Dealing with Restrictive Covenants

1. Introduction

A land owner who transfers some land, either by disposing of the freehold or by granting a lease, can by stipulation impose restrictions against the land’s use or development – which may mean accepting a lower price for that transfer, of course.

These notes cover typical questions and their answers in connection with restrictive covenants only, i.e. ones that impose a negative duty on the new and successive owners of the land. Thus, they do not cover positive covenants, such as for the payment of money or the doing of works, or easements.

These notes are written by James Brenan as general guidance only and do not pretend to be a substitute for proper advice on the specific facts of any situation. No responsibility is accepted for any decision taken in reliance on what is said here. You should only rely on advice from your retained solicitors.

2. Basic Matters: Examples, Terminology, Registration and Legality

Restrictive covenants are in effect prohibitions which, to be binding on successors in title to the covenanting party (known as “the covenantor”) and his successors, must, among other requirements, be for the benefit of some adjacent land and not be purely personal. Here are typical matters that they can prohibit:

• adding to or enlarging a building;
• altering a building’s architectural appearance;
• subdividing a parcel of land;
• excavating the ground;
• carrying out any mining;
• building at all on the land, such as a garden square;
• erecting any satellite dish, aerial or mast;
• change in manner of use of the burdened property;
• trading outside certain hours.

The person who imposes a covenant and in due course his/her successor in title is known as the covenant owner or the covenantee. Establishing who has the benefit of a particular covenant is one of the first tasks of any adviser. In some situations a multitude of local residents can be entitled to enforce the covenant.

The benefit of a restrictive covenant provided that it is not purely personal to the original covenantee, i.e. that it touches and concerns the land, can be passed down to future owners of the benefiting land by three means. These are (i) express annexation by virtue of the terms of the document creating the covenant or since 1926 by section 78 of the Law of Property Act 1925, (ii) assignment, and (iii) the imposition of a building scheme or scheme of development. The exact permutation of facts in any case needs careful consideration, for example whether we are concerned with the original parties or one of them and a successor or with two successors. The question of necessary benefit to the land of the covenant owner always needs to be considered.

Restrictive covenants created since 1926 must be registered at the Land Registry for registered land or at the Land Charges Department for unregistered land in order to bind future owners of the burdened land. Those created prior to 1926 depend for their validity on rules of notice and whether, in particular, notice of the covenant appears in the abstract or epitome of title of the burdened property.

If a restriction is against competition between traders, such as a tie to restrict products being sold except ones from an approved supplier, the covenant owner will be subject to possible challenge and penalties under competition laws, which is an area not covered here.

Any covenant that attempts to impose discrimination contrary to laws such in areas of sex, race, age or disability discrimination laws is illegal.

3. The Interpretation of Vague or Uncertain Wording

Anyone affected by a covenant should first consider its exact words and establish what it means, and particularly with regard to any proposed development.

Vague words – such as ‘a’ – or uncertain meanings are always for a Court to interpret ultimately, and not for a Tribunal (see below), where there is disagreement. Sub-section 84(2) of the Law of Property Act 1925 empowers the Court: (a) to declare whether or not in any particular case freehold land is, or would in any given event be, affected by such a restriction, and (b) to declare what, upon the true construction of a document is the nature and extent of the restriction it imposes and whether the restriction is, or would in any given event be, enforceable and if so by whom.

To ascertain meaning a Court will consider the document containing the covenant as a whole and its factual context from the time of its creation. Someone’s contention about what they actually intended by using the words they did is not admissible in evidence as an aid to interpretation. Subsequent dealings between the parties are not admissible in evidence regarding the meaning of the covenant although they can be highly relevant to questions around waiver, delay and ‘damages in lieu of injunction’.

Where an outdated term is used, such as “a victualler”, it is necessary to consider its dictionary definition from the time when the covenant was granted.

4. Absolute and Qualified Prohibitions

If a total ban on some activity or type of change is imposed the covenant is known as “absolute” and the covenant owner usually has no implied duty even to consider any proposal for relaxation or discharge. There are very limited exceptions to this rule in the case of covenants against alterations to business premises – which are explained in James Brenan’s notes on “Improvements and Additions to Business Premises”.

If the covenant controls an activity by making it subject to prior approval from the covenant owner then the covenant is known as “qualified” and the question arises as to the limits of the covenant owner’s discretion in exercising that control.

