Restrictive Covenant Cases in the UK: Business Use Restrictions

Introduction

Restrictive covenants play a significant role in UK property law, particularly those preventing business use of residential properties. For professionals defending and protecting these covenants, understanding the legal landscape is essential. This report examines key cases that have reached the Upper Tribunal (Lands Chamber) and subsequent appeals, with a focus on how these covenants operate, how they are defended, and the circumstances under which they may be modified or discharged.

The legal framework for modifying or discharging restrictive covenants is primarily governed by Section 84 of the Law of Property Act 1925, which gives the Upper Tribunal power to intervene under specific statutory grounds. Recent high-profile cases such as Alexander Devine Children's Cancer Trust v Housing Solutions Ltd and Coven Care Homes Ltd v Hockney & Ors provide valuable insights into judicial reasoning and evolving legal principles in this area.

Legal Framework for Restrictive Covenants

Definition and Purpose

Restrictive covenants are legally binding restrictions imposed on land by agreement between freehold landowners or contained in a lease. According to guidance from the UK government:

"A restrictive covenant is a legally binding restriction imposed on land by agreement between two freehold landowners or contained in a lease. Restrictive covenants are often imposed when someone sells their land, for example to prevent the buyer from using it for business, to prevent building on it, or to ensure that they keep to a particular style or size of building."

These covenants are private arrangements, enforceable only by the person who imposed the covenant and subsequent owners of that person's land.

Types of Business-Related Restrictive Covenants

In the context of business use, restrictive covenants typically:

1. Prevent the use of residential property for commercial purposes
2. Restrict specific types of business activities
3. Limit construction or alterations that would facilitate business use
4. Preserve the residential character of an area

LegalVision notes that in commercial contexts, restrictive covenants may:

"...restrict the tenant from using the property for particular business use; prevent the tenant from constructing other property on the land; ensure the commercial tenant only makes alterations to the property with the permission of the landlord..."

Section 84 of the Law of Property Act 1925

The primary statutory mechanism for challenging restrictive covenants is Section 84 of the Law of Property Act 1925, which empowers the Upper Tribunal (Lands Chamber) to discharge or modify restrictive covenants under specific grounds.

As explained by DLA Piper:

"To discharge or modify a restrictive covenant, there are two main options: 1. express release (non-statutory route) 2. application to the Tribunal (statutory route)"

Stephens Scown elaborates:

"Restrictive covenants are often a significant hurdle in property development, imposing limitations that can hinder the progress of even the most well-conceived projects. However, Section 84 of the Law of Property Act 1925 offers a legal mechanism to modify or discharge these covenants under certain conditions."

The statutory grounds for modification or discharge include:

1. The covenant is obsolete due to changes in the character of the property or neighborhood
2. The covenant impedes reasonable use of the land without securing practical benefits of substantial value
3. All persons entitled to the benefit have agreed to the discharge or modification
4. The proposed discharge or modification will not injure the persons entitled to the benefit

Landmark Case: Alexander Devine Children's Cancer Trust v Housing Solutions Ltd

Case Background

This Supreme Court case from 2020 has become a landmark in restrictive covenant jurisprudence. The case concerned land in Maidenhead where a developer had built houses in breach of a restrictive covenant that prohibited building.

According to the Supreme Court:

"The case concerns a piece of land situated in Maidenhead which in 1972 was sold by a farmer to a development company who already owned neighbouring land. As part of the conveyance, the development company covenanted by deed that, inter alia, no building would be built on the Application Land."

The covenant benefited adjacent land that later became a children's hospice operated by the Alexander Devine Children's Cancer Trust. The developer had built 13 houses in breach of the covenant before applying to the Upper Tribunal to modify the covenant.

Key Legal Issues

The case centered on two main issues:

1. Whether the Upper Tribunal had jurisdiction to modify the covenant under Section 84(1)(aa) of the Law of Property Act 1925 on the grounds that it impeded reasonable use without securing practical benefits of substantial value
2. If jurisdiction existed, whether the Tribunal correctly exercised its discretion in modifying the covenant

A critical aspect was the developer's conduct in deliberately breaching the covenant before seeking modification.

