Restrictive covenants and your options

Keystone’s commercial property team outlines the options for purchasers of freehold property when there are enforceable restrictive covenants.

When buying freehold land, it is important to identify as early as possible whether there are any existing binding restrictive covenants. A covenant can affect the potential use of the land and ultimately its development and resale value.

A restrictive covenant may not be a complete barrier to buying and using the land for your purposes. This article outlines the options for negating the effect of the covenant on freehold land. (Covenants within leases and leasehold land are outside the scope of this article.)

A restrictive covenant is created by deed, where one party agrees with another to restrict the use of its land for the benefit of the other party or parties. By its nature, such a covenant is negative rather than positive. The obligation to observe a restrictive covenant may bind successors in title.

Typical restrictive covenants include:

• prohibition against particular uses of the land, whether for a particular trade, businesses or development use, such as prohibiting residential use;
• restricting the number or type of buildings that can be erected on the land affected;
• prohibition of building in certain areas, such as in front of a specified building line; and
• restricting the height of structures that can be built on the land.

As part of the due diligence process in acquiring the land, your solicitor will initially check if any restrictive covenants exist and, if they do, whether the restrictive covenant is enforceable. It is important to realise that, whilst these covenants are enforceable between the original parties as a matter of basic contract law, they can also be enforceable by successors in title.

If a problem arises due to an enforceable restrictive covenant on your land, there are a number of options:

• Indemnity insurance -The most common approach is to obtain indemnity insurance against the risk that a person owning land with the benefit of the restrictive covenant seeks to enforce it. Most mortgagees accept indemnity insurance to minimise their risk and it is generally sensible to cover successors in title at the same time. If the covenant is enforced, the insurance company will pay the insured’s legal costs in defending the action, negotiating a release of the covenant and pay damages to the person with the benefit of the restrictive covenant. Compensation, based on a difference in market value, is usually payable to the insured if, for example, the development cannot continue or the use of the site is curtailed.

Insurance is particularly useful where a long term solution is required or a funder or mortgagee is involved.

Please note that if insurance is contemplated, this should be investigated as the first option before any approach is made to any third party (see below).

• Express release -It may be possible to negotiate the release or variation of a restrictive covenant by deed. If indemnity insurance is being considered as a possible option, it should be borne in mind that any approach to a beneficiary of the covenant may limit the ability to obtain indemnity insurance.

This option will only be effective and should only be attempted in limited circumstances where there is a high degree of certainty as to the covenant, the relevant parties and the extent of the lands involved.

• Lands Tribunal -If an express release or insurance is not available, an application can be made to the Lands Tribunal for the discharge or modification of a restrictive covenant. An applicant must establish an interest in the freehold land which is subject to the restriction and one ground of action against everyone who benefits from that restriction.

The Lands Tribunal can discharge or modify the restriction if one of the following grounds applies:

• the covenant is obsolete either due to changes in the character of the neighbourhood, to changes in the character of the burdened land or any other material circumstances;
• the covenant impedes some reasonable use of the land;
• no injury will be caused to those with the benefit of the restriction by the discharge or modification; or
• if the beneficiaries agree to the discharge or modification by their actions or omissions.

However, an application to the Lands Tribunal is often a long process particularly in a disputed case where months of preparation and process must be followed.

To conclude, the existence of a restriction may not be a barrier to using the land for a prohibited use or for breaching the terms of the restriction. Care should be taken to carry out due diligence to determine the extent of the restriction but in a manner that does not negate possible solutions. Keystone Law can assist you in carrying out the correct due diligence and finding a solution to any problem covenants where possible.