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Removing or relaxing restrictive covenants on land

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05/07/2021

Developers will be all too aware that restrictive covenants can prevent land being used for a particular purpose.  Restrictive covenants can limit the use of land; prohibit particular businesses, undesirable activities or potential nuisances; or restrict the height, type and/or density of buildings that can be erected on land.  In some cases restrictive covenants may even prevent development altogether.  Often restrictions will be historic, yet their existence can have a significant impact upon the development potential, and therefore on the marketability and value, of land.

In this briefing, Walker Morris’ Real Estate Litigation experts Martin McKeague and David Manda provide an up-to-date overview of the legal and practical options for overcoming restrictive covenant-related impediments to development.

Options for removing or relaxing covenants

Any party wishing to vary or relax a restrictive covenant has a number of options:

  • Negotiate with the beneficiaries of the covenant for an express release or variation. This is often the most commercially expedient option, but will only be effective where the full extent of the benefitting land can be ascertained; where all owners of the benefitting land can be identified and located; and where the parties can agree the release/modification, usually in return for the payment of a premium.
  • Proceed with development in breach, probably having taken out an indemnity insurance policy against the risk of a beneficiary seeking to enforce the restrictive covenant[s]. In some cases, perhaps where extensive enquiries as to the existence and whereabouts of beneficiaries have been conducted and proved unsuccessful, this might be a feasible option.  Developers should be aware, however, that the usual remedy for breach of a restrictive covenant is an injunction.  That can involve demolition of the development, and a significant costs bill.
  • Apply to the Upper Tribunal (Lands Chamber) (UT) for the modification or discharge of a restrictive covenant. For more information on this option, see below; or
  • Obtain a court declaration as to the nature, extent or enforceability (or not) of the restrictive covenant. (A favourable court declaration can by highly persuasive, and can therefore assist greatly, if obtained as a pre-cursor to any commercial negotiations or subsequent UT application.)

Grounds for removal/relaxation

The Law of Property Act 1925 (LPA 1925) affords the UT discretionary jurisdiction to modify or discharge restrictive covenants affecting land if one or more of the grounds in section 84 LPA 1925 applies, namely:

  • the covenant is obsolete;
  • it impedes some reasonable use of the land;
  • the beneficiaries of the covenant expressly or impliedly agreed to the release or modification; and/or
  • no injury will be caused.

Key takeaways from recent cases

Restrictive covenant disputes have hit the legal headlines several times in the last couple of years.  The following cases clarify key aspects of the law, and highlight important practical points for developers.

Is the covenant obsolete?

The very recent case of Savage v 60 Kent Road (Maintenance) Ltd [1] addressed what it can mean for a covenant to be obsolete.  The case was decided in the developer’s favour.

The restrictive covenant in question prevented the carrying out of building or alterations without plans being approved by “the Vendors’ Surveyor” and the fee of two pounds and two shillings being paid.  The Vendors on the conveyance were three individuals who had all died. As the Vendors (as defined) had passed away, they had no surveyor; the restriction did not refer to surveyors of successors in title; and the fee provision did not account for increase by inflation.  All of this suggested that the covenant was not intended to run with the land, and that it was therefore obsolete.

One key takeaway from the Savage case is that where a beneficiary or, as here, a party with a power of approval is no longer in existence, then a restrictive covenant automatically lapses.

Another is that the existence of historic fees or other provisions which do not include mechanisms to ‘future-proof’ a restriction may be an indicator of obsolescence.

What does ‘impediment to reasonable user’ actually entail?

In the Alexander Devine [2] case the developer was aware of the existence of restrictive covenants and of objections to development raised by the beneficiaries of the covenants, but continued to build regardless.

The developer argued that the restrictive covenants impeded a reasonable use of the land (that is, development in accordance with planning permission).  However, when considering this particular section 84 ground, the UT must be satisfied not only that the covenant impedes some reasonable use of the land, but also that the restriction does not secure any practical benefit of substantial value or advantage, or is contrary to public interest, and that money could adequately compensate any disadvantage suffered as a result of its modification/discharge.

The Supreme Court confirmed in this case that, in these circumstances, “contrary to public interest” should be interpreted narrowly.

The Supreme Court also took a very dim view of what it termed the developer’s “deliberate and cynical breach” and ordered that it must not be allowed to benefit from presenting the courts with a fait accompli.  The development is therefore now at risk of being ordered to be demolished.

One key takeaway from the Alexander Devine case is that ‘impediment to reasonable user’ is clearly not a wide-ranging ground that will easily facilitate the removal or relaxation of restrictions to allow development in accordance with planning permissions.  Developers will also need to prove that the restriction does not secure any practical benefit of substantial value or advantage, or that it is contrary to public interest.  The Supreme Court’s comments as to how such provisions are to be interpreted are likely to mean that that may be difficult to do.