Supreme Court Decision

The Supreme Court unanimously ruled against the developer, overturning the Upper Tribunal's decision to modify the covenant. Lord Burrows, delivering the judgment, emphasized that the developer's "cynical breach" of the covenant was a significant factor.

As summarized by Squire Patton Boggs:

"In the recent case of Alexander Devine Children's Cancer Trust v Housing Solutions Ltd, the Supreme Court confirmed that any 'cynical conduct' should be taken into account when a restrictive covenant has been breached. This is a significant outcome for property developers who wish to build on burdened land."

The UKSC Blog notes:

"The Supreme Court, led by Lord Burrows, with whom the other four Justices concurred, agreed with the Court of Appeal that the Upper Tribunal decision erred in law, but concluded so through different reasoning, specifically in relation to the stage of the analysis at which conduct should be considered."

Implications for Defending Restrictive Covenants

This case provides several important principles for those defending restrictive covenants:

1. Conduct matters: A party's conduct in deliberately breaching a covenant before seeking modification is relevant to the Tribunal's exercise of discretion
2. Public interest considerations: While public interest (such as housing needs) is relevant, it doesn't automatically override private property rights
3. Substantial value: The privacy and amenity provided by a covenant can constitute "practical benefits of substantial value"

As 39 Essex Chambers explains:

"At the heart of the case was what Lord Burrows styled a 'dilemma'. The Alexander Devine Children's Cancer Trust ('the Trust') had built a hospice that enjoyed the benefit of a restrictive covenant preventing building on a plot of land ('the Application Land'). This covenant afforded the terminally ill children of the hospice privacy in the use of its grounds."

The Supreme Court's decision reinforces the strength of restrictive covenants and raises the bar for developers seeking to modify them after deliberate breaches.

Coven Care Homes Ltd v Hockney & Ors: Business Use in Residential Areas

Case Background

This recent case concerned the conversion of a residential property into a children's care home. The property at 2 Redwing Close in Hammerwich, Staffordshire, was part of a small residential estate developed in 1988 and was subject to a restrictive covenant limiting its use to a private dwelling house.

According to case details:

"The applicant currently operates two small care homes for children with learning difficulties and complex needs, registered with OFSTED to care for up to two children aged between 7 and 18 years. The application seeks to modify the existing restrictive covenant to allow the property to continue functioning as a children's care home."

The estate consisted of 20 homes, with objectors expressing concerns primarily about parking issues related to the operation of the care home.

Legal Arguments and Decision

The case turned on the application of Section 84(1)(aa) and (c) of the Law of Property Act 1925. The applicant sought to modify the covenant to permit the property's use as a children's care home.

While the full decision details are limited in the provided materials, this case represents an important example of how the Upper Tribunal approaches business use (specifically care homes) in residential settings.

Muskwe & Another v Cochrane [2023]: Care Home Use Modification

Case Background

This 2023 Upper Tribunal case provides a more recent perspective on modifying restrictive covenants for care home use. The applicants owned a freehold property in Braintree, Essex, and wanted to use it as a residential care home for up to four children/young persons.

Trowers explains:

"The property was subject to two restrictive covenants, one from 1997 not to use it 'other than as a single private residence', and one from 2000 not to use it 'other than as a single private dwellinghouse with usual outbuildings'. In 2020, Braintree District Council granted planning permission for a change of use from residential dwelling (C3) to a residential care home (C2) for up to four children/young persons and the Property was used as a care home for two children from January 2022 until November 2022 in breach of the restrictions."

Legal Arguments and Decision

The applicants sought modification of the covenants under Section 84 of the Law of Property Act 1925. Charles Russell Speechlys notes:

"In Muskwe & Anor v Cochrane [2023] UKUT 262 an application was made to modify restrictive covenants under Section 84 of the Law of Property Act 1925. The covenant in question prevented the applicant from implementing planning consent."

