December 1, 2020
When a piece of land is sold, the seller will often impose restrictive covenants which are designed to limit the buyer’s use of the land in some way. These are enforceable if they ‘touch or concern’ the land and also provide a benefit to a clearly identified neighbouring piece of land. They bind the land forever unless released even though the original legal owner may have changed. Sometimes they are used to ensure that the neighbouring area is improved in some way, more often they are a restriction based on the original seller wanting to retain a level of control and perhaps to ensure that, for example, competition from a new buyer is in some way restricted.
What should you do if you think you will breach the covenant?
It is possible to obtain title indemnity insurance which would cover the cost of defending a court claim, any reduction in the value of the property and other related costs. You should note that the taking out of indemnity insurance does not prevent a claim and there could still be a delay whilst the insurer attempts to deal with the beneficiary. In addition, the policy will only usually cover the property for the use as detailed to the insurer when the policy was purchased; it is not a blank cheque to do as you wish. If the property does not yet have planning permission, insurers may be more reluctant to provide cover because there is more opportunity for the beneficiary or other parties to critically review the planned use.
It is possible to strive for a release from the covenant but this can be complicated because of the likely passage of time since it was written and the difficulty in finding the beneficiaries. If you were to approach the beneficiary to obtain a release, any indemnity insurance would then be invalidated as the beneficiary would be on notice that you might intend to breach the covenant. There is an option to apply to court for a release from the covenant, but this can be expensive, and success is not guaranteed as the court’s power is discretionary. To succeed, the applicant must establish that the covenant is outdated and obsolete, it hinders reasonable development of the land and/or is contrary to public interest, the beneficiaries have agreed, and no injury (financial or otherwise) will be caused to the beneficiaries.
Therefore, a more realistic option may be to try to rearrange any development to accommodate the covenant, particularly if it only affects part of the land under development.
What are the penalties if you breach without permission?
It may be easy to think that no one will notice a breach. But what are the consequences if they do? A recent Supreme Court case, Alexander Devine Children’s Cancer Trust v Housing Solutions Limited considered this very issue. In this case the property had a restrictive covenant from 1972 preventing buildings or structures being placed on the land and only permitting the land to be used for parking vehicles. Millgate, the developer, planned to build 23 affordable housing units on the land to complement a further 75 units on neighbouring land. Despite it being possible to build the units so as not to breach the covenant or apply for a discharge from its restrictions before building work commenced, Millgate chose neither option. Millgate then sold the development to Housing Solutions Limited. Once the Court of Appeal had overturned the original judgement which had been in Housing Solutions Limited’s favour there was the potential risk that the units would have to be demolished following an injunction or that they would have to make a substantial damages payment.
This risk is so high that it is essential that developers/purchasers endeavour to plan around the covenant if at all possible, consider the use of insurance or if the case appears strong, make an application to the court to have the covenant released. Carrying on in hope that nothing will happen should never be an option. Your solicitor will be able to identify these issues at an early stage in the purchase of the land and be able to advise on mitigation options.
Wallace Robinson & Morgan Limited are based in Solihull & Dorridge and serve clients across Birmingham and the West Midlands, Warwickshire, Worcestershire and further afield. Our team of Company and Commercial Lawyers are happy to help if you would like advice about restrictive covenants and other planning related issues.
If you would like to discuss your matter, please call 0121 705 7571 and ask to speak to a member of the Company and Commercial law team or email us at firstname.lastname@example.org .
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