.  Although the Supreme Court regarded Millgate conduct as being “exceptional”, developers should heed the case as a warning not to seek modification or variation of a covenant after carrying out works in full knowledge of the covenant.