Restrictive Covenants – The Cost of Modification

To modify or not to modify? That is the question faced by the Tribunal in an abundance of recent decisions.

The answer is largely the former, with most applications to modify restrictive covenants based on ground (aa) of Section 84(1) Law of Property Act 1925, being successful. That is, that the covenant impedes the reasonable user of the subject property.

The decision of the Upper Tribunal Land Committee (UTLC) is, of course, discretionary. So there isn’t a formula as to how to present a case to achieve a guaranteed favourable outcome. Though there are some trends.

Obtaining planning permission is important. Instructing objective surveyors to provide unbiased and realistic value calculations is a must. Good behaviour is also critical; where parties do not conduct themselves in a reasonable manner they could see the pendulum of favour swinging away.

The recent UTLC case law has established that where they have found that the covenants should be modified/released under s.84, the loss of the objector must be considered and, where appropriate, compensation must be paid. In broad terms, these cases look at the market value of the injured property and apply a percentage to cover a drop in that value.

The method of calculating this percentage seems haphazard and leans more on the discretionary “what feels right” side of decision making, however a trend is emerging. Here is my brief review of some of those recent cases:

Re Pottier’s Application [2010] UKUT 206 (LC), 2.5%

• Decision summarised at paragraph 42: “There is likely to be a marginal effect upon the amenity of the property arising from the construction of a house close to the boundary and the associated risk that the existing tree screen will not survive in the long term. In my opinion the diminution in the value of the objector’s property arising from the modification of the restriction would be 2.5% or £6,875 when applied to the existing value of £275,000.”
• The objector’s house was in a poor state of repair and their surveyor insisted that the compensation should be based on the value once improved (£350,000). This argument was rejected.

Re Perkins’ Application [2012] UKUT 300 (LC), £2k

• The UTLC had originally erroneously found that the act of constructing the dwelling would constitute a breach of the covenants, which conflicts with the decision in Shepherd v Turner [2006] EWCA Civ 8. The objectors put weight on damage to the road rather than loss in value to their properties. (Though see Theodossiades below!)
• When considering the above point anew, the UTLC compared the development works required for a new dwelling to be equal to the improvement works on an existing dwelling on the same street. The latter was not in breach, but still represents the same annoyance.
• The case then focusses on loss of views, which is found to be negligible and worthy “only” of £2,000 to the immediately adjoining neighbour. No science is offered to confirm from where this figure emerges.

Re Rae’s Application [2016] UKUT 0552 (LC), <2% – £5k and £2.5k

• At paragraph 4, it is stated that: “Under s.84(1B) the UTLC is required to take into account the development plan and any declared or ascertained pattern for the grant or refusal of planning permission in the relevant areas…”
• Decision summarised at paragraph 76: “Doing the best we can, we consider that the diminution in value, is in the order of £5,000 in respect of [No.11], and £2,500 in respect of [No.10]. These figures would amount to less than 2% of the likely value of the properties, even assuming the lowest of [the surveyors] range of values. We do not consider those figures to be substantial.”
• “Substantial” confirmed to mean “considerable, solid, big” – referencing Shepherd v Turner.
• Covenant modified with a requirement for adequate fencing to protect privacy.

Hennessey v Kent [2017] UKUT 243 (LC), 5% – £21k

• UTLC held it to be correct to modify, as the proposed use was reasonable and planning permission had been granted.
• Agreed that Kent would suffer loss and awarded him £21,000.
• Modified covenant to allow the development on the basis that it wasn’t used for residential care.

Re Barter [2017] UKUT 451 (LC) – the UTLC found there to be a lack of evidence to quantify a compensation payment

• Applicant wished to construct 13 new flats in breach of a covenant not to build any additional buildings for residential use.
• Held that the covenant was primarily imposed to secure a share in future development value.
• In this case the application failed, because it was imposed a mere 4 years ago and the applicant was the original covenantor. Were that not the case, the covenant would have been extinguished without compensation.

Re Theodossiades [2017] UKUT 0461, £8,100 – based on 18 months of reduced income (10%) during construction.

• The applicant’s main claim was that the covenants impede the reasonable use. UTLC found the proposed use to be reasonable on the basis that planning permission had been granted.
• Although the covenants impede the development, they do provide “some practical benefits to the objectors,” though these are not of substantial value or advantage.
• Representation for the objectors estimated a 5-10% diminution in value. In light of development in the neighbouring area and past breaches of the “loose scheme” of covenants, UTLC held that will not affect the benefiting properties. BUT…
• £8,100 was awarded to one neighbour due to the temporary disturbance during the construction works. This represented a 10% loss in rental value, based on £4,250 per month, £51k per annum and an estimated build duration of 18 months.
• Covenants modified to ensure the development was carried out in accordance with the planning permission.

Re Geall [2018] UKUT 0154 (LC), 2.5% – £65k

• UTLC inclined to modify the restrictive covenant on the basis that:
  • Planning permission had been granted and therefore the use was reasonable.
  • The drop in value of the objector’s property was not substantial. Even though most of us would consider £65k to be a substantial sum, it wasn’t compared to the full property value of £2.6m.
• The covenant was modified to reflect the works granted by the planning permission.

The summaries set out above do not contain details of the legal costs that will have accrued and are payable by both sides. Those readers with experience of this process will have an idea as to what the final tallies may be. It is worth highlighting that Perkins reached the Court of Appeal and then back down to the Tribunal again.

Commentary on Geall has questioned the value in the imposition of future restrictive covenants in the first place, when they can be extinguished or modified, as demonstrated in the above series of decisions.

In my view, these cases and DUAL Asset’s claims experience, demonstrate that restrictive covenants still keep their very large teeth sharp. Although the amounts of the awards do vary in sum (though not so much the percentage), a developer will need to be pretty committed to stomach the costs of getting the application through.

To find out more, contact the Underwriter below:

Wesley Timothy
Senior Underwriter
+44 (0)161 457 1299
[email protected]