Restrictive covenants imposed in order to extract overage payments from future owners are susceptible to challenge
A covenant to pay overage is a positive covenant. This means that the burden of the covenant will not run with the overage land. Some covenantees try to get round this by imposing restrictive covenants, which can be bought out, as a device to extract overage payments from future owners.
Cosmichome Ltd v Southampton City Council [2013] EWHC 1378 (Ch) highlights the risks of relying on restrictive covenants to safeguard overage payments. The case concerned a site that the BBC acquired from the Council in 1989 for £1. The transfer included a covenant that the BBC would construct a building on the land, which was to be used only by the BBC, or by someone exercising its franchise, as a broadcasting centre.
The restriction was not absolute; the BBC was entitled to use up to 25% of the lettable floor space for other uses. The transfer also envisaged that the restriction might one day be lifted in return for an overage payment, to enable the site to be used for some other purpose. The BBC sold the freehold in 2004, but took a leaseback for 25 years and still occupies the site. However, the new owners have now asked the court to confirm that the covenants restricting the way in which the site is used are not binding on them or their successors in title.
The burden of a restrictive covenant will run in equity if the covenant restricts the way in which land is used or enjoyed and touches and concerns land nearby that belongs to the covenantee. This means that the covenant must preserve the value or amenity of the neighbouring land: P & A Swift Investments v Combined English Stores Group PLC [1988] 2 EGLR 67. The burden of the covenant must also have been intended to run with the land (which is presumed, unless the contrary is shown, as a result of section 79 of the Law of Property Act 1925) and the covenant must have been protected by registration.
The new owners argued that the fact that the covenants were expressed to be for the benefit and protection of land retained by the council should not blind the court to their substance. The covenants enhanced the value of the covenantee’s pocket, rather than its land. They were, in fact, personal in nature and a change of use would not adversely affect land in the vicinity.
The court granted the declaration sought. The judge understood the importance that the council attached to the BBC’s presence in the city and acknowledged that both parties had apparently accepted that the restrictive covenants were intended to and were capable of benefiting the council’s land. However, there was no firm evidence as to why the covenants were imposed and the council was unable to show that the covenants protected the nature, quality, amenity or value of its adjoining land. Indeed, the evidence suggested that the covenants were imposed to ensure that the BBC remained in occupation and to provide a lever for extracting an overage payment if the site were to become surplus to the BBC’s requirements. Consequently, the user covenants were not binding on any subsequent owners of the land.
Allyson Colby is a property law consultant
