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Strategic Breach of Restrictive Covenants by Developer

Strategic Breach of Restrictive Covenants

Strategic Breach of Restrictive CovenantsA recent case sheds new light on the courts’ view of an intentional breach of restrictive covenants. In Millgate v Smith and Others [2016] UKUT 515, Millgate, received planning permission to build 23 affordable housing residential units on plot A. Despite the grant of planning permission, plot A was subject to a restrictive covenant that restricted approximately half of the land to use as a car park.

On a nearby plot of land, Millgate had also received planning permission for a lucrative development of premium properties.  Permission for the lucrative development was conditional on Millgate’s building and releasing for sale affordable housing units.

Tactical approach taken by Millgate
Millgate made a strategic decision to begin building the affordable housing units on plot A, in contravention of the restrictive covenant. Once 10 of the affordable housing units had been completed and occupied and the remaining 13 were almost complete, Millgate applied to the court to have the restrictive covenant discharged. The application was objected to by a number of parties including the Children’s Hospice, on the adjoining property.

The stakes were high.  Millgate could not release any more premium properties for sale on the nearby development until the affordable housing was completed and released for sale.

In considering Millgate’s application to discharge the restrictive covenant, the court considered a number of factors.  However, the decision was largely based on one issue, that is, whether the discharge would be in the public interest.

The judge criticised Millgate for making the application after the building work had commenced and stated that the courts did not look kindly on this type of behaviour.

Decisive factor was the public interest
However, the decisive factor here was the public interest.  The judge concluded that the empty houses represented “an unconscionable waste of resources” and he could not allow this housing to stand by empty while families were waiting for them.  Consequently, the judge discharged the restrictive covenant.

Millgate was required by the court to pay the adjoining hospice £150,000 for a boundary planting scheme to alleviate the hospice’s loss of privacy.  However, this relatively modest amount did not impinge on the profitability of Millgate’s overall scheme.  In fact, Millgate had attempted to settle out of court for this exact amount. Millgate could now go ahead with the sale of the more premium properties nearby.

Lucy Harrison, Commercial Property Solicitor at Barr EllisonNot a direct precedent
Public interest considerations by the courts will always hinge on the specific facts and context of each case.  Consequently, this case should not be considered by developers as a direct precedent.

However, it is clear that a tactical approach to restrictive covenants as part of an overall scheme can pay off.  It is likely that Millgate purchased plot A (the cost of which would have reflected the restrictive covenant) in order to fulfil its obligations in relation to the other, premium site, in the most economical way.  While it was a risk, the likelihood of the courts ordering the destruction of affordable housing in order to enforce the requirement that the land might be used as a car park was correctly assessed by Millgate’s team to be low.  This type of strategic approach carries with it risks and should not be planned without expert legal advice.

By Lucy Harrison, a member of the Commercial Property Team at Cambridge solicitors Barr Ellison.

Disclaimer: While we do all that is possible in terms of ensuring its accuracy, this blog contains general information only. Nothing in these pages constitutes legal advice. You need to consult a suitably qualified lawyer from the firm on any specific legal problem or matter.

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