A well-known South East developer, having previously successfully secured an order overriding restrictive covenants preventing construction on land adjacent to a children’s hospice, has now had that order overturned by the Court of Appeal. The Upper Tribunal had allowed the restrictive covenant to be overridden to legitimise the construction of affordable housing which had taken place in breach of the covenant and had been swayed by the argument that it was entitled to do so because the importance of meeting the need for affordable housing in the area meant that it was not in the public interest to enforce the covenant.
The original decision led to much commentary about the inter-relationship between planning policy and the operation of private law restrictive covenants and the balance between the public interest as demonstrated by national and local planning policy and the decisions of planning committees to allow much-needed housing development and the private rights of individuals to enforce restrictive covenants.
The law relating to section 84 of the Law of Property Act 1925, which provides powers to modify or override restrictive covenants, is highly complex and a range of factors have to be taken into account. The Court of Appeal, in reversing the decision to override the restrictive covenant, made it clear that in order to defeat a restrictive covenant on the grounds that it was contrary to public interest, the developer would have to show that it had made fair use of the opportunities to negotiate a waiver or release of the covenant and why it should not have tested the issue of public interest by making a section 84 application in advance of undertaking construction work in breach of the covenant.
The developer was criticised by the Court for having deliberately ignored such procedures and knowingly breaching the restrictive covenant by building without seeking to negotiate or making an earlier application for release. This clearly tainted the Court’s view and may have influenced the outcome despite the fact that the first objection was made only after the buildings were in the course of construction.
There is no automatic equivalence between the balancing exercise leading to grant of a planning permission and the balancing exercise needed to assess whether a covenant is contrary to the public interest. The Court of Appeal made it clear that it was not the role of the Upper Tribunal, hearing a section 84 application, to come to the rescue of a developer which deliberately undertakes development in breach of covenant, however meritorious the nature of the development.
The Court of Appeal also criticised the assessment of the Upper Tribunal that the contract was not in the public interest by pointing out that a number key factors had not been given adequate weight, namely, the site was in a greenbelt and that there were existing arrangements in place for making a payment to the Local Authority in lieu of the provision of affordable housing on the site. This significantly undermined the argument that it was essential for the affordable housing to be provided on that site as opposed to any other local site. The Upper Tribunal was also criticised for not taking into account when assessing what is in the public interest, the impact of seeming to reward the perceived misconduct of the developer in deliberately breaching the covenant. The consequence is that the restrictive covenant remains in place. However, the houses have been built and arrangements made with the local housing association for their occupation.
It would be surprising if an injunction will be obtained to require the houses to be demolished but there remains a question of the amount of compensation which might be payable for the breach of covenant. Given the critical comments made by the Court of Appeal about the conduct of the developer, it is unlikely that they will receive much sympathy if the question of compensation reaches the courts.
Implications for developers
The message to developers is that they are taking a high stakes gamble if they flagrantly build in breach of covenant. An order modifying or releasing a covenant cannot be assumed to be available retrospectively in any event and the message from the Court of Appeal is that if a developer is seen to be acting in a high handed way in ignoring their legal obligations, then the chances of a successful application for modification under Section 84 diminish. The decision on the question of “public interest” emphasises how complex the issues are and how much of a lottery it is to try to invoke that element of section 84 in order to defeat a restrictive covenant.
What about indemnity insurance?
The problem is that development routinely takes place in breach of covenants, particular where covenants are little more than historic legacies deriving from ancient conveyances which have no practical relevance today. The commonplace, if not default, response to discovering adverse covenants affecting a site is to secure a policy of indemnity insurance. It is a standard pre-condition of maintaining cover under such policies that no approach is made to the potential beneficiaries of the covenant. To do so will generally void the policy. Therefore it is routine for developers to be required not to contact the beneficiary – exactly the behaviour for which the developer, in this case, was criticised. What the Court considered in this case to be improper behaviour may, in fact, have been forced upon them by the terms of their insurance policies.
If the developer, in this case, had such insurance then the financial consequences of compensation claims should fall upon the insurers or underwriters. However, the adverse publicity is not something that can be insured against.
This case suggests that securing a modification of a restrictive covenant remains an uncertain process and that, on this narrow issue of public interest, the chances of success are less than previously thought. For developers looking to cover similar risks through indemnity insurance they may find that securing cover may be less straightforward than before and/or the premium payable may become more expensive, particular if insurers fear higher compensation liability as a result of their insured being penalised for not trying to negotiate in advance a variation or release of the offending covenant.
For further information please contact, Derek Ching by email at [email protected].
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.