The owner of a qualified covenant has a wide leeway for decision but must not act in a way that is beyond all bounds of reasonableness. That owner can only refuse permission to such a change for the protection of its own neighbouring property or business interests. That owner cannot simply refuse in order to extract money. Accordingly, a refusal will need to be supported by a statement of reasons if it is challenged.

There is no liability in damages for an unreasonable withholding of consent in one of these situations. The covenantor’s remedy is simply to sue for a declaration that consent has unreasonably been denied – or to wait to be sued for breach and then counterclaim for such a declaration (which would be risky).

5. Restrictive Covenants are poor devices for holding overage rights.

Overage refers to the retention of the right to a share of the later realised value which comes about when land is developed, or when its ability to be developed is confirmed by some event – for overage is always a creature of agreement and so one has to look at the agreement’s definition of the triggering event.

A restrictive covenant can have the effect of securing overage, but it is not an ideal vehicle for this purpose and can easily fail to deliver if this is its intended purpose. Without going into all the reasoning in detail, here is a short list of reasons why restrictive covenants often fail to secure overage even though this may have been the covenantee’s wish:

• It might be discharged or varied under section 84 of the Law of Property Act 1925 for no or for consideration which may well not have any relationship with the land’s enhanced development value.
• If the covenant owner tries to negotiate for releasing the covenant in return for a payment, that may be used in evidence as a reason for the Tribunal to relax the covenant or for the court to deny the owner an injunction as remedy for breach.
• The covenant owner needs – unless it is a local authority which relies on section 609 of the Housing Act 1985 – to retain land close to the burdened land which benefits from the restriction and just owning a ransom strip of land for this purpose may well not be enough.

Thus, as a general proposition and summary of the law, such covenants are properly for protecting amenity and not overage.

6. Remedies for Breach: Injunction Orders

Someone who owns land which is burdened by such a covenant and who is about to seek planning permission for some development which would be, or arguably would be, in breach should write to the person who is or would be the covenant owner (if their identity is known or able to be found) to reassure them that no development work will start until questions under the covenant have been resolved.

A covenant owner should voice objection by a letter upon learning of any breach or real threat to commit a breach. Otherwise, that owner risks being found to have waived its right to claim an injunction. Many years of acquiescence to an obvious breach can also give rise to a waiver of the covenant entirely. In the context of leases the Courts have drawn this line in various cases between 15 and 20 years.

An injunction claim is stronger if it is accompanied by a claim for an interim injunction to preserve the status quo pending the eventual trial, but this can be a difficult issue and Counsel’s opinion will be necessary.

An injunction is a discretionary remedy from the Court which means, among other matters, that the claimant party must “come with clean hands”: that party must not have done anything to mislead the defendant or otherwise acted unreasonably. Thus, any injunction claim should be pursued within a suitably reasonable time of the damage complained of, or the defendant can rely on the equitable defence of “laches” (which means unconscionable delay). In high value situations, that time limit can be measured in weeks or even days.

The criteria for the granting of an injunction order are too complex to summarise here. They have slightly been altered with the law now being more amenable to the possibility of making a money award instead, by the Supreme Court’s decision in Coventry v Lawrence [2014] UKSC 13.

A defendant’s undertaking to the Court given in a particular form and under appropriate warning is binding as much as an injunction. Both an injunction order and an undertaking to the Court are ultimately enforceable by a fine and/or by imprisonment for contempt of Court.

Injunction Orders are enforced through the same Court using the criminal law burden of proof, of “beyond a reasonable doubt”, due to the threat of imprisonment of a fine. This procedure is known as “committal”.

7. Remedies for Breach: Damages and Costs

As well as or instead of claiming an injunction, the covenant owner can claim damages.

Damages are usually awarded for the breach until it is remedied.

If the claimant party’s position is not as strong as it might be, for example due to delay or the loss being only slight or it being measurable in money, the Court may also award damages instead of an injunction.

Damages for such infringement of property rights can be claimed and calculated on the equitable basis, i.e. with regard to the profits made. These are known as “disgorgement damages”. Accordingly, the defendant party will have to disclose all relevant financial information to show the net profit from the breach, and expert evidence may be called in order to assist the Court to find this and to analyse it.

Alternatively, damages can be claimed and indeed limited in the amount for which the covenant owner would have sold the release or variation needed to the wrongdoer. This will give rise to legal argument over the issue of what is a due proportion of the profits attributable to the breach relative to the other aspects of the development. This proportion has to be reasonable in the circumstances. The Court has a broad discretion to find and award a percentage share of profits from the development that seems just or, as the cases put it, that “feels right”.

