Restrictive covenants on land: Lessons from recent cases

Restrictive covenants requiring consent to plans: The role of reasonableness

Developers will be all too aware that restrictive covenants can limit the use of land, prohibit particular activities or potential nuisances, or restrict the height, type and/or density of buildings that can be erected. In some cases restrictive covenants may even prevent development altogether. Often restrictions will be historic, yet their existence can have a significant impact upon the development potential, and therefore on the marketability and value, of land. Some restrictive covenants are easy to spot and understand, such as “This land is to be used for agricultural purposes only”, for example.  But some restrictions can be more subtle, yet equally as important, and potentially just as devastating, to development.

One such restriction is a requirement for consent be granted to plans. This is a restrictive covenant in substance if not in form because, if the requisite consent to plans is not obtained, then development cannot lawfully proceed.

Depending on the wording of the particular covenant, it may prompt the questions: whose consent is required (and, in turn, where is/are that person/those people, and can they be contacted?); and is their giving of consent absolutely at their discretion, or is it subject to reasonableness?  Where consent can be given or withheld entirely at the beneficiary’s discretion, that is known as an absolute covenant. Where the giving of consent is subject to reasonableness (as is very often the case), that’s a qualified covenant.

The 2022 case of Davies-Gilbert v Goacher [1] concerned the reasonableness of decision-making under a qualified restrictive covenant. In the case, the High Court decided that public law principles of ‘Wednesbury reasonableness’ apply to the question of consent/refusal of consent under a restrictive covenant even though covenantees in this context are usually private individuals/businesses and not public bodies. ‘Wednesbury reasonableness’ is the requirement that the decision-making process in relation to the exercise of a contractual discretion (here, the discretion whether to grant consent to plans) be undertaken in good faith and not arbitrarily or capriciously. The Davies-Gilbert v Goacher case is good news for developers faced with qualified covenants requiring consent to plans. It effectively adds an additional layer of checks and balances to make sure that the beneficiary under such a restrictive covenant acts reasonably when asked to consent to development plans.

Section 84 applications: Recent case law on the discharge or modification of restrictive covenants

The Law of Property Act 1925 (LPA 1925) affords the Upper Tribunal (Lands Chamber) (UT) discretion to modify or discharge restrictive covenants affecting land if one or more of the grounds in section 84 LPA 1925 applies, namely:

• the covenant is obsolete;
• it impedes some reasonable use of the land;
• the beneficiaries of the covenant expressly or impliedly agreed to the release or modification; and/or
• no injury will be caused.

Several recent section 84 applications contain key takeaways for landowners/developers:

Sutton v Baines: Never ask for more than you need

When considering how to seek discharge or modification of a restrictive covenant under Section 84 LPA 1925, the case of Sutton v Baines [2] highlights the importance of never asking for more than you need.

In this 2022 case, the applicant applied for the blanket discharge of a ‘one house’ restriction which prevented her from constructing a second dwelling on her property. While the UT held that the applicant’s proposed development was not unreasonable, the request for a blanket discharge was problematic. A blanket discharge would leave the beneficiaries/objectors vulnerable to whatever planning permission the applicant, or anyone to whom she sold the land, could obtain. The impact on the value of the beneficiaries’/objectors’ land, if the restrictive covenant was to be discharged in its entirety rather than modified, could not be quantified. The UT therefore concluded that the restrictive covenant should not be, and was not, discharged. Had the applicant instead requested a mere modification to facilitate her proposed development, she would, in all likelihood, have succeeded.

The case demonstrates how a well-drafted modification of a restrictive covenant should be sufficient for a developer’s purposes, and will be much easier and more palatable for the Upper Tribunal to award than a full discharge.

Schwarzschild Ochs Pty Ltd v Concerto Properties Ltd: Wider circumstances will be taken into account

In the case of Schwarzschild Ochs Pty Ltd v Concerto Properties Ltd [3], an application was made to modify a restrictive covenant within a sublease.  The covenant restricted the use of the premises to a shop and showroom or, with the consent of the landlord, any business use within class B1 of the Schedule to the Town and Country Planning (Use Classes) Order 1987, which did not include medical use. The applicant wanted to assign or sublet within the medical sector, but the landlord refused.  The applicant therefore applied to the UT under section 84.

The UT held that the clause was not obsolete for the purposes of section 84(1)(a), so the application did not succeed on that ground. However, an assessment of whether the covenant in question impedes a reasonable user or land (which was the other section 84 ground relied upon in this case), involves an assessment of the extent to which, if at all, the covenant secures a practical benefit of substantial value or advantage to the beneficiary. The UT noted that, as a result of the wide permitted use wording within the lease, as well as separate, sufficient protections with the remaining lease terms [4], modification of the restrictive covenant would not result in a substantial loss of control for the landlord over its premises. The covenant did not, therefore, secure a practical benefit of substantial value or advantage to the landlord. The UT allowed modification of the restrictive covenant to enable use of the premises for medical purposes.

