by Michael Dore
On the sale of freehold land with long-term development potential, but no immediate prospect of the grant of planning permission, a vendor may wish to reserve the right to receive an overage payment if planning permission is granted at some time in the future. This article examines the problem of securing such a future contingent payment on land.
English law does not recognise, as a separate interest in land, the right for a former owner of a freehold to receive a proportion of the increase in the value of the land, consequent on the grant of planning permission for its development. It is not possible directly to attach the liability for payment to the land itself; but a conveyancing device must be used so that the owner for the time being, in practice, has to discharge the liability if he wishes to develop the land. To achieve this the vendor can either restrict the use of the land until such a payment is made or require the original purchaser to ensure that subpurchasers enter into a direct covenant, with the original vendor, to make such a payment. In either case if the device fails the vendor will not receive his overage payment.
Imposing restrictive covenants
The vendor may seek to secure the overage payment by imposing a restrictive covenant not to use the land other than for its current use. This is coupled with an agreement to release or modify the restrictive covenant on receipt of a proportion of the increase in value of the land, consequent on the grant of planning permission.
The purchaser remains liable to the vendor for damages for breach of the restrictive covenant by his successors in title after he has disposed of the land, unless the covenant is expressed to bind the purchaser only during his ownership of the land. Where the vendor is selling the land at or near its open market value, and the prospect of the future grant of planning permission is speculative, the purchaser will not wish to remain personally liable to make an overage payment after he has disposed of the land.
The vendor will, in those circumstances, have to claim against successors in title who were strangers to the original contract with the vendor. For the restrictive covenant to be effective against subpurchasers of the land, or parts of it, the vendor must have retained land which is ascertainable with reasonable certainty, and which is capable of being benefited, and the covenant must touch and concern the retained land.
Where the vendor is, for example, selling a farm and retaining the farmhouse those conditions can be fulfilled without too much difficulty. If, in reality, the vendor is selling essentially the whole of his land, he will have difficulty in retaining a parcel or parcels of land to which the restrictive covenant can be attached, and which are capable of benefiting from the restrictive covenant. If the successors in title to part of the purchaser’s land successfully argue that the restrictive covenants are not binding on them, because the small retained parcels of land are not capable of benefiting from the restrictive covenant imposed on the land which has the benefit of the planning permission, the vendor cannot enforce the restriction, and so will not receive the overage payment either from the original purchaser or the successor in title.
In Marten v Flight Refuelling Ltd [2] Ch 115 a restrictive covenant was imposed on land consisting of a farm of 562 acres that no part should be used for any purposes other than agricultural purposes without the vendor’s consent. It was held that the Crichel Estate of about 7,500 acres was entitled to the benefit of that covenant, and an injunction was granted to prevent industrial use on approximately 200 acres of the farm. Wilberforce J said at p 136:
Was the land capable of being benefited by the covenant? On this point as on those last dealt with, the answer would appear to be simple. If an owner of land, on selling part of it, thinks fit to impose a restriction on user, and the restriction was imposed for the purpose of benefiting the land retained, the Court would normally assume that it is capable of doing so. There might, of course, be exceptional cases where the covenant was on the face of it taken capriciously or not bona fide.
The leading case of Federated Homes v Mill Lodge Properties (1979) 254 EG 39 did not alter, and in fact supported, the principle expressed by Wilberforce J. The argument would therefore centre on whether the restrictive covenant was bona fide for the benefit of retained land or a device for securing the overage payment.
If the vendor is unable to retain land capable of benefiting from the restriction he can reserve a right of re-entry on breach of the restrictive covenant, confined to the perpetuity period, which takes effect as an equitable right in land; and which is enforceable against the purchaser’s successors in title even though they are not directly bound by the covenant itself, either by privity of contract or estate. Such a right of re-entry was given full judicial support in Shiloh Spinners v Harding (1973) AC 691. It was further stated that a right of re-entry by A on certain defined events to retake the freehold land of another person B so as to change the beneficial ownership of the land was not contrary to public policy.
