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28/12/17

Breaching Bad?

With the London development market on the prowl for the next build site and with open land resources dwindling in the capital and beyond, we have now reached the point where plots that once laid empty, as a result of various restrictive covenants dictating their use and/or development potential, are now prime sites.

The government is also putting pressure on developers to incorporate social housing elements into all new build developments to combat the housing crisis. The answer to developers’ problems may lie in an application under section 84 of the Law of Property Act 1925 (“the Act”).

The Act gives the Upper Tribunal (Lands Chamber) (“the Tribunal”) the power to discharge or modify a restriction in certain circumstances and, where it exercises this power, the discretion to award the party with the benefit of the restriction compensation as a result of losing all or part of that benefit.

The rules
An application can be made by any person with an interest in the freehold or leasehold land which is subject to a restriction. It is not uncommon for an application to be made in response to enforcement proceedings brought by a party with the benefit of the restriction. That person, or persons, can object to the application as can persons claiming through the party with the benefit (i.e. tenants or mortgagees).

The Act sets out various grounds on which an application under s. 84 can be made. These include circumstances where the applicant can satisfy the Tribunal that the restriction is obsolete, its existence is unreasonable, impedes the use of the land for public or private purposes or the conduct of the parties (i.e. the owners of the land with the benefit and burden of the restriction) is such that it can be implied (or indeed it is expressed) that the restriction is no longer necessary. These grounds apply both where the applicant is applying to discharge the restriction or modify it in part.

The Act gives the Tribunal absolute discretion, where the application is granted, to award compensation to the respondent for the loss of the benefit of the restriction. The compensation can be calculated in a number of ways. However, it appears the Tribunal is more likely to award it with reference to the value of the loss suffered by the respondent as a result of the restriction being discharged or varied than the alternative, being to attempt to compensate the respondent for the increase in value of the dominant land as a result of the restriction at the time it was originally granted. It is clear that any such calculation would be difficult and inaccurate given that most applications under the Act are, by their very nature, in respect of historic restrictions.

The reality
Most recent cases in the Tribunal in respect of s.84 applications have been where a developer has breached a restriction and is applying retrospectively for that restriction to be modified or discharged.

In a recent case, Millgate Developments Limited v Smith (2016) (“the Millgate case”), the Tribunal was asked to discharge a restrictive covenant prohibiting the parking of vehicles in respect of a plot of land upon which the applicant had constructed social housing units. At the time of the application tenants had already been allocated flats within the development but had not been able to occupy them as a result of the restriction. The applicant had obtained planning permission for the development, which the Tribunal was required to take into consideration as the application was made on the basis that the construction of much needed social housing was in the public interest, and therefore the restriction should be discharged. The Tribunal noted that the grant of planning permission did not override any private rights affecting the plot of land but that it was indicative that the development was likely to be in the public interest.

The Millgate case seems to suggest that an applicant will be more likely to be successful in its application under s.84 if it has, deliberately or not, already breached the restriction that is the subject of the application. However, in the earlier case of re: George Wimpey Bristol Ltd’s Application (2011), the Tribunal made it clear that “it is not inclined to reward parties who deliberately flout their legal obligations in this way”.

It appears that the Tribunal was conflicted when making the decision in the Millgate case but that an open offer made by the applicant making a “constructive proposal” to settle the matter and ultimately, with the proposed social housing tenants in mind, the Tribunal granted the applicants request.

Expectations
There are a number of specific exclusions under the Act. These include Royal Parks, land retained by the Crown or Duchy, land used by the armed forces or civil aviation (s84(11)) or where the land is used for public purposes and was obtained as a gift or for nominal consideration (s84(7)).

The most notable exclusion is that the Act doesn’t apply to obligations imposed by way of s.106 agreements (s.106A(10)). This is to prevent parties from avoiding obligations agreed by way of compromise in respect of developments. This is in line with the intention of the Act which is to allow for modification or discharge of restrictions in order to allow for the changing face of the development industry and the needs of the ever growing UK population.

It should be noted that the Act doesn’t just apply to restrictive covenants but any restrictions affecting land. This includes leasehold land. However, the Act only applies where the leasehold interest was granted for more than 40 years and 25 years of that term has already expired.

Conclusion
In summary, it seems that breaching a restriction is bad unless it can be shown that the benefit of the proposed breach outweighs the wrong the restriction is trying to prevent and any party breaching a restriction should be prepared to pay a hefty price for the privilege.

Each application will turn on its own facts and, in the words of Walter White himself, when in doubt “maybe your best course is to tread lightly” and take some advice.