Author: Nick Wood
Developers often identify land that looks good for development on the face of it, only to discover that there are restrictive covenants preventing the land from being developed or used in the way they would like. This can be incredibly frustrating; especially where the restrictive covenants are historic and the interests they seek to protect appear to be of limited modern relevance.
In this article I will explore what a developer can do when confronted by such a restrictive covenant. I have used “beneficiary” to describe the party with the benefit of the restrictive covenant and “you” to describe the developer.
That a restrictive covenant exists does not mean that it is enforceable by the beneficiary. To be enforceable a restrictive covenant must firstly “touch and concern” or somehow benefit other land, and the benefit must also have been intended to run with that benefitting land. The covenant cannot merely be a covenant of personal benefit to the original contracting party. It also cannot be a covenant securing a money payment obligation. Secondly, the beneficiary must actually own the benefitting land. Thirdly, the restrictive covenant must be clear. If it is ambiguous because the wording or benefitting land is unclear, or if future events were not anticipated when the covenant was originally drafted (such as a company being dissolved), then it can be an unenforceable restrictive covenant. Fourthly, if the benefitting land has ever been in common ownership with the burdened land for any period of time since the covenant was imposed then the restrictive covenant will not be enforceable. Fifthly and finally, the benefit of the restrictive covenant must pass to the beneficiary by “annexation”, “assignment” or “scheme of development”.
In connection with this fifth enforceability requirement, post-1926 covenants where the land is identifiable will generally pass forward by annexation because such covenants are deemed to be made at law with the contracting party’s successor owners and occupiers. If this statutory annexation does not assist the beneficiary, then the contract giving rise to the restrictive covenant must expressly benefit successors for the beneficiary to be able to enforce the restrictive covenant. Otherwise the beneficiary will have to rely on assignment or schemes of development. To be able to rely on assignment the beneficiary must have expressly been assigned the covenant together with at least part of the benefitting land as part of the transaction. If the beneficiary does not have the benefit of a restrictive covenant because of annexation or assignment then to enforce the beneficiary must prove a scheme of development. This is unlikely to be the case except for very particular circumstances where a contracting owner must have intended to sell a particular area of land in plots.
Property lawyers and developers were reminded that these enforceability requirements are not merely academic in a recent case, Doberman v Watson HC-2017-000370. In that decision it was held that a developer could build an additional residential property on his plot of land because the restrictive covenant which would have prohibited him from doing so was not enforceable. The benefit of the restrictive covenant had not passed to the purported beneficiaries by annexation (the benefitting land was not clearly defined), assignment (no express assignment had taken place) or scheme of development (no scheme of development existed).
Section 84 of the Law of Property Act 1925 entitles you to apply to the Lands Chamber of the Upper Tribunal for the waiver, discharge or modification of restrictive covenants. If the restrictive covenant is unenforceable for any of the reasons given above, for good order you should make such an application to discharge the restrictive covenant in question. Further, if the covenant is obsolete because of changes in the character of the burdened land or neighbourhood or for any other material reason, such an application would also be sensible. However, where it is possible that the restrictive covenant will be enforceable such an application would be ill-advised because it can be a time-consuming and expensive process with no guarantee of success. If unsuccessful, it would also inhibit your ability to insure against the risk of the restrictive covenant being enforced.
The beneficiary may agree to release the land from the burden of the restrictive covenant. This can be an easier means of dealing with restrictive covenants, but it is an approach that is rarely used in practice. This is because the beneficiary may take the opportunity to request a significant payment or may refuse to cooperate, and once you have tipped them off you will likely be unable to insure your proposed breach. Further, it can be difficult to be certain you have the consent of all beneficiaries to the release if the benefitting land is not precisely defined.
If a restrictive covenant may be enforceable, you may wish to get planning permission for your proposed development before you do anything else. Anybody can apply for planning permission to develop land. This means you can make a planning application before you acquire the land. This will give the beneficiary time to object to the proposed development so you can discern whether any objections are likely at an early stage. An added benefit, should the beneficiary fail to object, is that your chances of getting the restrictive covenants insured, released or modified will improve.
Because of the risks associated with applying to the Lands Chamber and with seeking consent or release from the beneficiary, the most common solution to dealing with a troublesome restrictive covenant is to insure against the risk of the restrictive covenant being enforced. Insurers will almost certainly require you to have planning permission for your development before they will insure this risk for you. If they do not require planning permission, the premium is likely to be much higher. The premium should be a one-off payment for an indefinite period and for the benefit of future owners, occupiers and mortgagees. The amount the insurer will require for their premium will depend on a number of factors, predominantly the level of cover you are seeking and the likelihood of the risk materialising. If the beneficiary cannot be identified and the restrictive covenant is historic, this will probably be a low risk. If, however, the beneficiary can be identified and the covenants are recent then it may not simply mean an increased premium; it may also mean the covenant cannot be insured.
The existence of a restrictive covenant on your development land is not necessarily the end of your development dreams. First, it’s worth exploring whether the restrictive covenant is actually enforceable. If it is, and the risk is one that looks like it might be insurable, you should consider obtaining planning permission and insurance. It would be worth engaging solicitors at an early stage to seek resolutions to these issues so as to avoid any nasty surprises when time and money have already been invested in the project.
Nick Wood, Associate, Fladgate LLP (email@example.com)