If the developing party had some statutory right to do what it did but failed correctly to exercise that right, upon payment of some compensation under the relevant Act, that may be all that is payable as damages: see the recent Supreme Court decision in Bocardo SA v. Star Energy Onshore Limited [2010] UKSC 35.

8. Purchase of Insurance Cover

If there has been an existing development in apparent breach of covenant for many years then insurers can often be willing to offer cover against the costs and risk of having to face enforcement action in the future. They may even be willing to offer cover against the possibility of a restrictive covenant being enforced to stop some specific proposed new development.

If you are contemplating taking out insurance cover then you should do nothing to disturb the situation or to alert the covenant owners in the meantime – for that is a common cause for such insurance cover to be refused or an increased premium to be charged.

Obtaining insurance is the commonly taken step where there is a covenant but its terms and owners are unknown (as can commonly be the case) or if there is some obvious past breach which appears to be been overlooked.

You would need to study carefully the proposed insurance wording, with regard to issues such as:

• development you are insured to carry out;
• the limit of cover and any excess;
• who will have the conduct of any dispute;
• whether it will stand for the benefit of your successors in title; and
• calculation of the insured amount of your loss in case you are later forced to comply with the restrictive covenant.

Any insurance policy is only as good as the financial standing of the insurer.

The worst thing about such a policy can be that it only pays a money sum if your development proposal is blocked by the covenant, which may be much less than you had hoped to win by carrying out the development. In other words, a policy does not stop you from actually being bound by the covenant.

9. Conversion of a Single Dwelling-House into Flats

Section 610 of the Housing Act 1985 enables any interested party to seek a variance of a prohibition – on either freehold or leasehold property – against converting one dwelling-house into two or more where either there have been changes in the character of a neighbourhood that favour letting of several flats instead of one house or planning permission has been granted for such a conversion. The Court has to give a right of hearing to any interested party and can then make whatever award appears most fitting, which can include making a variance order accompanied by the payment of compensation.

This jurisdiction was considered by the Court of Appeal in Lawntown Limited v. Camenzuli [2007] EWCA Civ 949. The court must have regard to all interests which are sought to be protected by the covenant and to the extent of harm which the proposed variation would bring about, weighing this against the interests of the party seeking to vary and the advantages from varying the covenant, in particular the creation of additional housing. The court will review the same considerations as will have been considered by the local planning authority but may impose a higher hurdle for the developer to overcome in regard to amenity issues affecting the covenant owner’s land.

10. Discharge or Modification by the Tribunal

Any interested person can apply to the Upper Tribunal (Lands Chamber) for the discharge or modification of a restrictive covenant in respect of freehold land. This right therefore extends to: mortgagees, purchasers under an uncompleted contract and option holders.

A leaseholder of premises under a lease originally granted for 40 years or more of which 25 years have expired can also apply to the Tribunal. Thus, many covenants in leases are potentially challengeable by this route. A lease which has been surrendered and re-granted for the purposes of a lease extension under the Leasehold Reform, Housing and Urban Development Act 1993 is regarded as unbroken. Any surrender and re-grant within the last 25 years will need to be fully considered.

Interested parties can object but their interest must be as a covenant owner or beneficiary rather than as a mere neighbour or busy-body.

Careful advice will be necessary on the choice of remedy, between discharge or modification and the new terms to be offered if modification is to be sought. It is safer to seek a modification limited to a specific set of proposals than to seek an outright discharge although the latter can be more beneficial and most appropriate in certain situations.

Any question as to the meaning of a covenant should be decided first by a Court – not by the Tribunal – on a reference under sub-section 84(2) of the Law of property Act 1925 (noted above) or in earlier stand-alone proceedings for declaratory relief before an application for discharge or modification is pursued, or the application can be stayed while this Court process is followed.

There are four available grounds for applying – as follows:

• The first, known as ‘ground (a)’: It is obsolete.

The Tribunal’s first available ground for discharge or modifying is: “by reason of changes in the character of the property or the neighbourhood or other material circumstances of the case…. the restriction ought to be deemed obsolete.”

This ground is very difficult to satisfy. First the restriction’s purpose must be identified and then it must be shown to be no longer capable of fulfilment. The changes of circumstances that can support such a finding will be either environmental or economic or social.

The Tribunal has to consider whether the purpose for which the covenant was created is still capable of fulfilment and if it is then the covenant ought not to be deemed obsolete.

• The second, known as ‘ground (aa)’: It impedes reasonable user or the public interest while securing less than substantial benefit to the owner and such loss can be commuted to a monetary amount.

