Restrictive covenants and a developer’s conduct

Posted on: January 10th, 2019

Ben Loosemore highlights the dangers posed to developers in not getting restrictive covenants properly discharged in advance of construction.

The recent case of Alexander Devine Children’s Cancer Trust v Millgate Developments Ltd and others [2018] is a useful one for developers to bear in mind if they are faced with a restrictive covenant that prevents building on land. It also serves to show how developers should approach discharging the covenant.

In this particular case, the developer was required to provide affordable housing in order to satisfy a planning condition, but part of the land to be built upon was burdened by a restrictive covenant that limited its use to a car park. Despite this restrictive covenant, the developer proceeded to build the affordable housing units anyway.

During the build, the beneficiary of the restrictive covenant asked the developer to stop, but the developer declined. To eliminate the risk of further enforcement from the beneficiary going forward, the developer applied to the Upper Tribunal to modify the restrictive covenant on the basis that:

  1. The covenant didn’t provide any practical benefits and/or its existence is contrary to the public interest (i.e. as affordable housing was being built on the land), and
  2. Money will be adequate compensation for any disadvantage suffered as a result of the restrictive covenant being discharged.

Initially, the developer won its case with the Upper Tribunal to modify the restrictive covenant to allow the development to proceed, to which compensation of £150,000 was paid to the beneficiary. However, this decision was successfully appealed later after the units had been transferred to the housing association.

The appeal was successful because the Court of Appeal found that the developer was “high-handed” in its approach to start the development having not first tried to secure the discharge of the restrictive covenant with the beneficiary. The Court also felt that the benefits of providing affordable housing did not outweigh the importance of upholding the restrictive covenants and ensuring that a proper discharge procedure is followed.

In terms of the next steps, having established that the restrictive covenant should not have been modified, and that there was a breach, it is not yet clear whether it is anticipated that the affordable units will be demolished, so it’ll be interesting to see how the case unfolds.

This case is a useful warning to developers of the risks involved in carrying out development in breach of a restrictive covenant, even if planning permission has been obtained without objection by the person with the benefit of the covenant, or if the building has already been constructed.

Obtaining a restrictive covenant indemnity policy is, of course, a more frequently used tactic, and will help cover a developer’s financial liability if enforcement action in respect of restrictive covenant were taken. However, if a developer found itself in a situation whereby no restrictive covenant indemnity policy was available then it shouldn’t follow a ‘develop first, discharge later’ approach, but instead should seek to discharge the restrictive covenant with the beneficiary first, as the Court of Appeal here advises.

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