The Upper Tribunal ultimately modified the restrictive covenants to enable the property to be used as a residential care home. This decision is significant as it demonstrates the Tribunal's willingness to modify covenants to permit care home use in appropriate circumstances, despite the business nature of such operations.

Fosse Urban Projects Ltd v Whyte and Others: Developer Conduct

Case Background

This case represents an important development in how the Upper Tribunal approaches developer conduct following the Alexander Devine precedent. It involved a developer who had deliberately breached a restrictive covenant for commercial reasons.

Osborne Clarke summarizes:

"A recent decision of the Upper Tribunal in the case of Fosse Urban Projects Ltd v Whyte and others serves as a warning to developers to deal with restrictive covenants before developing land. The decision marks a departure from the previous high-profile case and demonstrates that the Upper Tribunal will not be minded to exercise its discretion to discharge or modify a covenant and sanction a development where a developer has deliberately and knowingly breached a covenant solely for commercial reasons."

Legal Arguments and Decision

The Tribunal found that while the covenant was technically obsolete due to area development (satisfying the jurisdictional grounds), it declined to exercise its discretion to modify the covenant due to the developer's conduct.

As Osborne Clarke explains:

"The tribunal found that the likely purpose of the restriction was to preserve a boundary between the development and open farmland. However, as the whole area had been developed, the covenant was obsolete, and the practical benefits of the covenant in respect of privacy and the open aspects of the objector's properties were not of substantial value or advantage. The developer had therefore successfully established two jurisdictional grounds (a) and (aa), satisfying the first stage of the test."

Despite establishing jurisdictional grounds, the application was rejected based on the developer's conduct, reinforcing the principle established in Alexander Devine that deliberate breaches will be viewed unfavorably.

Recent Cases (2024)

Lackey v Pearce and another [2024]

This 2024 case involved an application to modify a restrictive covenant preventing the construction of additional dwellings in the rear garden of a property on a residential estate built in the mid-1970s.

Norton Rose Fulbright reports:

"In Lackey v Pearce and another [2024] UKUT189 (LC), the applicant had obtained outline planning permission to build an additional dwelling in the 'generously sized' rear garden of their property, which was part of a residential estate built in the mid-1970s. However, the houses on the estate, including their property, was subject to a restrictive covenant preventing the erection of additional dwellings."

The application was unsuccessful, though the specific reasoning is not detailed in the provided materials.

Patel and others v Spender and others [2024]

This case concerned properties on a residential estate in Docklands developed in the late 1990s that were subject to a restrictive covenant preventing substantial alterations to external appearances.

Norton Rose Fulbright notes:

"An application to modify a restrictive covenant was also unsuccessful in Patel and others v Spender and others [2024] UKUT 62 (LC). In this case, the properties on a residential estate in Docklands developed in the late 1990s were subject to a restrictive covenant not to add or alter the property in any way so as to affect substantially its external appearance."

While not specifically about business use, this case demonstrates the Upper Tribunal's continued conservative approach to modifying restrictive covenants, particularly in planned residential developments.

Literacy Capital Plc v Webb [2024]

Although this case concerns employment rather than property covenants, it provides insight into how courts assess the reasonableness of business-related restrictions.

Gateley summarizes:

"In Literacy Capital Plc v Webb [2024] EWHC 2026 the High Court considered a restrictive covenant in an investment agreement and found that it was unenforceable as it was too widely drafted and lasted too long. The covenant applied UK-wide but the investor had failed to provide any evidence of the geographical scope of the company's contracts beyond Suffolk and Norfolk."

The court found the covenant unenforceable because:

"The scope of the covenant went far beyond the company's core services provided when the founder worked for it and included areas such as management consultancy, supplying administrative staff to HM Courts and mental health services – fields in which the founder had no expertise. The investor had failed to justify the 10-year time period which far exceeded the duration allowed in ex-employee or sale of business cases."

This case highlights the importance of reasonable scope and duration in restrictive covenants, principles that apply across different types of covenants.