This second ground invites the Tribunal to counter-balance the developer’s proposed reasonable user against the remaining practical benefit of the restriction to the covenant owner or the public interest, and to consider what monetary compensation would be adequate to cover any loss or disadvantage to be suffered by the covenant owner from a discharge or modification. This ground has become easier to pursue in recent years, with the Upper Tribunal showing a greater willingness to use it.

This is the most common basis for such applications to the Tribunal. Such an application can even be pursued immediately after the covenant in entered into. The evidential demands can be great, due to the wide-ranging cost-benefit analysis that it envisages. Expert evidence is likely to be called, possibly from experts in several disciplines. Prior planning permission makes this ground easier to show but is no guarantee of success. The same neighbour amenity considerations that are addressed through the planning process are typically re-addressed but this time to a higher hurdle of satisfaction when such an application is brought before the Upper Tribunal.

As the developer has to satisfy the Upper Tribunal that the loss or damage to the amenities of objectors will be less than substantial, this is typically referred to as “the limited benefit test”. Any such limited loss as is found to follow from the discharge or modification must also be found to be able to be commuted to a monetary amount.

The “public interest” alternative within this ground is especially difficult to prove. If the local council objects to an application in its capacity as guardian of the public interest the application is probably doomed.

On the other hand, local authorities sometimes apply to the Tribunal on this ground for release from covenants and in such instances local residents can object as guardians of the public interest. Compensation is unlikely to be deemed to be an adequate recompense for loss of the covenant’s restriction in cases where a larger number of people object, subject to the sum total of their objections being ‘substantial’.

• The third, known as ‘ground (b)’: There has been an agreement to discharge or modify.

Seeking a declaration from the Tribunal that there has been a binding agreement from all covenant owners is useful in case any owner is being evasive as to giving their consent or there is an argument for waiver from long acquiescence to the breach.

If no objectors file denials after appropriate notification of the claim the Tribunal can be invited to find such an agreement.

• The fourth, known as ‘ground (c)’: No Injury.

This last ground is a sweep-up provision to prevent vexatious or frivolous objections: that there is no loss to any one who owns the benefit from discharging or modifying the covenant.

11. Relevance of Planning Permission under section 84 applications

The existence of a planning permission is persuasive for the second of the above grounds. It can demonstrate what’s in the public interest. Its terms can also be a guide for the Tribunal as to the extent for modifying the covenant.

The Upper Tribunal must take account of the development plan and patterns of grants and refusals of planning permission locally.

Obtaining planning permission can be seen a first and lower hurdle that is to be overcome. Sometimes a developer can increase their prospects of success before the Upper Tribunal by going back to the drawing board with their architect once planning permission has been obtained and then making design improvements to their scheme to further address the concerns of the covenant owner as those were expressed in the planning process.

12. Statutory Compensation Awards

The Upper Tribunal can in its discretion award compensation when making an order for discharge or modification, in one of 2 ways.

The first is to look at the covenant owner’s loss from the impact of the development, which can be calculated by reference to any resulting fall in value of their property or by reference to the cost of works needed to counteract that adverse impact. The covenant owner’s loss of ability to hold the developer to ransom for a share of the scheme’s profits is not a recognised basis for assessing the amount of compensation. This compensation is usually a mere sop by comparison to the developer’s profit.

The second method is to enquire into the effect that imposing that restriction had on the price originally received for the burdened land. A successor in title to the original covenant owner (except perhaps an heir) might have difficulty in showing this second basis of compensation claim but this is essentially a question of fact.

13. Processing a Claim for Discharge or Modification

First you will need to formulate the discharge or modification you will seek and identify the potential objections.

Although it can be expensive to obtain planning permission – which will now only be valid for 3 years – this can be a wise step.

Next, a case needs to be developed on issues of advantage and disadvantage to the opposing parties, identifying any objectors’ losses. Enquiries should be made to identify the valuation components to the price originally paid for the land if there is a risk of the second basis of statutory compensation being applied, as noted above.

Pre-action correspondence should be opened up with the covenant owner that addresses all points in a logical order and the parties’ respective evidence should be offered for agreement in order to try and narrow the issues. This causes a heavy commitment to professional costs at the early stages – often referred to as front-end loading – as is typical now in all civil claims.

Alternative dispute resolution methods – such as mediation and expert certification of specific technical points – should be considered, particularly at an early stage, when they are most effective.

