Developers will be aware that a procedure exists under section 84 of the Law of Property Act 1925 by which an application may be made to the Lands Tribunal for the discharge or modification of a restrictive covenant.
Less well known is that a similar procedure exists under section 610 of the Housing Act 1985 in relation to the sub-division of residential premises. We will look at the operation of both sections in the context of the latest case law, along with the issue of how compensation under section 84 of the LPA 1925 is calculated.
Re Vince's application
In this case, the owners of a large 20 room house obtained planning permission to convert it into five separate dwellings, including the construction of a two-storey extension.
The house was affected by a restrictive covenant preventing its use other than as a single private dwelling house in the occupation of one family. It also prohibited interference with the light and air enjoyed by neighbouring properties. One of the neighbours objected to the conversion. The owners applied to the Lands Tribunal for the covenant to be modified so as to allow the development to proceed.
An application under section 84 of the Law of Property Act can be made on a number of grounds:
- That by reason of changes in the character of the property or the neighbourhood, the restriction ought to be deemed obsolete; or
- That the continued existence of the covenant would impede some reasonable use of the land, money would be adequate compensation to the person entitled to the benefit of the covenant and either the covenant secures no practical benefit or it is contrary to the public interest; or
- That the person with the benefit of the covenant consents to its modification; or
- That the proposed discharge or modification will not injure the person with the benefit of the covenant.
If the application is made on the basis that the covenant impedes a reasonable use of the land, the Lands Tribunal is entitled to have regard to the development plan and any declared or ascertainable pattern for the grant or refusal of planning permissions in the relevant area.
In this case the Tribunal found that although the proposed conversion would not materially affect the value of the neighbouring house or the views from it, it would result in increased vehicle movements. This would therefore affect the peace and quiet enjoyed by the neighbouring property. The Tribunal held that it would also result in some loss of light, although placed less emphasis on this as the rooms affected included a utility room and a cloakroom which were "transitory". This was opposed to habitable rooms such as a living room or bedroom. It also declined to take into account any disturbance caused by the building works themselves, on the grounds that this would be temporary and the covenant was concerned with the long-term use of the land.
The Tribunal decided that the covenant continued to secure a practical benefit and that the neighbour would be injured by its modification, within the meaning of section 84. It therefore refused the application.
Lawntown Limited v Mr & Mrs Camenzuli
The developers in Re Vince's case may wish that they had applied under section 610 of the Housing Act 1985 instead. Section 610 applies where:
- Owing to changes in the character of the neighbourhood in which the premises are situated, they cannot readily be let as a single dwelling-house, but could readily be let for occupation if converted into two or more dwelling-houses; or
- Planning permission has been granted which allows the premises to be used as two or more separate dwelling-houses;
And in either case, the conversion is prohibited or restricted by the provisions of the lease of the premises, or by a restrictive covenant affecting the premises.
Any person "interested" in the premises may apply to the court for the terms of the covenant to be varied. While there is a considerable amount of case law on section 84 LPA 1925, very little exists on section 610 HA 1985. This case concerned how the discretion of the court under section 610 to vary a covenant should be exercised.
The existing section 610 is a successor to previous similar legislation. It was originally enacted to deal with the problem of large houses built during the last century which have outlived their purpose as single family dwellings.
Lawntown was a property development company which had bought a semi-detached house with a view to converting it into two flats. It obtained planning permission for the conversion but the neighbours objected on the grounds that this was in breach of a restrictive covenant affecting the premises.
Planning permission had already been granted for the conversion. Lawntown argued that the only factors weighing against the development which the court was entitled to take into account were those the local authority had not already considered in deciding whether to grant planning permission.
The Court of Appeal disagreed, holding that it should have regard to all relevant factors, including those which had already been considered by the local authority. The factors included not just the respective harm and benefit that would accrue to the parties involved, but consideration of matters of wider public policy. The court acknowledged that the property in this instance was not the sort of property for which section 610 had been originally designed. Nonetheless it found that the urgent demand for more housing in London outweighed the objections of the neighbours and modified the covenant to permit the conversion.
Things to consider
Section 610 has fewer conditions attached to it than its equivalent provision in the LPA. Arguably this may mean that a residential developer should use section 610 in preference to section 84 wherever possible.
The disadvantage of taking this route still remains even after the case of Lawntown Limited v Mr & Mrs Camenzuli. There is very little guidance on how the discretion of the court under the section will be exercised and each case will turn very much on its facts.
Winter v Traditional and Contemporary Contracts
In this case it was common ground that the covenant in question should be modified. The only question before the Tribunal was the amount of compensation which was payable to the neighbours under section 84 LPA. The objector was arguing for a share in the development value, as is recognised to be the usual basis of compensation for damages for breach of a restrictive covenant.
The Court of Appeal held that the starting point for the basis of compensation under section 84 is the loss caused by diminution in the value or enjoyment of the objector's property, not the loss of his financial bargaining position.
There is no hard and fast rule as to how that loss is to be assessed, although the "negotiated share" approach is a permissible tool for the Tribunal. The court acknowledged that it may be difficult as a matter of logic to see why impact on the amenity of one property can in any way be related to the enhanced profitability of another. However, this may be the case where a simple estimate of the diminution in value of the objectors' properties is unlikely to be a fair reflection of their subjective loss.
Where that approach is taken, the percentage awarded must bear a reasonable relationship to the actual loss suffered by the objector. The court expressed concern that claims based on high percentages of development value, such as a 50:50 split, were still being advanced by valuers and lawyers. The court commented that this created unrealistic hopes in objectors, thus delaying settlement and aggravating loss and anxiety.
Things to consider
What seems clear following this case is that, while share of development value may be a permissible method of calculating damages for modification of a restrictive covenant under section 84, the percentage applied is likely to be small. An applicant should certainly not regard a share of the profit as their entitlement as a matter of principle.
From the developer's perspective therefore, it may be better to apply under s.84 for the modification or removal of a covenant, rather than to ignore the breach of covenant, proceed with the development regardless and risk being liable for common law damages (which are more likely to be calculated on a percentage of its profits).
This is particularly the case where insurance is unavailable, perhaps because the identity of the person with the benefit of the covenant is known.
This analysis was written by Sarah Allen, associate in Wragge & Co's Real Estate group.
This analysis may contain information of general interest about current legal issues, but does not give legal advice.