It is doubtful whether the court intended to ensure that a covenant of any nature whatsoever, imposed on freehold land, should be enforceable against successors in title merely by the insertion of an equitable right of re-entry. However, the insertion of such a right of entry, if acceptable to the purchaser, affords the vendor a substantial degree of protection.
Having created restrictive covenants and, so far as possible, having attached the liability for their breach to the purchaser and to his successors in title, a vendor has to consider the jurisdiction of the Lands Tribunal to modify restrictive covenants. The Law of Property Act 1925, section 84(1) as amended gives a discretionary power to the Lands Tribunal on the application of any person interested in the freehold land affected by any restrictive covenant, wholly or partially to discharge or modify any restriction on being satisfied that, inter alia, by reason of changes in the character of the property or the neighbourhood or other circumstances of the cas% which the Lands Tribunal may deem material the restriction ought to be deemed obsolete (section 84(1)(a)); or (in a case falling within subsection (1A) below) the continued existence thereof would impede some reasonable use of the land for public or private purposes or, as the case may be, would, unless modified, so impede such user (section 84(1)(aa)).
Subsection (1A) authorises the discharge or modification of a restriction by reference to its impeding some reasonable user of the land in any case in which the Lands Tribunal is satisfied that the restriction, in impeding that user, either:
(a) does not secure to persons entitled to the benefit of it any practical benefits of substantial value or advantage to them; or
(b) is contrary to the public interest;
and that money will be adequate compensation for the loss or disadvantage (if any) which any such person will suffer from the discharge or modification.
The applicant may be ordered to pay to any person entitled to the benefit of the restriction one, but not both, of the following:
1. a sum to make up for any loss or disadvantage suffered by that person in consequence of the discharge or modification; or
2. a sum to make up for any effect which the restriction had, at the time when it was imposed, in reducing the consideration then received for the land affected by it.
Therefore if land with little hope value is sold for its market value, and is subsequently divided among several subpurchasers, one of whom through his own efforts obtains planning permission, that subpurchaser can apply to the Lands Tribunal for the discharge of the restriction under sections 84(1)(a) or (aa). If successful, he would argue that it would be just to make an award under the second head. At the time when it was imposed, the restriction would have had a minimal effect in reducing the consideration then received for the land affected by it, so the sum awarded by the Lands Tribunal under that head would not be substantial.
Imposing positive covenants
The vendor may seek to secure the overage payment by imposing a positive covenant on the purchaser, first to make the payment during the period of his ownership and, second, to ensure that on a subsequent sale of the land, or any part, the subpurchaser will enter into a direct covenant with the vendor to make the payment. If that chain of positive covenants fails, either by default or by the deliberate act of a successor in title, the vendor is left without a right of action against the current owner of the land. To prevent this the vendor may seek to secure his interest in the land by creating a mortgage irredeemable until planning permission has been granted. In this way the vendor retains the charge certificate of the title to the land, and can prevent any disposition until the subpurchaser enters into a direct covenant to make the overage payment. The question then arises whether a subpurchaser can insist upon redeeming the mortgage before planning permission is granted.
On principle there is nothing to prevent a mortgage of freehold land from being made irredeemable for a considerable number of years (Knightsbridge Estates Trust Ltd v Byrne [8] 4 All ER 618) or for an uncertain period, or where a sum is not capable of immediate pecuniary valuation, but the essential requirements of a mortgage transaction are not observed where the right of redemption is rendered illusory. It is open to a subpurchaser to argue that, because a mortgage is for an uncertain sum and may be redeemed only on the happening of a future uncertain event, the mortgage may never be redeemable and the right of redemption is illusory.
This argument could, in theory, be overcome by the insertion of a redemption figure, index-linked to land prices, on receipt of which the vendor would permit early redemption. In practice, this could have potentially grave tax consequences for the vendor. Such a redemption figure would ascribe, to the prospect of future payment, a value of which the Inland Revenue could charge to capital gains tax without the constraints imposed in Marren v Ingles [0] 1 WLR 983.
The conclusion must be that in almost all cases where a vendor seeks to secure an overage payment on freehold land, the conveyancing device used will be open to attack by a sub-purchaser who is unwilling to make the payment.
