UK Upper Tribunal grants modification of restrictive covenant to heritage property

A recent decision of the Upper Tribunal on the application of section 84(1) of the Law of Property Act 1925 and the modification of restrictive covenants raises a number of arguments not normally considered in this type of case and will be of interest to developers in light of the tribunal's consideration of permitted development rights and whether there was a cynical breach of the restrictive covenant in question.

The judgment in Kay v Cunningham and another was in favour of the applicant who was seeking modification of a restrictive covenant not to use its heritage property other than as a "single private residence", to enable it to continue to use five bedrooms for bed and breakfast purposes.

Dispute background

The case concerned a Grade II listed dwelling known as Lea Hurst which was formerly the home of Florence Nightingale. The dwelling was previously used as a nursing home up until 2005 and the wider estate included two additional dwellings, The Coach House and Lamp Cottage. The estate had two access points, Old Drive and New Drive. While Old Drive reached both additional dwellings, New Drive (refurbished as part of the restoration) provided access only to Lea Hurst.

When the estate was split up, the transfers of The Coach House and Lamp Cottage were sold as private dwellings with the benefit of the following covenants:

• "'Not to use Lea Hurst other than as a single private residence; and
• 'Not to do anything in or on the retained land and Lea Hurst that may be or grow to be a nuisance or disturbance to the property."

Lea Hurst was purchased in 2011 by the applicant, Mr Kay, for £1.7 million who then spent a further £1 million renovating the property. Notwithstanding the wording of the covenants, Mr Kay used the property as a bed and breakfast and made five bedrooms available for this purpose.

Relying upon the covenants, the owners of The Coach House and Lamp Cottage sought injunctive relief in the Business and Property Court which prompted Mr Kay to apply to the Upper Tribunal to modify the first covenant only while the application for relief was stayed. The proposed modified covenant was:

• "not to use Lea hurst other than as a single private residence with or without additional accommodation of paying guests; and
• not to allow more than five rooms at a time to be used as bedrooms for the accommodation of paying guests in Lea Hurst."

Section 84 of the Act

The legal test under section 84 comprises two stages. The first stage is jurisdiction and the second is discretion. Should an applicant establish that the tribunal has jurisdiction to modify or vary the covenant, they must then persuade the tribunal to exercise its discretion to make the change.

There are four jurisdictional gateways:

(a)        the covenant should be deemed obsolete;

(aa)      the covenant impedes reasonable use and does not confer practical benefits of substantial value or advantage to the person with the benefit of the covenant and money is adequate compensation for the loss or disadvantage (if any) the person with the benefit will suffer;

(b)        all parties with the benefit of the covenant consent; or

(c)        the discharge or modification will cause no injury.

Mr Kay successfully argued that he should be entitled to rely on gateway (aa).

Judgment granting modification

The tribunal outlined several important considerations in its decision to grant modification of the restrictive covenant under gateway (aa). It highlighted that use of the property as an ad hoc bed-and-breakfast building was allowed under permitted development rights and the change of use did not require planning permission. This was key to the tribunal finding that the proposed use was "reasonable" for the purposes of gateway (aa) as it was indicated that the change of use is minor and was not one that would normally be of concern.

The tribunal held that the covenant did not secure practical benefits and was not of substantial value or advantage. It also highlighted the Listed Building status which places strict limits on Lea Hurst so the protection of the covenant was rendered less important than for normal properties.

It found that the likely disturbance to Lamb Cottage was negligible, especially as the houses were 75 metres apart and separated by expansive gardens and boundary walls. When granting the modification the tribunal made it conditional on guest access restricted to using only the New Drive – which would not disturb Lamp Cottage.

Cynical breach

One feature of this case was the objectors' argument that the court should not exercise its discretion as Mr Kay had knowingly been in breach of the covenant and it would be unjust to allow the modification.

Mr Kay successfully argued that there was an altruistic element to his decision to share Lea Hurst with visitors given its cultural significance and that he was not solely motivated by commercial considerations. This was balanced against Mr Kay's behaviour in not recognising the obvious breach of covenant when this was drawn to his attention by the objectors. Ultimately this factor was not determinative in the exercise of the Tribunal's discretion. 

Osborne Clarke comment

The most interesting aspect of this decision is the relation between the planning system and the question of "reasonable use" for the purpose of the gateway test.  

The outcome suggests that where a covenant prevents a change in use that does not require planning permission and falls within permitted development rights, this may be a key factor in the tribunal's exercise of its discretion.

However, the tribunal emphasised that modification or discharge can be refused even if one of the gateways above is made out. The tribunal retains its discretion at the second stage and it will need to be convinced to exercise it to modify the covenant.

The tribunal's analysis at this second stage was also interesting. In this case, the applicant's apparently deliberate breach of the wording of the covenant was not critical and it appears that his motivations were an important factor in this finding. In different circumstances, where the breach is a result of purely commercial considerations, it is easy to imagine that the tribunal may exercise its discretion to punish cynical conduct.

This Insight was written with the assistance of Peter Coyle, Trainee Solicitor at Osborne Clarke.