14. Costs in Tribunal cases

The Upper Tribunal has a power to award costs. The general rule is that, unless the conduct of an objector in opposing the application has been unreasonable, a successful objector will be awarded costs but an unsuccessful objector will not have to pay the applicant’s costs.

This costs regime means that it lies in the parties’ interests to make formal offers as to the anticipated outcome of the proceedings and to keep under review the use of alternative dispute resolution methods such as mediation. These are known as ‘Calderbank Offers’. They are specially filed with the Upper Tribunal as ‘sealed offers’ when the application is brought and can be considered by the Tribunal once it has determined the application and any compensation payment.

15. Persuading Councils to use compulsory purchase powers

Developers are sometime able to persuade the local planning authority to intervene by use of compulsory purchase powers and thereby help them to assemble the lands that they need. Compensation is of course payable through the council for the value of the land involved, which will include the value from owning such a covenant, but only its value without reference to the developer’s scheme – and therefore not on a ransom value basis.

This intervention by a planning authority can have the effect of washing land titles of their private encumbrances. Section 237 of the Town and Country Planning Act 1990 provides that once land is acquired or appropriated by a local authority for planning purposes and works are carried out in accordance with planning permission no private right affecting that land, such as any restrictive covenant or easement (other than in favour of statutory undertakers or under the telecommunications code), is effective to restrict the erection, construction or carrying out of maintenance of any building or work on the land by the authority or its successor in title.

16. Local Authorities as Covenant Owners

Local authorities are creatures of statute and therefore can only as they are permitted by their constituting legislation. One example of this principle at work is that a local authority is not allowed to impose a restrictive covenant against future development over a house that is transferred following a tenant’s exercise of the statutory “right to buy” – under the Housing Act 1985. The duty to sell under the “right to buy” provisions of that Act means to sell free of any encumbrance which is designed to reserve development value to the council, since such value is part and parcel of the normal incidents of ownership and therefore must be transferred. This was decided by the Court of Appeal in R v. Braintree District Council, ex parte Halls [2000] 36 EGLR 19. The problem here is that restrictive covenants can still be imposed by transferring councils for other, valid, statutory purposes, such as to protect the amenities of an area (and they do not, unlike private covenant owners, need to retain any benefitting land in order to be able to enforce against successors in title of the original covenantor). So before you rely on this ‘Braintree’ point against a council you must also find out the powers relied upon for creating the covenant: they may be so wide that they can outflank the Braintree rule. Councils will argue that it was their duty to obtain the best deal they could for their local people, under their well-known ‘fiduciary duty’. This argument calls for a fine consideration of the statutory powers the council acted under when taking the covenant. Bear in mind that where there are two powers of equal applicability to a situation the council can rely on the one which is the most beneficial for it, as confirmed by the Supreme Court in Cusack v. London Borough of Harrow [2013] UKSC 40.

If a local council grants planning consent for certain development this has been decided, by the Court of Appeal in Graham v. Easington District Council [2008] EWCA Civ 1503, to mean that the covenant impedes some reasonable user of the land and secures no practical benefit. Thus, the obtaining of planning permission for development seems now to be a strong basis for requiring the release of a local authority’s restrictive covenant without payment of any compensation.

A local council can however appropriate a property right that it owns in order to hold it for planning purposes under Section 232 of the Town and Country Planning Act 1990 and then it may dispose of that right in consideration for a planning benefit and without requiring any monetary payment. Such a transaction may form part of an agreement under Section 106 of the Town and County Planning Act, for example.

A restriction imposed by a Section 106 agreement can in principle be challenged later by an application to the Upper Tribunal. This would be one of the situations in which the Tribunal might consider the public interest. A very recently imposed restriction from a Section 106 agreement is unlikely to be discharged or modified in this way, unless perhaps there has been some significant and previously unforeseen change in the locality.

17. Recently imposed covenants or one still involving an original covenantor

These are notoriously harder to have discharged or modified before the Tribunal but not necessarily impossible and specialist advice should be sought.

The meaning of ‘recent’ is not precise and is a matter of degree probably until the covenant is about 30 to 40 years old.

Whereas Tribunal judges formerly took some moral exception to an application in respect of a recent covenant that element of dislike or distaste has now fallen away and judges are now more analytical and so will weigh up recentness and/or that an application is being brought by an original party alongside other relevant considerations. But these factors certainly can make the application harder to pursue and if successful more prone to an award of compensation.

For more information and help in regard to your restrictive land covenant problem, contact James Brenan at Spencer West LLP – [email protected] – or on 07930 316105.