Supreme Court ruling sends warning sign about breach of restrictive covenants

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restrictive covenants

Supreme Court ruling sends warning sign about breach of restrictive covenants


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A recent supreme court ruling has sent a warning message to developers who knowingly breach restrictive covenants where other viable options are available. How could insurance help to protect your business?

The judgment in the eagerly awaited Millgate Developments Ltd/Housing Solutions Ltd/Alexander Devine Children’s Cancer Trust case on restrictive covenants and affordable housing is the first time that the Supreme Court has been required to consider a case concerning s.84 of the Law of Property Act 1925 under which restrictive covenants can be removed or modified. The Court has refused the developer’s application to modify the covenants.

Background

Millgate was a developer that owned land subject to a restrictive covenant which prevented any use of the land other than as a car park. The Alexander Devine Children’s Cancer Trust owned a neighbouring property which benefited from the covenant.

It was building a hospice for terminally ill children on the site and planned to have a peaceful wheelchair path around the perimeter of its gardens.

Millgate built 13 affordable housing units in order to meet planning obligations which would allow it to market a high-value development nearby.

Planning was obtained (the Trust did not object to the planning application) and Millgate built the homes close to the boundary with the Trust’s land, in deliberate breach of the covenant, and then applied to the Upper Tribunal to modify the covenant.

The case was first heard by the Upper Tribunal in 2017. The Upper Tribunal found that the housing development had a significant impact on the hospice land and also noted that Millgate had not acted in good faith.

However, it held that the public interest in making the affordable homes available immediately to people who had been waiting for social housing was sufficient to justify modifying the covenant.

Housing Solutions purchased the development after the original application was made by Millgate but before it was appealed.

The Supreme Court Decision

The case has gone all the way to the Supreme Court, with the Court of Appeal and the Supreme Court both disagreeing with the Upper Tribunal’s decision. Although there was a strong argument that it was in the public interest to allow the social housing units to remain, ultimately this did not outweigh the public interest in protecting the Trust’s contractual rights. The matter is now in the hands of the Alexander Devine charity trust to decide what to do next. The final paragraph of the Supreme Court judgement refers to the trust having the ability to apply for a prohibitory injunction to stop the 13 housing units being occupied, or for a mandatory restorative injunction requiring the houses to be removed in part or in full. Accordingly, their claim could well include an account for profits, as well as “negotiating damages”.

This case demonstrates that despite obtaining planning permission, without third party objections in relation to the restrictive covenants, that there is still a very real risk that the beneficiary of the covenants can take successful enforcement action.

How can insurance help?

A legal indemnity policy can be obtained to cover this risk to protect the developer and subsequent owners in the event of enforcement action by third parties – such cover can be assessed on a pre-planning basis as well as once planning permission is granted and usually covers such losses as:

  • Damages or compensation awarded against the insured by the courts
  • Cost of altering, demolishing and/or reinstating all or any part of the property including any part of any building or other construction on or forming part of the property
  • Reduction in market value
  • Abortive costs of works
  • Costs of settlement
  • Defence costs
  • Cost and expenses incurred with the insurer’s consent

In some instances, consequential losses such as business interruption and loss of profits can also be included on the policy for an additional premium. In most cases, once cover is in place the Insured party doesn’t have to do anything further in respect of the covenants, such as approaching potential beneficiaries or applying to the Upper Tribunal for modification of the covenants.

Not only does this save the insured time and money as lengthy applications and negotiations are not required, it also gives the insured peace of mind that they can develop the site safe in the knowledge that if a third party attempts to enforce the covenants this would be dealt with by the policy.

Our team is a highly experienced team of specialist legal indemnity and defective title insurance brokers who are able to use their knowledge and strong relationships with insurers to provide an open market broking service for any size of development site as well as single assets or portfolio of properties.