Insight

Property Developers – Beware of Restrictive Covenants

Property development can be a risky business! All too often developers make the fundamental error in believing that the grant of planning permission from the relevant council is all that is required to move forward with the development of property.

However, developers must be wary of restrictive covenants lurking within the title deeds to the property. Restrictive covenants can severely limit the type of construction which may be undertaken on the land to be used for development.

The existence of a restrictive covenant will not necessarily put an end to the development but it could result in significant additional costs, costly delays, substantial changes to the proposed development and, in extreme cases, applications to court for permission to remove the restrictions.

If you are a landowner looking to sell your property to a developer, the existence of restrictive covenants may potentially reduce the value of your property.

What is a restrictive covenant?

It is an obligation created by a formal deed that limits the rights of an owner of land. It is attached to the land itself and usually all subsequent owners and occupiers (successor’s in title) are bound by it.

What types of rights are restricted?

This will depend on the wording of the covenant but they generally relate to the use of the land and operate for the benefit of immediate neighbours or the local community.

Examples include:

  • Land may not be used for conducting a business;
  • Alcohol may not be sold on the land;
  • Construction may not be above a certain level and/or restrict a neighbour’s view;
  • Limit to the number of buildings which may be constructed on the property.

How can I find out if restrictive covenants apply to the land?

Restrictive covenants are usually recorded in the title deeds and registered on the title deeds as an encumbrance.

In the case of unregistered land or where a covenant was created prior to 1926 a subsequent owner will be considered bound if they were aware (or ought to have been aware) of the covenant’s existence.

If you are contemplating a development you must carefully scrutinise the title deeds for restrictive covenants.

If you are contemplating developing unregistered land a specialist solicitor will be able to assist in investigating whether there are any pre-1926 covenants. It is important to bear in mind that planning restrictions (regulated by the local authority) do not override restrictive covenants. The fact that the local authority would approve the construction of a block of flats on a piece of land will not help a developer if the land itself is restricted by covenant to, for example, a single storey building.

Do restrictive covenants mean that all development is doomed?

The short answer is no.

There are various options to consider some are trickier than others. In deciding the best approach the first step is to determine whether:

  • It is valid and enforceable;
  • Its wording does effect the proposed development.

A restrictive convent will not be valid and enforceable in circumstances where it is:

  • Ambiguous to the extent that its legal meaning is unclear;
  • Contrary to competition law where for example a specific type of business is prohibited on the property and the beneficiary of the covenant operates the same business;
  • Related to property too far away from the land meant to benefit from the restrictive covenant. This is known as the “touch and concern” principle;
  • Related to unregistered land and it is established that no prudent purchaser could have discovered the covenant following proper investigation of the title;
  • Contrary to public policy where, for example, the covenant restricts ownership to persons of a certain faith or race.

If the covenant is valid and enforceable your solicitor may be able to pursue one of the following routes:

  • Indemnity insurance against breach. Land ownership in England and Wales has been documented, in some form or another, for centuries. If the covenant exists but it is so ancient that it is impossible to identify with any certainty who the beneficiaries are a developer could take out insurance against the possibility of a claim arising in the future. There are specialist insurers of these types of risks who will very carefully assess the nature of the covenant and extent of the risk materialising and determine a premium.
  • A deed of release from the covenant. This can be granted by the party in whose favour the covenant operates. This is usually a neighbour. In a case of building height restriction, a neighbour could formally consent to waive the restriction. This can be achieved by careful negotiation and must be embodied in a properly drafted deed which will, in effect, amend the land’s title deed and remove the restrictive covenant;
  • Application to the Lands Tribunal. This tribunal is a specialist court set up to deal with all matters relating to land and development. In terms of Section 84(1) of the Law of Property Act 1925 the Lands Tribunal may modify or discharge a restrictive covenant affecting land on one or more of the following grounds:
    • the covenant is obsolete by reason of changes in the character of the property or the neighbourhood.
    • the covenant impedes some reasonable use of the land.
    • the beneficiaries of the covenant have agreed, either expressly or by implication, by their acts or omissions, that the covenant should be discharged or modified.
    • the discharge or modification of the covenant will not cause injury to those with the benefit of the restriction.
  • Application to court for declaration of invalidity of the covenant. An application of this nature would be necessary in circumstances where it is open to doubt whether the restrictive covenant is valid and enforceable.

What if the developer simply ignores the restrictive covenant?

This would be an extremely risky course of action. A developer who proceeds in full knowledge of a restrictive covenant could risk a significant damages claim from the beneficiaries of the covenant (ie the owners of the land which benefits from the covenant). In addition a court may grant injunctive relief halting all further building works or directing that the existing structures be demolished.

Conclusion

It is vital, when purchasing land for development, that you first instruct a solicitor to thoroughly examine all aspects of the title and in particular advises as to the impact of any restrictive covenants on that title.

A local authority assessing plans for a proposed development will not consider the title or the possibility of restrictive covenants as part of its decision making process. Where a covenant is found to be valid and enforceable a costly (in both time and money) process may ensue to allow the development to proceed. This can be avoided or at least properly budgeted for in the early planning stages of the development.

This article is provided for general information only and is not intended to be nor should it be relied upon as legal advice in relation to any particular matter. If you require specific legal advice on any issue relating to land development and restrictive covenants, we at Burlingtons Legal LLP will be able to assist. Please contact us on  +44 (0)20 7529 5420 to arrange a consultation.

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