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Objector’s financial interest not sufficient to prevent discharge of restrictive covenant

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23/08/2021

Landowners and developers will be all too aware that restrictive covenants on land can often impede or prevent development.  Walker Morris’ Real Estate Litigation specialist David Manda explains that a covenantee’s objection made purely on the basis of its financial interest should not defeat an application for modification or discharge of a restrictive covenant.

Why is the Father’s Field case of interest to landowners and developers?

In early July 2021 Walker Morris published a detailed overview of legal and practical advice on the relaxation or removal of restrictive covenants on land to facilitate development.  That article can be accessed here.

Later that month the Upper Tribunal (Lands Chamber) (UT) decided the Father’s Field Development Ltd v Namulas Pension Trustees Ltd [1] case, which will be of interest for landowners and developers because it confirms:

  • Where a restrictive covenant secures for the covenantee a ‘practical benefit’ which cannot be adequately compensated in money, then an application for modification or removal of that covenant made under section 84 of the Law of Property Act 1925 (LPA 1925) may not succeed.
  • The ability of a covenantee/an objector to demand a payment in return for the release of a restrictive covenant is not a ‘practical benefit’ for the purposes of section 84 LPA 1925.
  • For these purposes a ‘practical benefit’ must involve an ‘amenity’ – that is, something practically useful or pleasant. A purely financial interest or ransom position is not enough.
  • Similarly, ‘loss or disadvantage’ which can be compensated under section 84 LPA 1925 does not include the financial value which a covenantee/objector might have negotiated in return for release.
  • The fact that an applicant was an original party to a restrictive covenant is not a bar to an application to modify or discharge.

In this case, the developer purchased land from the vendor/objector.  The vendor imposed a covenant which prohibited, for a period of 30 years, residential development without the vendor’s prior written consent.  The developer subsequently applied to discharge the restrictive covenant under section 84 LPA 1925.  The vendor objected, admitting that its interest was purely financial in respect of sharing in development value.  The UT discharged the application and did not award compensation to the vendor/objector.

What practical advice arises?

The key practical message to come out of this case is that the correct way for a party to secure a purely financial interest such as a share of development value in land is to enter into an overage agreement, rather than by imposition of a restrictive covenant.

The UT pointed out that an overage agreement is not vulnerable to modification or discharge via section 84 or any other means, plus it has the advantage that the share payable is stated expressly at the outset, rather than having to be negotiated at the point when the covenantee is in a position demand a ransom.

For further advice and information in connection with overage agreements, please see our earlier article here.

Developers will be encouraged by the UT’s clarification that the ability to extract a ransom payment does not suffice as a ‘practical benefit’ to defeat a modification/discharge application.

The UT’s statement that section 84 makes no distinction between original covenanting parties and their successors is also helpful because it clarifies that the section does not contain any requirement or implication that original covenantees must remain tied to their initial bargain even if/when circumstances change and development potential arises.

How we can help

If you would like any further advice or assistance in connection with the enforcement, modification or discharge of any restrictive covenants, whether that be in relation to freehold or leasehold land and whether it be in relation to commercial negotiations or legal recourse via an UT application; or if you would like any advice in connection with the negotiation of an overage arrangement, please do not hesitate to contact David Manda or any member of our Real Estate Litigation team.

 

[1] [2021] UKUT 169 (LC)

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