UK Upper Tribunal declines to discharge restrictive covenant on developer's conduct grounds

A recent decision of the Upper Tribunal in the case of Fosse Urban Projects Ltd v Whyte and others serves as a warning to developers to deal with restrictive covenants before developing land.

The decision marks a departure from the previous high-profile case and demonstrates that the Upper Tribunal will not be minded to exercise its discretion to discharge or modify a covenant and sanction a development where a developer has deliberately and knowingly breached a covenant solely for commercial reasons.

Background

Fosse Urban Projects Limited (the developer), obtained planning permission in July 2021 to build a house on land subject to a covenant which restricted it from being used "other than as a garden land" in connection with an "adjoining property". 

The developer subsequently made an application to the Upper Tribunal in October 2022 under section 84(1) of the Law of Property Act 1925, which gives the tribunal power to discharge or modify any restriction on the use of freehold land in certain circumstances. However, by the time of the hearing in September 2023, the developer had already gone ahead and built the property on the land, in breach of the covenant.

Test for jurisdiction

The legal test under section 84 of the Act comprises two stages – jurisdiction and then discretion. The applicant must first establish that the tribunal has jurisdiction to discharge or modify the covenant. Once jurisdiction is proved, the applicant must then persuade the tribunal to exercise its discretion to make the change sought.

There are four jurisdictional gateways in section 84(1) of the Act. The developer sought to have the covenant discharged relying on gateways (a), (aa) and (c): 

• the character of the local area had changed considerably from a small residential area with a rural aspect over farmland to an urban area, rendering the covenant obsolete;
• there were no practical benefits of substantial value or advantage were secured which would be lost if the restriction was discharged and it did not impede reasonable user; and
• the discharge of the restriction would not harm any neighbours owning benefitting land.

The adjacent landowners (who were found to have the benefit of the covenant) contested the application on various grounds including loss of an uninterrupted view and loss of privacy.

Judgment

The tribunal found that the likely purpose of the restriction was to preserve a boundary between the development and open farmland. However, as the whole area had been developed, the covenant was obsolete, and the practical benefits of the covenant in respect of privacy and the open aspects of the objector's properties were not of substantial value or advantage. The developer had therefore successfully established two jurisdictional grounds (a) and (aa), satisfying the first stage of the test.

The developer then needed to persuade the tribunal to exercise its discretion to make the modification sought. The tribunal will not normally refuse to exercise its discretion if jurisdiction has been made out, but is likely to do so where conduct is egregious and unconscionable.

The tribunal inferred that the developer had known of the covenant and its enforceability but had taken a "cynical" gamble that the neighbours would not seek to resist the application after building work began.  Furthermore the developer had also failed to provide evidence to explain its actions, which meant adverse inferences could be drawn. The tribunal declined to exercise its discretion on the basis of the evidence submitted and the developer's conduct.

Osborne Clarke comment

This decision leaves the parties in some uncertainty – the developer's property is in breach of covenant but will remain where it is unless the objectors seek to enforce the covenant or claim damages for the breach in court.

However, it provides confirmation that the tribunal will take a dim view of cynical conduct and will not enable developers who deliberately and knowingly commit breaches of restrictive covenants.

While this departs from the judgment in Kay v Cunningham last year, it perhaps can be distinguished based on the applicant's motivation. In that case, the applicant had an altruistic element to its breach in citing the cultural significance of restoring a heritage property.  

Ultimately conduct is and will remain a relevant factor for tribunals. This case is a clear warning to developers who may be considering bypassing the application process and commencing works. A "build first, apply later" approach based on purely commercial considerations could cause an application to discharge or modify a restrictive covenant (that would have otherwise succeeded) to fail.