Strategies for Defending Restrictive Covenants

Assessing Covenant Enforceability

When defending restrictive covenants, the first step is to assess their enforceability. Harper James advises:

"The enforceability of a restrictive covenant hinges on its reasonableness regarding the interests it seeks to protect and the restrictions it imposes. In England and Wales, courts are generally reluctant to enforce covenants that they perceive as unfairly restricting an individual's ability to work. Therefore, businesses must ensure that any restrictive covenant they wish to enforce is carefully drafted to balance the need to protect the business without being overly restrictive."

Key factors to consider include:

• The clarity and specificity of the covenant's wording
• The legitimate interests being protected
• The covenant's scope and duration
• Changes in the character of the neighborhood since the covenant was created

Gathering Evidence of Breach

When a breach is suspected, gathering comprehensive evidence is crucial. Harper James suggests:

"Steps you can take (dependant on the exact nature of your situation) to establish a breach can include: Checking company emails, files and mobile phone records for any evidence of the breach suspected. This might include conversations with existing members of the workforce or customers that are evidenced by way of these communications, emails forwarded on to third parties or personal email addresses."

For property-related covenants, evidence might include:

• Photographic evidence of unauthorized construction or alterations
• Business registration documents showing commercial use
• Advertising materials indicating business operations
• Witness statements from neighbors
• Planning applications or permissions

Opposing Section 84 Applications

When opposing an application to modify or discharge a restrictive covenant under Section 84, several strategies can be effective:

1. Demonstrate substantial practical benefit: Provide evidence that the covenant secures practical benefits of substantial value, such as preserving neighborhood character, privacy, or property values

2. Highlight applicant conduct: Following Alexander Devine, emphasize any deliberate breaches by the applicant

3. Challenge obsolescence claims: If the applicant argues the covenant is obsolete, provide evidence that the character of the property or neighborhood remains consistent with the covenant's purpose

4. Present compensation inadequacy: Demonstrate that financial compensation would be inadequate to offset the loss of the covenant's benefits

As Legal Foundations notes:

"One effective strategy is to demonstrate that the covenant is either too broad in scope or extends for an unreasonable duration, rendering it unenforceable. Presenting evidence that supports the claim that the restrictions are unnecessary for the protection of legitimate business interests can also be pivotal."

Leveraging Precedent

Recent cases provide valuable precedent for defending restrictive covenants:

1. Alexander Devine principle: Emphasize that deliberate breaches should weigh against modification

2. Conduct-focused approach: Following Fosse Urban Projects, highlight any opportunistic or cynical behavior by the applicant

3. Substantial value of residential character: Use cases like Coven Care Homes to argue for the substantial value of maintaining residential character

Wilberforce Chambers notes the strategic importance of restrictive covenants in development disputes:

"The powers of the UT are important to developers because they are often key to unlocking developments of land burdened by restrictive covenants. Restrictive covenants are frequently seized on by objectors to the development who seek to use the covenants to prevent it. Invariably this represents 'round two' of a fight which began at the planning stage, when the developer has successfully faced down the 'nimbys' and has, despite their opposition, managed to secure a valuable planning permission."

This observation highlights the dual-track nature of many development disputes, where restrictive covenants provide a second line of defense after planning objections.

Emerging Trends and Future Developments

Increased Scrutiny of Developer Conduct

Following Alexander Devine and Fosse Urban Projects, there is a clear trend toward increased scrutiny of developer conduct in restrictive covenant cases. The Upper Tribunal and higher courts are taking a dim view of deliberate breaches motivated by commercial gain.

Norton Rose Fulbright observes:

"There has been a spate of recent cases relating to applications to the Upper Tribunal (UT) for the modification or discharge of restrictive covenants preventing building and development. Section 84(1) of the Law of Property Act 1925 gives the UT power to discharge or modify any restriction on the use of freehold land on being satisfied that one or more statutory grounds are met by the applicant."

This increased activity suggests growing awareness of the challenges and opportunities presented by restrictive covenants in property development.

