Cynical Breach of Restrictive Covenants Dismissed by Supreme Court

What Happened in This Case?

Millgate Developments Limited ("Millgate") was the original developer of affordable housing units on some development land. The land adjacent to the development site belonged to the Alexander Devine Children's Cancer Trust ("the Trust") and benefitted from restrictive covenants over the development land.  The covenants prevented the use of the development land for anything other than parking and provided that no building structure should be erected on the land.  Millgate went ahead with construction work on the development site, knowing that 13 of the houses were being built in breach of the restrictive covenants.

After completing the work, Millgate applied to the Upper Tribunal for the modification of the restrictive covenants under section 84 of the Law of Property Act 1925.  The Trust objected to the application and maintained that the restrictive covenants should be enforced for the benefit and privacy of terminally ill children using the hospice on the Trust's land.  The Upper Tribunal accepted Millgate's application and decided that the covenants should be modified, stating that the "public interest outweighs all other factors in this case. It would indeed be an unconscionable waste of resources for those houses to remain empty."  

The Trust appealed and the decision was reversed in the Court of Appeal.  Housing Solutions Limited, who had bought the development from Millgate, appealed to the Supreme Court.

What Did the Supreme Court Decide?

Whilst there were four grounds of appeal, the central issue for the Supreme Court was the relevance of Millgate's 'cynical breach' when deciding whether the covenant should be modified on the ground that it was 'contrary to public interest'.  The Supreme Court sought to weigh up the public interest in 13 houses not going to waste against the hospice providing a safe haven for terminally ill children.

The Supreme Court unanimously dismissed the appeal on the basis that:

• The breach could have been avoided. Millgate could have built the houses using an alternative layout, so that the houses would instead be on some unburdened land.
• If Millgate had made the application before building the houses, it is unlikely that they would have been able to satisfy the 'public interest' ground, as there would not have been 13 families in need of housing.

The Supreme Court held that the Upper Tribunal had erred in law in failing to take into account these factors when exercising their discretion.

What Does this Mean For Developers?

The judgment provides important guidance on how the court will approach a potential breach of a restrictive covenant.  The court will look closely at the conduct of the parties and the alternative courses of action that could have been taken to avoid a breach.  If developers seek to modify a restrictive covenant, they should make their application at the earliest opportunity, before they start to build.

For advice on restrictive covenants, please contact Katie Hickman in our Property Litigation team on 020 7665 0913 or complete the form below.