Key points
- A covenant restricting use, which protects a money payment obligation, may be a valid restrictive covenant as well, if it preserves the amenity of land nearby
- This can create problems if restrictive covenants are imposed to protect overage
For the benefit of restrictive covenants to be capable of passing to successors in title, the covenants must “touch and concern” land, as opposed to providing some purely personal advantage for the covenantee.
Bryant Homes Southern Ltd and others v Stein Management Ltd and others [2016] EWHC 2435 (Ch); [2016] PLSCS 273 raised two issues. Was a covenant to use land only for agriculture a valid restrictive covenant, or had it been imposed for reasons unconnected with the use and enjoyment of land? And who was entitled to enforce or release it?
User restriction
The covenant was included in a conveyance made in 1993 and was expressed to be made with the owners of, and successors in title to, a farm house and track. In addition, the parties to the conveyance entered into a contemporaneous, but separate, agreement in which the developer promised to promote the land that it had just acquired (which was burdened by the covenant) and other land retained by the seller, for development. In return, the seller promised to release the restrictive covenant following the grant of planning consent and receipt of an overage payment.
In due course, the seller sold the farm land that the developer had promised to promote for him, together with part of the farm track, to another company for a substantial sum of money. As part and parcel of that transaction, he assigned the benefit of the restrictive covenant as well. The company funded the acquisition with borrowings and charged the land to its lender as security for repayment of its loan.
As a result, the developer needed to know who was entitled to release the covenant, and its obligation to pay overage. Was it the company (acting by its liquidator, since it was now into liquidation)? Had the rights devolved under the charge, which the lender
had enforced when the company defaulted?
Benefit of the covenant
The lender sold to Stein. It claimed that it was entitled to enforce the user restriction because it had acquired part of the farm track that benefited from the covenant. The developer (which had already obtained a release from the liquidator of the company to whom the benefit of the covenant had been assigned) tried to persuade the court that Stein was mistaken. It relied on the fact that the restriction was not expressed to be for the benefit of the farm house and track and claimed that the covenant created a contractual right. In other words, it was not a proprietary right that ran with the land.
The court noted that the covenant was expressed in entirely conventional terms. It was made with the seller and his successors in title, and the owners or occupiers for the time being of the farm house and track, which indicated that the benefit was intended to run with the land. Of course, that did not mean that the covenant must, as a result, “touch and concern” that land. However, the user restriction was capable of benefiting land.
Overage scheme
The developer drew the court’s attention to Cosmichome Ltd v Southampton City Council [2013] EWHC 1378 (Ch); [2014] 1 EGLR 171, highlighting the difference between covenants that protect land and covenants that secure overage. It pointed to the links between the 1993 conveyance and the overage agreement, and argued that the agricultural use restriction had been imposed to secure any overage that was due, and not to protect the farm house and track.
Therefore, so the argument went, the benefit of the covenant did not run with the land. Furthermore, if it did, successors in title could hold everyone to ransom because the benefit of the covenant would be vested in people who were not parties to the overage agreement and were not bound to release the restriction on payment of the overage. Potentially, therefore, the covenant could remain in situ and the seller could find himself in breach of his contract to discharge it.
The judge was unmoved by the revelation that the overage scheme was not foolproof and refused to allow the contents of the overage agreement to subvert the meaning of what, on the face of it, looked like an ordinary restrictive covenant that made sense as it stood. The restriction had been registered at the Land Registry, but the overage agreement had not. Third parties would not know what the overage agreement said and, in Cherry Tree Investments Ltd v Landmain Ltd [2012] EWCA Civ 736; [2012] 2 EGLR 141, the court had ruled that it should be slow to allow a registered interest to be defeated by a comparatively invisible provision in an off-register document.
Annexation
Since the covenant “touched and concerned” the farm house and track, the effect of section 78 of the Law of Property Act 1925 was to annex it to that land, so that it passed automatically with it. In addition, Federated Homes v Mill Lodge Properties Ltd [1980] 1 EGLR 113 established that there is a strong presumption that the benefit of a restrictive covenant is annexed to the whole, and to each and every part, of benefited land. Nothing displaced that presumption here.
So the judge upheld Stein’s argument that it might be able to enforce the covenant, as the owner of part of the farm track, if it could show that the track bed was capable of benefiting from the restriction on use. Sadly for us, that argument was reserved for another day.
Allyson Colby is a property law consultant
