Title covenants – are they binding on future owners?


Author: Roland Brandman


Roland Brandman, Senior Associate, Fladgate LLP (rbrandman@fladgate.com)


 

Countless properties up and down the land, probably the majority, either have the benefit, or are subject to the burden, of a title covenant.

A title covenant is basically a promise made in a deed to do or not to do something with a piece of land. Covenants can relate to all sorts of things. Just a few examples: a covenant not to build in a particular area or above a certain height (e.g. to protect a view); a covenant not to use the property for certain purposes (e.g. to reduce business competition nearby or just to prevent nuisance); a covenant to maintain a shared area (e.g. keeping landscaped areas looking good or an access way usable).

The question

One question that arises when looking at covenants (for example, as part of the due diligence investigations on a property for a proposed purchase) is whether they are enforceable against successors in title.

Take a scenario:

  • N1 Ltd owned a large vacant site and in 2010 decided to develop the north half of the site (North site), but sell off the south half (South site) to another developer, S1 Ltd.
  • N1 wanted to make sure that S1 would not build any office blocks too near the boundary of the two sites. Therefore S1 (at N1’s insistence) gave a covenant in the transfer deed “not to build any buildings or erect any other structures” within a 20 metre wide tranche on the South side of the boundary (South No-Build Covenant).
  • S1 as purchaser of course wanted to make sure it had sufficient access rights to get to the South site. The only highway ran along the north boundary of the North site, so N1 granted to S1 in the transfer deed a right of way over an existing road that ran all the way from the highway into the South site. To ensure that the part of the road in the North site was kept in usable condition, N1 covenanted “to keep the road in a good state of repair” (North Repair Covenant).

All sounds fine. Post-development of both sites, N1 has sold the North site to N2 Ltd, and S1 has sold the South site to S2 Ltd.

Is S2 bound by the South No-Build Covenant?

Is N2 bound by North Repair Covenant?

Common sense would presumably say “yes” in both cases. Surely N1 and S1 must have understood that the covenants had a perpetual importance for the relevant parcels of land, and could not be regarded as merely personal obligations on the original covenantors, and the courts would back this up?!

However, English law did not take that approach. Instead, it says that the land itself (and therefore a covenantor’s purchaser/successors in title) are bound only if the covenant is “negative in substance”, not where it is “positive in substance”. Basically a covenant that is negative in substance can be complied with by sitting back and doing nothing. In contract, positive in substance means that the owner with the burden of the covenant would have to take positive action (e.g. have to pay some money to do something) to comply with the covenant,

In our situation, this means that S2 will be bound by the South No-Build Covenant. Not building something requires no positive action in and of itself. What if S1 had tried to be clever and phrased the covenant so that it looked positive, e.g. “to ensure that the area is kept open and without any buildings or other structures”? A court will see through this, looking at the substance of what is agreed, not the mere appearance of the wording; because the actual effect is still that no positive action is required, the covenant will be treated as negative.

Here we seem to get the “right” result.

The problem

However, the position with the North Repair Covenant is not so sensible. Because the North Repair Covenant requires positive action – N1 has either to resurface the road every so often or pay someone else to do so – N2 will not be bound by the North Repair Covenant. S2 would just have a claim against N1 (even for N2’s non-compliance) and that is no good if N1 has been liquidated or has no funds to meet a claim.

The solution

Solicitors have had to try and come up with solutions to get around this illogical result. As stated above, a court will look at the substance of what is agreed (not the mere appearance of the wording) so trying to make the covenant wording look negative on its face – for example, “not to let the roadway fall into disrepair” – will not work.

The most common solution would be for N1 to covenant in the transfer deed to S1 that N1 (and owners of the North site in future) will not sell or grant a long lease of the North site unless the buyer (N2) itself gives a new stand-alone covenant to perform the North Repair Covenant. To ensure N1 (and N2 and other owners of the North site in future) actually comply with this, S1 would want to get a restriction on the registered title to the North site (i.e. a direction to HM Land Registry that they simply cannot register a sale of the North site without evidence/confirmation that the new covenant has been given).

The process is cumbersome. The suggested mechanism can cause a heated debate between a seller and buyer negotiating a sale because Land Registry restrictions are heavy duty instruments – extreme caution is needed because without strict compliance a property sale cannot be registered.  The wording of a restriction can make getting a sale registered more onerous, and bad wording could make a property unsaleable.

In practice, we often see that a restriction has not been entered against the burdened title, and then the buyer which should have given a stand-alone covenant has not done so. In our situation that would mean that N2 has bought the North site but is not bound by the North Repair Covenant. That is a bad situation, but not necessarily a disaster. The general law will give the South site a bit of help in this situation; if the roadway has fallen into disrepair so that it cannot be used, it will be implied that S2 can do repair work itself. However, S2 would not be able to recover any of the cost from N2 (its only potential claim being against N1 as the original covenantor).

The future

There has been discussion over many years about Parliament changing the law to simply this situation and make positive covenants, like negative covenants, automatically binding on the original party’s successors. However, for so long as there are no doubt more urgent matters to be put in Westminster’s legislative queue, it looks as though we are going to be left waiting.

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