Why restrictive covenants are a rising risk

The experience of spending more time at home this year has led to a collective reassessment of our priorities. As a nation, the home has become the centre of everything, our place of work and relaxation.

Housing sales are buoyant according to RICS market research, and finding the right home has become increasingly complex. New factors such as space for an office have become more important than a short walk to station, while an excellent broadband connection and access to outdoor spaces have also rocketed up the priority list.

We have also become increasingly aware of our neighbours. Is this something professional developers should focus on, and change the culture of aggressive bully schemes?

In this case, Millgate Developments Ltd acquired a site and then applied for planning permission to build 23 affordable houses there, in line with its planning obligations. However, a problem arose with the neighbours because 13 houses were to be built on land under a restrictive covenant, which said: "No building structure or other erection of whatsoever nature shall be built or erected or placed on [the land]";and "[The land] shall not be used for any other purposes whatsoever other than as an open space for parking of motor vehicles". The original vendor that created the restrictive covenant in 1972 was a John Smith, a major landowner and farmer in the local area. The original transaction also included an overage provision however this expired in 1994.

It is important to remember that private rights, such as restrictive covenants, do not prevent the granting of planning approval. Planning permission had been given in March 2014 and Millgate began construction in July that year. Therefore, the existence of a planning permission should give zero comfort to a technical due diligence (TDD) or project monitoring surveyor, the risk of enforcement from neighbours is still fully live.

The neighbour and beneficiary of the restrictive covenant in this instance was the owner of the adjacent land, the Alexander Devine Children's Cancer Trust. Neighbour disputes commonly have circle within circle relationships and this is a classic example of the interlink of relationships over time. At the centre of the dispute was the fact that the land in question had been gifted by Barty Smith, the son of the original John Smith, on December 2, 2011, for the construction of a hospice for terminally ill children. This direct relationship in the parties seeking to enforce the restrictive covenant was commented upon by the Supreme Court.

In September 2014, in line with known best practice, the Trust wrote to Millgate to object to the development. This meant that Millgate continued to build in full knowledge that it was breaching the covenants.

Aggressive developers have, over the past 20 years, become emboldened to use the cost of prospective litigation and the complexity of this specialist area of law to build regardless, and then seek release after development has been completed. This strategy has in part been enabled by poor technical due diligence from funders and those parties unknowingly holding the risk. That tactic was used by Millgate in Alexander Devine when, in July 2015, it applied to the Upper Tribunal seeking modification of the restrictive covenants after it had completed the development.

In the first instance this aggressive strategy appeared to have worked, and in November 2016 the tribunal allowed Millgate's application. This decision took the view that the injury could be resolved by compensation of £150,000 to the Trust – effectively rewarding Millgate for poor conduct with super profit. The tactic was cynically deployed in full knowledge of the potential reward.

The Trust then did something amazing by appealing the decision. This was a courageous decision for a charity, and it was rewarded with a favourable reversal of the tribunal decision in the Court of Appeal.

Typically, it is at this stage that restrictive covenant litigation would instead have ceased – almost by tradition, because no case under the Law of Property Act 1925 involving the modification of a covenant had ever escalated to either the House of Lords or Supreme Court. Nevertheless, Millgate appealed to the Supreme Court. On 6 November 2020, it refused the application to modify the restrictive covenant, and this now means the Trust could seek an injunction to enforce it requiring the demolition of the now built housing units.

This is not just a trend in restrictive covenants. For instance, on 13 March 2020 the High Court handed down its second judgment in a complex and lengthy City of London rights of light dispute. Readers wishing to following the case should start at the first decision, Beaumont Business Centres Ltd v Florala Properties Ltd [2018] EWHC 2112 (Ch), and then move to Beaumont Business Centres ltd v Florala Properties Ltd [2020] EWHC 550 (ch). Here, the court granted a neighbour's injunction to cut back a building in this case the property was not only built but had already been tenanted.

This case can also be traced back to decisions made by the developers to adopt highly aggressive strategies, seeking to impose schemes on neighbouring landowners only to realise that the courts are no longer supporting this stance. What may shock readers is that a deal had been negotiated which the developer walked away from in the false belief that it could impose the scheme on the neighbour.

The courts are therefore clearly signalling to the market that such aggressive tactics will not now be rewarded. So how is this going to affect professional practice in 2021? Early signs of the mood change can be seen in the debate on Schedule 23 of the High-Speed Rail (West Midlands to Crewe) Bill 2020 in parliament on 12 November 2020.

There was little support for the idea of a public infrastructure body, such as HS2, appearing to act in a high-handed or aggressive manner against the private rights of adjacent landowners. At the time of writing, further ministerial meetings are being held to seek to achieve a more balanced solution that protects landowners' rights. RICS has been formally requested to form an industry expert working group to prepare practitioner guidance on the operation of the legislation. This grouping has representation from the Institution of Civil Engineers (ICE) and senior legal practitioners. The group will now be meeting online in compliance with lockdown conditions and this should be in a position to published draft guidance in early 2021.

With any emerging trend, there is an increasing risk of non-qualified persons purporting to be expert. We suggest that the term should apply only to those with professional qualifications, established expertise, proper training, CPD, and professional indemnity insurance. RICS publishes professional guidance notes on technical due diligence, project monitoring, rights of light and party wall practice such that chartered building surveyors are well placed to support clients seeking advice on this complex area of practice.

Developers’ risk registers are likely to be adjusted to focus on negotiation and settlement and early release from issues. The carousel below suggests how a neighbourly matters section of the red–amber–green (RAG) risk register structure might look.  

Related competencies include: Conflict avoidance, management and dispute resolution procedures, Development appraisals, Housing strategy and provision, Legal/regulatory compliance, Planning development and management