Lawbite: Upper Tribunal criticises cynical “build first and apply later” approach to discharging or modifying a restrictive covenant

Fosse Urban Projects Ltd v Whyte and others [2023] UKUT 286 (LC); [2023] PLSCS 205

At the end of 2023, the Upper Tribunal (Land Chambers) (UT) refused a developer’s application to modify or discharge a restrictive covenant pursuant to section 84(1) of the Law of Property Act 1925 (LPA 1925). The developer, Fosse Urban Projects Ltd, had commenced building a house in breach of a restrictive covenant, and the works had been completed and the house was occupied, before the UT heard the application. This cynical “build first and apply later” gamble did not pay off. The decision offers a reminder of the importance of good developer conduct when dealing with restrictive covenants, and will be of interest to landowners, developers and those benefiting from restrictive covenants relating to land in England and Wales.

The restrictive covenant:

Fosse wished to build a house upon land in Norfolk which was burdened by a 1996 covenant “not to use the land other than as garden land in connection with the adjoining property”.

After commencing the building project, Fosse applied to discharge or modify the covenant using the process set out in section 84(1) of the LPA 1925. Section 84 gives the UT the power to discharge or modify such covenants on being satisfied of certain conditions. This is a two part process: 1) the applicant must establish that the UT has jurisdiction to modify the covenant – which means convincing it that one of the stated grounds apply, and; 2) the applicant must then persuade the UT to apply its discretion to modify or discharge the covenant in question.

The respondents, who owned and lived in properties close to the new house and who benefited from the covenant, resisted the application.

The grounds for modification/discharge:

Fosse relied principally on sections (a) and (aa) of section 84(1) in its application. The UT concluded that both grounds were established.

Ground (a) - the restriction was deemed obsolete.

The character of the local area had changed considerably since the covenant was created in 1996, with what had previously been open farmland having been developed substantially into a housing estate, with 800 homes. As a result the UT concluded that the covenant was obsolete.

Ground (aa) - the continued existence of the restriction did impede reasonable use of the land for public or private purposes and it did not secure practical benefits of substantial value or advantage to the objectors:

The existence of planning permission for the house evidenced that the build was a reasonable use of the land. Further it was clear that the covenant impeded the applicant. Whilst the covenant did secure practical benefits to the objectors – comprising the open aspect and uninterrupted views and privacy – the UT concluded that these benefits were not “substantial”. As a result, this ground was also satisfied. 

Discretion

Having established that it had the jurisdiction to modify or discharge the covenant, the UT then addressed the question of how to exercise its discretion i.e. having established that it “can” modify/discharge, it turned to the issue of whether it “should” modify/discharge.

It declined to modify or discharge the covenant. A key factor in this decision was Fosse’s conduct, both in building the property before securing a modification/discharge and also in the proceedings themselves. In particular:

• the UT drew adverse inferences from the lack of witness evidence from Fosse. It concluded that it was probable that Fosse, being an experienced developer in receipt of legal advice, was aware of the covenant and that it was enforceable. It then took a gamble in building the house taking a chance that those benefiting from the covenant would not seek an injunction or resist any later application to modify or discharge the covenant
• the UT was unwilling to overlook such a deliberate and cynical breach of covenant, committed with a view to making a profit
• the burden of proof is on the developer to explain why they acted as they did and to provide evidence which persuades the Tribunal that their conduct was not cynical because, for example, they proceeded in ignorance of the existence of the covenant, or under a genuine misconception about its effect. It is not for the objector to show that the conduct of a developer which has built in breach of a covenant was "egregious and unconscionable"

The objectors can now either seek to enforce the covenant by claiming an injunction or claim damages for the breach. Neither of those remedies is within the jurisdiction of the UT and will have to be claimed from the Court. The UT encouraged the parties seek to resolve the position by agreement, after taking proper legal and valuation advice, before engaging in further litigation. 

Key points:

If the developer had “applied first and built later”, then its application to modify or discharge would have been successful, as the UT found that ground (a) and (aa) had both been established

• this case emphasises just how important good developer conduct is in cases like this. The UT cannot be called upon after the event to retrospectively sanction a cynical and flagrant breach of covenant. Developers would be well advised to identify any development constraints early and allow time for a section 84 process to proceed to its conclusion
• the decision echoes the stance taken by the Supreme Court in the Alexander Devine Children's Cancer Trust (Respondent) v Housing Solutions Ltd (Appellant) [2020] UKSC 45 where the court took a similar dim view of a developer’s “cynical breach” of the restrictive covenants involved
• developers should note the risks of proceeding with developments in breach of covenants even where they have planning permission
• efforts made after the event to mitigate the effect of building in breach of covenant may be seen as too little too late. In this case, an offer to fit opaque glass in a window which overlooked the objectors’ properties was not enough to sway the UT to exercise its discretion in the developer’s favour
• the developer will now need to negotiate a settlement with the objectors. Evidence was produced that the value of the objectors’ properties was diminished by circa £25,000 as a result of the breach. However any financial settlement is likely to be negotiated based on a “negotiating damages” basis that will take into account the profit unlocked by the developer in building in breach That number is likely to be greater that the diminution in value number. If the developer had applied first, then it is likely to have been successful and would only have had to pay statutory compensation to the objectors which would likely have been limited to the lower diminution in value number