Restrictive covenants: Modification and compensation

Where restrictive covenants offer no substantial practical benefit to an objector, recent decisions suggest relatively modest compensation will suffice as a remedy for modification, says Stephen Green Since the advent of the Law of Property Act 1925 (the Act), there has been a mechanism by which to secure modification of restrictive covenants which bind land. The key relevant provisions are at section 84(1) of the Act. Where the Upper Tribunal (Lands Chamber) (the UT) is satisfied that a ground is proven, it can wholly or partially discharge or modify a restrictive covenant. The grounds can be summarised as follows:  (a) a change in character of the property or neighbourhood; (aa) any case within Section 84(1A) where the continued existence of the covenant would impede some reasonable user; (b) express or implied consent as to discharge or modification; and (c) no injury to the person with the benefit, where discharge or modification is granted. Section 84(1A) cases are those where either: (a) the restriction impeding the user does not secure the beneficiary any practical benefit of substantial value or advantage; or  (b) it is contrary to the public interest;  and, money will be an adequate compensation for loss or disadvantage suffered as a result of the discharge or modification. There is also a provision for payment of compensation under sub-section 84(1)(c) for either: (i) any loss or disadvantage suffered; or (ii) any loss in value of the land by virtue of the discharge/modification. Section 84(1C) also gives the UT power to add such further restrictions on use by the applicant as appear reasonable. Adequacy of compensation There are many circumstances where compensation can be an adequate remedy for discharge or modification, and two recent cases offer examples of where compensation is awarded and at what level.  In Re Lynch [2016] UKUT 488 (LC), Ben Lynch made an application under grounds (a) and (aa) of the Act. He wanted to build a second house on land in Ruislip, which was subject to a restrictive covenant, limiting construction to one dwellinghouse per plot. The construction of a second dwellinghouse would breach the restrictive covenant. When Lynch acquired the land he was aware of the restriction. Nevertheless, he applied for and secured planning permission to build a second detached house on the plot. Before the UT, Lynch had to establish that: (1) by reason of changes in the character of the property/neighbourhood or other circumstances, the restrictive covenant ought to be deemed obsolete (ground (a)); and/or (2) the continued existence of the restrictive covenant or its modification would impede some reasonable use of the land, in circumstances where there is no practical benefit of substantial value or advantage to the beneficiary (grounds (aa) and (1A)). The UT decided: (i) there had been no significant changes to the character of the neighbourhood, nor other material circumstances; and (ii) the new house would be seen from another objector’s patio and block some light, affording some “practical benefit” to the objector. Were those practical benefits of substantial value or advantage to the objector? Would money be an adequate compensation for discharge of the restrictive covenant? The UT considered that the planned second dwellinghouse would result in a “small effect” on the value of both objectors’ properties and therefore allowed compensation of 2.5% and 1.5% of market value (£25,000 and £15,000) respectively. In Re Rae [2016] UKUT 0552(LC), Richard and Avril Rae applied under grounds (a), (aa) and (c) of the Act to modify a restrictive covenant which affected their property. Again, the Raes’ property was burdened by a covenant that restricted their ability to construct more than one detached dwellinghouse on their land. A dwellinghouse had been on their land for some years and they had secured planning permission for the erection of a second dwellinghouse on the plot. The UT decided that ground (a) was not made out. Ground (c) was not relied on with any vigour and withdrawn. The principal issue therefore was ground (aa). The UT accepted that the construction of a second dwellinghouse was a reasonable use. The question left to be decided, therefore, was whether under section 84(1A) the restriction secured the objectors some “practical benefit of substantial value or advantage”.  The meaning of the word “substantial”, under guidance from Carnwath LJ in Shephard v Turner [2006] EWCA Civ 8; [2006] 2 EGLR 73 was considered. That guidance recommended applying a commonsense meaning. The primary practical benefits to the objectors were: (i) the integrity of a “scheme of development”, (which the UT did not consider a valid objection); and (ii) views from neighbouring properties and control of traffic flow on the access road shared by the Raes and the objectors. The UT accepted that the immediate neighbours would be able to see the roof of the new property to a small extent, but the impact would be minor. Similarly, it accepted that any increased traffic flow would not be substantial. Taking all issues in the round, to include the fact that the Raes were seeking only a specific modification rather than discharge, the UT allowed modification, conditional on (i) payment of compensation and (ii) limits on the removal of shrubbery to preserve the view. It took the view that the practical benefit to the primary objectors was capable of compensation in money and awarded sums of £5,000 and £2,500 respectively to the two immediate neighbours. Those sums represented less than 2% of the likely market value of the neighbours’ property. A good rule of thumb? As things stand, it seems that where the UT is satisfied that there is no practical benefit from the restrictive covenant to an objector under section 84(1)(c) or 84(1A), or where any practical benefit is not substantial, compensation in money might well be an adequate remedy for discharge or modification. It appears that a compensation award in the order of less than 3% of open market value might well be regarded as a reasonable rule of thumb for a modest infringement of the practical benefit. Stephen Green is a partner and the national head of real estate litigation at DWF LLP