Other key takeaways are that developers should ensure that their conduct is exemplary when discovering and dealing with beneficiaries of restrictive covenants, and that any application under section 84 should be made before building works commence.

Does the covenant impede reasonable user of the benefitting land?

It is perhaps trite law that land benefitting from a restrictive covenant must be clearly defined and easily ascertainable [3], but that test can sometimes be difficult to apply in practice.

The recent case of Re Copleston and Norton [4] considered the extent of potentially benefitting land, and therefore the identification of potential beneficiaries.

The applicants obtained planning permission to erect a new house.  The proposed site was burdened by restrictive covenants which prohibited use of the land other than as a private garden.  The applicants applied to release/modify the restrictions to enable the development to proceed on the basis that they restricted reasonable use of the land.  The respondents, who owned a substantial property only part of which expressly benefitted from the restrictions, objected.  They argued that the restrictions secured for them practical benefits of substantial value or advantage which could not be adequately compensated in money.  The UT had to determine whether it should consider the effect of the proposed development on the whole of the respondents’ property, or on just the benefitting land.

In a decision which may be unwelcome to developers, the UT decided that it should consider the effect of the proposed development on the whole of the respondents’ property.  The case therefore seemingly widens the circumstances in which land may be considered to be ‘benefitting land’, and therefore in which persons may be considered beneficiaries.  The case therefore broadens somewhat the scope for objectors to oppose section 84 applications.

Does the option to discharge/modify covenants apply in the leasehold context?

It is widely known that the UT’s jurisdiction to modify or vary restrictive covenants applies in respect of freehold land.  It is perhaps less well known that this jurisdiction can also extend, in certain circumstances, to leasehold covenants [5].  In fact, section 84 can offer a landowner of a long leasehold interest with the opportunity to override restrictions, and therefore to unlock additional value in its portfolio.

The recent Berkeley Square case [6] was a worked example of the UT’s approach to section 84 applications in the leasehold context.

The case demonstrates that if planning consent has been obtained for a proposed development and/or where it can be shown that the covenant in question does not secure practical benefits of substantial value or advantage to the landlord/beneficiary, a tenant/applicant is likely to succeed.

Similarly, however, it is important when considering a section 84 modification application, to take into account the nature of the landlord’s objections and their legitimacy. If the landlord owns any neighbouring property or if the restrictions form part of a wider leasehold scheme, for example, it may well be reasonable for a landlord to rely on the covenant to exert control and to restrict uses that it may deem undesirable or in conflict with its own or its other tenants’ interests.

Importantly, though, the ability merely to extract financial gain from the enforcement of a leasehold covenant should not provide the landlord with a good reason to oppose the application.  A landlord refusing to agree a modification requested by a tenant should always ensure they are able to justify, with evidence and in light of the section 84 (12) grounds, why the covenant is required.

Practical advice

Taking into account all of the above, developers may wish to note the following practical advice:

  • It’s good to talk. Fostering good neighbourly relations, co-operating with beneficiaries of restrictive covenants and working with them to design developments that are less likely to incite objections, can go a long way.
  • In many cases, negotiating openly and fairly with beneficiaries can avoid the need to pursue a section 84 application at all. It can result in a developer who wishes to remove or relax restrictive covenants simply reaching an agreement with any beneficiaries (which might also involve the payment of a premium), to that effect.
  • However, remember that the terms of any title indemnity insurance must be considered before any contact is made with beneficiaries, in case any such contact could invalidate any insurance policy.
  • Even if neighbourly negotiations do not result in an agreement, they can stand a developer in good stead with the UT if and when it is subsequently asked to exercise its discretion on a section 84 application.
  • Finally, in all such applications, factual evidence and the overall context will be key.  The UT will consider all relevant circumstances – including the nature of the land and the proposed development, the extent of any benefitting land, and the position of the beneficiaries and any practical benefits claimed by them to be secured by the restrictions. The motivation and conduct of the applicant and respondent may also be taken into account.

How we can help?

If you would like any 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 – please do not hesitate to contact Martin McKeague, David Manda or any member of our Real Estate Litigation team.

 

[1] [2021] UKUT 102 (LC)

[2] Alexander Devine Children’s Cancer Trust v Housing Solutions Ltd [2020] UKSC 45, and see our more detailed briefing for further information

[3] Crest Nicholson Residential (South) Ltd v McAllister [2004] 1 WLR 2409

[4] [2021] UKUT 18 (LC), and see our more detailed briefing for further information

[5] Section 84(12) LPA 1925 applies where a lease is for more than 40 years and more than 25 years have expired. It will not assist in the case of short term occupational leases, but is relevant to longer leases, whether in a commercial or residential context.

[6] Berkeley Square Investments Ltd v Berkeley Square Holdings Ltd [2019] UKUT 0384 (LC).  See our earlier Walker Morris briefing for further information and for the facts of the case.

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