Key points
■ Restrictive covenants imposed to extract payments from future owners are susceptible to challenge
■ Covenants of very recent origin are not necessarily proof against applications for their modification or discharge
Restrictive covenants have been a part of English property law for generations. The majority of such covenants are used for the purposes for which they were approved in the landmark case of Tulk v Moxhay [1848] EWHC Ch 34 – to control the way that land is used for the protection of properties nearby. However, some landowners impose restrictive covenants on land that they are selling in the hope of extracting further value, in the form of future payments, from subsequent owners of the land.
Re: Barter’s Application [2017] UKUT 451 (LC); [2017] PLSCS 213 reminds us of the dangers of so doing. The case was brought by a couple who purchased a large Victorian property in Bridgwater from Somerset County Council in 2013. The building was designed as a large residence, but had more recently been used as a daycare centre, and was set in grounds of about half an acre. The council knew the property would interest developers. However, the transfer included a covenant, which was expressed to be for the benefit of adjoining highway land, prohibiting the construction of new residential accommodation on the land.
After completing their purchase, the buyers applied for, and obtained, planning permissions to divide the existing building into flats and to erect a new building containing 13 two-bedroom flats in the grounds. In due course, the council approached the buyers offering to release the covenant against new building in return for a share of the resulting development value – and subsequently rejected the buyers’ offer of £5,000.
Section 84
The covenant was enforceable against the buyers as the original covenantors, even if the highway land did not genuinely benefit from it. So they applied to have the covenant modified or discharged. The council informed the tribunal that it opposed the application, but was not represented at the hearing at which the tribunal considered grounds (aa) and (c) of section 84(1) of the Law of Property Act 1925.
Ground (aa) applies where a covenant restricts a reasonable use of land, and either does not secure to the persons entitled to the benefit of it any practical benefits of substantial value or advantage, or is contrary to the public interest. One further condition must be satisfied. It must be possible to compensate those who lose the benefit of the covenant by the payment of money. Ground (c) applies if the applicant can show that no injury will be caused by the modification or discharge of the covenant.
The Upper Tribunal accepted that the covenant impeded the construction of new flats in the grounds of the property and agreed that this would be a reasonable use of the land. However, the evidence showed that the benefit secured by the covenant was pecuniary. The council had admitted that it hoped to extract further value from the land in the form of a payment for the release of the covenant.
Stockport v Alwiyah Developments [1983] 52 P&CR 278 confirmed that an opportunity to bargain for the discharge of a covenant is not one of the benefits protected by ground (aa). And Re: Bennett’s and Tamarlin Ltd’s Applications [1987] 54 P & CR 378 confirmed that loss of a bargaining position is not an injury that can be considered for the purposes of ground (c). Consequently, the tribunal could modify or discharge the buyers’ covenant on both grounds (aa) and (c).
Discretion
The power conferred by section 84 is a discretionary one. And the time that has passed since the imposition of a covenant and the closeness of an applicant’s connection to the original covenantor are factors that can be taken into account when considering an application to modify or discharge covenants. In this case, the applicants were the original covenantors and had entered into the covenant willingly less than four years previously.
Once upon a time, covenants of very recent origin used to be treated as almost sacrosanct. However, in Jones v Rhys-Jones [1975] 1 EGLR 118, the Court of Appeal explained that the age of a covenant and the identity of the covenantor must be weighed in the balance, but are not necessarily decisive, when considering applications under section 84.
Compensation
If the tribunal modifies or discharges a covenant, it may require the applicant to compensate those that benefit from it for any loss or disadvantage suffered as a result. Alternatively, it can award a sum to compensate the recipient for any reduction in price caused by the covenant when it was imposed.
The buyers had paid £249,950 for the property and the tribunal had no doubt that the council would have demanded a higher price for the land without the covenant. It noted that the buyers were fully aware of the restriction on new building and had bought with the intention of constructing new flats that they hoped to sell for up to £1.7m. Consequently, it considered the buyers’ offer of £5,000 for a release “improbably low”.
Unfortunately for the buyers, but perhaps not for local taxpayers, the tribunal was not provided with any evidence of the financial impact of the covenant on the price paid for the land. Had it had any, the tribunal made it clear it would have been inclined to discharge the covenant. But because there was none and the council had indicated its willingness to negotiate a release, the tribunal dismissed the buyers’ application, leaving the parties to agree the price of a release for themselves.
.Allyson Colby is a property law consultant
