Uneasy lies the land that wears a covenant

In this article Oskar Musial takes a look at why prospective buyers should be on alert when discovering the existence of restrictive covenants on title and what can be done about them.

Let us set the scene: many decades ago, Y, an owner of a large rural estate sold a portion of their land to X. The land was divided into two plots, each owned by separate parties (Y and X). Over many years, those two plots were sold on again, sometimes further divided up and sold to different buyers. What was once a single estate is now ten or more separate plots.

Buyer Z comes along and decides one of those plots would be an excellent spot for a brand new office development. Perhaps the plot already benefits from planning permission granted by the local authority. However, the conveyance from Y to X contains a clause to the effect that “no building may be erected on the plot save for a single storey private dwelling house”.

What Z has stumbled on is a restrictive covenant which appears to jeopardise their plans.The discovery of a restrictive covenant may however be a surmountable obstacle. Let’s have a look at restrictive covenants and what can be done about them.

What is a restrictive covenant?

A restrictive covenant is an agreement by one landowner that it will restrict the use of its land in some way for the benefit of another landowner. The key feature of a restrictive covenant – and the reason why it can create problems – is that it runs with the land.

As such, successors in title will be bound by a restrictive covenant agreed by predecessors and, conversely, will continue to be entitled to the benefit of it. It can therefore be many years (even centuries) before a restrictive covenant becomes a problem, at which point the respective landowners may have changed multiple times over and the original context and meaning of the restrictive covenant may have been warped or lost.

A restrictive covenant can prevent many otherwise valid uses of land. Typical examples include complete restrictions against building, restrictions against building above a certain height, restrictions on types of land use, and so on. 

Risk

Going against the terms of a restrictive covenant entitles the landowner with the benefit of it to seek damages and/or an injunction preventing breach. This is a high risk for the landowner with the burden, who is left with these choices:

• do not breach the covenant (changing their plans);
• breach the covenant and hope for the best (that the benefitting party is unaware or does not care);
• reach an agreement with the benefitting party (likely to be for a release fee); or
• apply to the Upper Tribunal (Lands Chamber) for variation or discharge of the covenant (see below).

Another practical solution is to insure against the risk of enforcement action, although of course the insurer will likely want a legal opinion first on the prospects of the various other outcomes. Insurers may be hesitant to provide a policy where a potential beneficiary has already been alerted to the existence of the covenant. It is important therefore that a buyer considers the insurance option before approaching the beneficiaries.

When does a covenant become a problem?

When a covenant is found, it should be scrutinised to see whether it can actually create problems and carry risks. There are three main questions which a buyer should consider in turn.

1. Does it apply on the facts?

In many cases, the answer to this question will be self-evident as, for example, in our introductory example in which buyer Z clearly cannot do what it intends to do on the land. However, it is not uncommon for the covenant to be ambiguous or for its meaning to be uncertain. This is especially true of covenants created a long time ago as the language and terminology used may have since become outdated.

2. Does it burden this land?

In respect of registered land, the burden of the restrictive covenant has to be noted on the charges register of the burdened land. When a purchaser comes to review a register of title, it will be able to see whether any restrictive covenants burden the land. In respect of unregistered land, the burden has to be registered as a class D(ii) land charge against the owner of the burdened land. In the case of covenants created before 1926, the burden of these may be discovered from abstracts, epitomes of title, and other title documents. It will also be necessary to establish whether actual, constructive, or imputed knowledge of the burden can be established.

3. Does someone have the benefit?

There has to be some land, capable of identification, which benefits from the covenant. Unlike the burden of a covenant, the benefit of it is not required to be (and therefore usually is not) registered. The inability to identify the benefitting land does not of course mean that it does not exist.

Instead, the buyer of either registered or unregistered land is therefore left to investigatory methods of trying to narrow down the beneficiary (or, as the case may be, multiple beneficiaries). The first port of call is to review the original deed which created the covenant but a copy may be difficult to locate. If so, a buyer can review title registers of adjoining and nearby properties with the view to extrapolating the identity of the beneficiaries. Replies to pre-contract enquiries can also be instructive. It is, of course, entirely possible that the buyer is left none the wiser after these investigations.

Release or variation of a covenant

If the covenant does cause a problem, the most pro-active approach involves making an application to the UT for the release or variation of the covenant. This can be both a lengthy and costly approach, hence it is not usually the first course of action although it does produce certainty.

The applicant needs to satisfy one of the three grounds specified in section 84(1) of the Law of Property Act 1925. These are:

• the covenant is obsolete (for instance, because the neighbourhood of the burdened land has changed so substantially since the creation of the covenant that its original purpose simply cannot be served);
• the covenant impedes some reasonable use of the burdened property and in so impeding it either does not secure any practical benefit of substantial value or advantage to the beneficiary or is contrary to the public interest, and money would be an adequate compensation for the loss or disadvantage (if any) suffered by the beneficiary;
• the release or variation will not cause any injury to the beneficiary of the covenant.

Such applications can of course be made more complicated and costly if a beneficiary of the covenant objects to it. Both parties will then end up submitting evidence to either prove or disprove whether the grounds in section 84(1) are satisfied. If the UT approves the application, it can still order the applicant to pay compensation to the beneficiary of the covenant if this is deemed appropriate.

Take-home message

Buyers should most certainly be alert to records of any restrictive covenants in the course of the conveyancing process. A restrictive covenant can be a genuine impediment to the use or development of land and should be addressed before a potential breach is commenced.

A shrewd buyer should adopt the following process to remove or minimise the risk created by a covenant:

1. Make appropriate investigations into the existence of any restrictive covenants on the title
2. Once a covenant is found, consider (i) does it apply to the facts? (ii) does it burden the land? (iii) does someone have the benefit of it?
3. Is the risk of the covenant substantial enough to warrant risk management steps?
4. Would insurance be sufficient to minimise the risk of the covenant?
5. Is the risk so substantial that pro-active steps are required by reaching an agreement with the benefitting party to discharge the covenant or by applying to the UT to vary or discharge the covenant?

Top 5 Restrictive Covenant Cases:

5. Bath Rugby Ltd v Greenwood & Ors v Bath Recreation Ltd [2021] EWCA Civ 1927: a covenant not to do anything which may become a nuisance or annoyance “to the neighbourhood” was ruled not to benefit adjoining land as it was too imprecise and conceptually uncertain to identify the adjoining land.

4. Re Martin’s Application [1988] 5 WLUK 102: an applicant failed in its application to discharge or modify a covenant on the basis that they’d obtained outline planning permission. Planning permissions do not override restrictive covenants.

3. Federated Homes Ltd v Mill Lodge Properties Ltd [1980] 1 WLR 594: a plot which did not carry a chain of express assignments of the benefit of a covenant was nonetheless said to have the benefit of it by way of annexation once the extent of the benefitting land in the original conveyance was properly construed.

2. Alexander Devine Children’s Cancer Trust v Housing Solutions Ltd [2020] UKSC 45: a case involving a developer’s “cynical breach” of a restrictive covenant in full knowledge of its existence and the Supreme Court’s subsequent refusal of the developer’s application to modify the breached covenant.

1. Tulk v Moxhay (1848) 41 ER 1143: a seminal case involving London’s Leicester Square which established that the burden of restrictive covenants attaches to land - a fundamental principle of the law on restrictive covenants.

This article first appeared in the Estate Gazette (EG Number 2303, 21 January 2023).