Eyes fully open

The case of Millgate Developments Limited and another v Smith and another [2016] UKUT 515 has gone some way to clarifying the court’s approach to the discharge or modification of restrictive covenants when attempting to balance public interest with conflicting private rights over development land.

Developers frequently wish to obtain modification to, or the release of, restrictive covenants to meet the high demand for new housing. In this case, the adjoining owner was a children’s hospice which benefited from a restrictive covenant preventing the development land from being used for any purpose other than a car park. The developer applied to the Upper Tribunal for discharge of the restrictive covenant so that 13 social housing units (which had already been built by the developer but which were currently unoccupied due to the hospice’s objection) could be utilised.

The hospice argued that the restrictive covenant retained a practical benefit in the form of the protection of privacy, noise, and light. The developer argued that retaining the restrictive covenant was contrary to public interest due to the need for more social housing.

The tribunal found that the restrictive covenant should be modified to permit the occupation and use of the 13 social housing units. It highlighted the clear public interest in providing new social housing and the great waste of resources if the units were not inhabited. The tribunal did, however, award compensation of £150,000 to the hospice due to the loss of the restrictive covenant.

It is important to note the significance of the fact that the development was social housing as opposed to a commercial development, and also the adequacy of damages to compensate the hospice. The tribunal suggested that the money could be used to offset the loss of privacy and seclusion by, for example, planting hedges along the boundary. The tribunal also looked favourably upon the developer’s previous conduct as it had offered £150,000 in damages to the hospice in return for its agreement to the release of the covenant. The tribunal did qualify its decision with a warning against developers not to simply disregard restrictive covenants when developing land.

Old or new?

In Grimes v The Trustees of the Essex Farmers and Union Hunt [2017] EWCA Civ 361, the Court of Appeal considered whether a notice to quit, which was served to the tenant’s previous address, was validly served.

In a handwritten note delivered to the landlord, the tenant notified a change of address. However, the landlord subsequently served notice to quit on the tenant at his address according to the tenancy agreement. The tenant claimed that his tenancy had not been validly terminated as the notice had been served to his old address and he claimed damages due to wrongful dispossession of the premises.

The judge at first instance took a literal interpretation of the lease, which stated: “Either party may serve any notice… on the other at the address given in the particulars or such other address as has previously been notified in writing.” The judge therefore found for the landlord on the basis that the notice had been served to one of the addresses stated in the clause.

The Court of Appeal overturned this decision. It held the relevant wording had to be considered in the context of the whole agreement and it was clear that the parties would have intended the language to be substitutive, with the new address superseding the old, rather than as providing two possible alternatives. The court highlighted the redundant nature of the tenant notifying the landlord of a new address if the landlord could simply disregard it and serve notices on the previous address.

The court therefore held that the notice to quit was invalid and the tenant was awarded damages of £31,500 plus interest and costs. Parties are perhaps best advised to serve notice on all available addresses in order to avoid issues such as these.

Leases and ground rents

Paying a nominal ground rent when you have a lease of a flat has been common practice for as long as the concept of a flat has been around. Acquiring a lease of a house with the subsequent burden of ground rent has been a more recent concept.

However, the government has announced a crackdown on leases on houses that can force purchasers to pay exorbitant ground rents. Ministers have unveiled plans to ban builders from selling further leasehold houses in a bid to protect buyers from extortionate future costs, which in certain cases make the property unsellable.

As a recap, ground rents are the charges that a leaseholder has to pay the company or individual that owns the freehold of a property. While with flats there is a logic to it, given that there have to be communal parts and a vehicle for how they are run and managed, developers have come under considerable criticism for adopting the same process with houses.

The immediate backlash for developers is going to be in relation to compensation claims. There are examples of purchasers being saddled with ground rents that are doubling every ten years: one particular example is a house built with a £295 annual ground rent, which will be £9,440 per annum in 50 years’ time.

Developers are setting aside millions for compensation payments. It is also predicted that conveyancing solicitors will face claims where they have not made it absolutely clear to purchasers the onerous burden they were being placed under.

The crackdown is going to have an impact on developers. The sale of freehold is a wide revenue source for developers. For example, McCarthy and Stone sells the vast majority of its homes on a leasehold basis. Last year it made 4 per cent of its revenue by selling off freeholds to investors. The big developers are making millions each year from the sale of ground rent assets.

Moving forward, developers will need to be careful about the ground rent provisions in the leases of flats. Clearly ground rents set at a sensible notional level increasing in line with the retail price index are not going to come under criticism. The freehold will still be attractive in the outside market as a guaranteed revenue provider. It should be noted that failing to pay ground rent provides a right for the freeholder to forfeit a lease and potentially have an extremely lucrative windfall.

When it comes to houses, there can be no real justification for providing for them to be subject to leases. It may remain in place as a way to keep purchase prices lower but hopefully with the recent publicity, buyers will proceed with their eyes fully open.

Mike Lewis is head of the property dispute resolution team at SA Law