Care Home Use as a Special Case

Recent cases like Muskwe & Another v Cochrane and Coven Care Homes suggest that care home use may be receiving special consideration in restrictive covenant cases. The social benefit of care facilities appears to be a factor in Tribunal decisions, though not determinative.

Potential Legislative Changes

While not directly addressing property covenants, there are signs of potential legislative changes in the broader area of restrictive covenants. Mayer Brown notes regarding employment covenants:

"In 2023, the UK government announced proposals to limit the duration of non-compete restrictive covenants in employment contracts to three months. There is no current timeframe given as to when this change could become law. This cap would not apply to non-solicitation restrictive covenants or to non-compete provisions outside of employment contracts."

This suggests a general trend toward scrutinizing restrictive covenants across different legal contexts, which could eventually influence property covenant jurisprudence.

Practical Guidance for Covenant Defense

Pre-emptive Measures

For those seeking to defend restrictive covenants effectively, several pre-emptive measures can strengthen their position:

1. Regular monitoring: Implement systematic monitoring of covenant-protected properties to identify breaches early

2. Clear documentation: Maintain comprehensive records of the covenant's history, purpose, and benefits

3. Community engagement: Foster relationships with other covenant beneficiaries to present a united front against modifications

4. Expert valuation: Obtain professional valuations demonstrating the covenant's impact on property values

Responding to Modification Applications

When facing a Section 84 application, consider these strategic approaches:

1. Two-stage analysis: Following Alexander Devine, distinguish between the jurisdictional stage (whether grounds exist) and the discretionary stage (whether modification should be granted)

2. Focus on conduct: Emphasize any deliberate breaches by the applicant

3. Demonstrate substantial value: Provide concrete evidence of the covenant's practical benefits

4. Challenge public interest claims: Where applicants cite public interest (e.g., housing needs), present counterbalancing public interests in covenant enforcement

Forsters explains the application process:

"When faced with a restriction on freehold and sometimes leasehold land, there are certain circumstances in which the owner of the land may seek to have a restrictive covenant modified or removed. The process of modification or removal involves making an application to the The Upper Tribunal (Lands Chamber). The applicant must satisfy one of the statutory grounds on which a restrictive covenant may be discharged or modified."

Understanding this process is essential for effectively opposing such applications.

Settlement Considerations

In some cases, negotiated settlements may be preferable to litigation. Consider:

1. Modified restrictions: Agreeing to more limited modifications than requested

2. Compensation arrangements: Negotiating adequate compensation for covenant relaxation

3. Alternative solutions: Exploring compromise solutions that address the applicant's needs while preserving the covenant's core benefits

4. Conditional consent: Granting consent subject to specific conditions that protect key interests

Conclusion

The landscape of restrictive covenant cases in the UK, particularly those involving business use restrictions, continues to evolve. Recent landmark cases such as Alexander Devine have strengthened the position of covenant beneficiaries by emphasizing the importance of applicant conduct and the substantial value of covenant benefits.

For professionals defending restrictive covenants, this evolving jurisprudence offers both challenges and opportunities. The Upper Tribunal's approach has become more nuanced, with increased attention to deliberate breaches and a careful balancing of private property rights against public interest considerations.

Key takeaways for covenant defenders include:

1. The critical importance of applicant conduct in the Tribunal's exercise of discretion
2. The potential for successfully defending covenants by demonstrating their substantial practical benefits
3. The need for strategic approaches to opposing Section 84 applications
4. The value of pre-emptive monitoring and documentation

As Legal Foundations aptly summarizes:

"Defending against restrictive covenant claims is a nuanced and complex process that requires a deep understanding of legal principles and strategic thinking. By ensuring their restrictive covenants are reasonable and enforceable, assessing claims carefully, and developing strong legal defences, businesses in England and Wales can protect their interests effectively."

With careful attention to legal developments, strategic preparation, and effective advocacy, those defending restrictive covenants can continue to protect the valuable property rights these covenants represent.