The key practical takeaway from this case is that, in exercising its section 84 discretion, the UT will not just consider a restrictive covenant in isolation. Wider circumstances, including other existing legal protections or restrictions, can be taken into account. In particular, where the land in question is leasehold, it’s always worth considering the operation and impact of the restrictive covenant alongside the operation and impact of all other lease terms.

Housing Solutions v Bartholomew Smith: A second bite at the cherry

In a recent development in the well-known Alexander Devine [5] case, Housing Solutions made a second application [6] to the UT for modification of the restrictive covenants.

Developers/landowners will recall that, in Alexander Devine, the developer had proceeded to build houses in breach of restrictive covenants. Following the decision of the Supreme Court which left the development vulnerable to demolition, Housing Solutions reached an agreement with the Alexander Devine Children’s Cancer Trust in 2021: in return for a payment, the Trust would release its covenants and allow the development to remain. However, the other beneficiary of the restrictive covenants, Mr Smith, did not agree any such release. That meant Housing Solutions still wasn’t able to sell the houses with clean title, and the development effectively remained unlawful.  In the 2023 instalment, Housing Solutions made a fresh application to the UT for modification of the restrictive covenants.

Mr Smith objected, arguing: (1) the second application was an abuse of process; (2) the doctrine of res judicata [7] applied; (3) Housing Solutions was estopped [8] from making a second application; and (4) the restrictive covenants benefitted his land and if the UT had jurisdiction to hear the application, it should reach the same decision as the Supreme Court.

In a significant win for the developer, the UT disagreed with Mr Smith on all counts.  (1) The second application was not an abuse of process because the Trust’s agreement to the houses meant that the circumstances had changed.  (2) Res judicata didn’t apply.  An assessment of whether a restrictive covenant impedes a reasonable user or land can involve an assessment of whether or not the covenant somehow protects the public interest.  That question had been the subject of the earlier case, whereas the current case concerned only the impact of the development and the restrictive covenants on Mr Smith.  (3) Housing Solutions was not estopped in any way from pursuing the second application.  (4) Mr Smith was unable to demonstrate that the covenants secured practical benefits of substantial value or advantage for him/his land; and, although the developer’s earlier conduct developing in breach should not be ignored, neither is it the function of the UT to punish a covenant-breaker where modification of the covenants will not injure the beneficiary.

This decision has the potential to be hugely helpful for developers.  It’s quite common for restrictive covenants to have more than one beneficiary. This case demonstrates that if an unsuccessful application to modify or discharge restrictive covenants results in agreement with one beneficiary, that change in circumstances may open the door to a fresh application, and one that might be more likely to succeed. The UT’s approach to Mr Smith’s res judicata and estoppel arguments should also be informative for developers considering a second attempt to modify or discharge restrictive covenants.  The case also represents a cautionary tale for objectors. Not only did the UT allow modification of the covenants, but also it found that no compensation was payable to Mr Smith.  The decision therefore highlights the risk that any objector takes if/when it refuses the certainty of a financial/release agreement.

Dealing with restrictive covenants: How we can help

Walker Morris’ specialist real estate litigators are experienced and expert when it comes to the enforcement, modification or discharge of restrictive covenants affecting land – whether that be in relation to freehold or leasehold land; and whether it be in relation to strategic risk management at the outset of a proposed development, or in relation to commercial negotiations or legal recourse via an UT application once a project is underway.

If you are a landowner or property developer and would like any advice or assistance in connection with the enforcement or relaxation/removal of restrictive covenants, please contact David Manda or any member of our Real Estate Litigation team.

Walker Morris’ Real Estate Litigation team and Planning team are hosting a development seminar where we will be discussing topical issues affecting the development of land. If you’re interested in joining this seminar, please register your interest here.

[1] [2022] EWHC 969 (Ch)

[2] [2022] UKUT 342 (LC), [2022] All ER (D) 64 (Dec)

[3] [2022] UKUT 150 (LC), [2022] All ER (D) 83 (Jun)

[4] for example terms prohibiting nuisance, prohibiting accumulation of rubbish/deleterious material, requiring compliance with all relevant laws and landlords’ regulations, and the like

[5] Alexander Devine Children’s Cancer Trust v Housing Solutions Ltd [2020] UKSC 45, and see our more detailed briefing for further information

[6] Housing Solutions v Bartholomew Smith [2023] UKUT 25 (LC)

[7] Res judicata is the fundamental legal and public interest principle which states that there should be finality to litigation and that defendants should not face repeated litigation in respect of the same set of circumstances

[8] the principle of estoppel precludes a person from asserting something contrary to what they have previously said or agreed, or what has been judicially determined