Rachel Booth, partner at Clark Holt solicitors & property development specialists, outlines the options available to anyone pondering how to deal with land bound by restrictive covenants.
You have found the ideal site BUT FOR the restrictive covenants which bind it. Would you overlook them or is your view that indemnity insurance will cover the problem?
Recent case law has highlighted the fact that the courts/tribunal take a dim view of ‘flagrant disregard of restrictive covenants’, otherwise known as cynical breach.
Added to this, the fact that planning permission has been granted for a development, which would breach a restrictive covenant, does not necessarily mean that the restrictive covenant is unenforceable.
Restrictive covenants are often used to restrict the kind of use that can be put to land or to prevent development entirely.
The owner of the land benefitting from the covenant will be able to enforce that covenant against the land burdened by the covenant, if certain rules are complied with.
The main remedies for a breach, or a threatened breach, are damages or an injunction to prevent the breach or to discontinue one.
If an injunction is awarded, it may even require a completed building to be demolished. At the very least, restrictive covenants can reduce the value and marketability of land and, in the worst case, can have far reaching consequences both from a financial and a PR point of view.
My recommendations are:
- Ignore or underestimate the possible impact of restrictive covenants when considering a site acquisition.
- Approach anyone that may have the benefit of the covenant to discuss them before you obtain legal advice, as this would probably result in indemnity insurance being unavailable to you.
- Involve your solicitor at the negotiating stage of your acquisition because they can undertake a high level review of the title at that early stage to see if any restrictive covenants apply (and if other potential problems that affect use or value exist). If you wait until the due diligence stage of a transaction, when a solicitor usually reviews the title, the price and other main terms of the deal will have been agreed, costs incurred and time will already have eaten into your timetable for the purchase.
- If restrictive covenants exist, discuss this with your team of advisors (solicitor/surveyor), to assess the possible impact on your plans and negotiations. Give your team time to assess the impact because whether or not covenants are enforceable is often a technical point and will depend on the circumstances of the case. Those circumstances include the law, the site itself, your plans and the likelihood of the owner of the benefitting land taking enforcement action.
- Consider the benefit of consulting specialists such as legal counsel. Their superior knowledge, although sometimes costly, can save time and money in the long run.
- Consider practical solutions such as the possibility of altering your development plans for the site, to accommodate the restrictions imposed by the covenants.
- Look into the possibility of indemnity insurance as a way to limit the main risks of carrying out your plans in breach of a covenant. Indemnity insurance is not always a fix but can be helpful if it is not possible to determine what restrictive covenants actually burden the land, or if it is unclear as to whether the covenants are enforceable or if it is not possible to identify the beneficiary of the covenant.
- If advice is that enforcement action is likely and that insurance is not a way forward, consider the possibility of negotiating a release or modification of the covenants by the benefitting owner, for a monetary payment. It is important in this case to identify all those that may have the benefit of the covenant, as an agreement to release or modify by one person will not bind others, in a situation where more than one person has the benefit.
- Consider a formal discharge or modification of the restrictive covenant. The Lands Chamber of the Upper Tribunal (previously the Lands Tribunal), has jurisdiction to discharge or to modify restrictive covenants, where the applicant can show that one or more of the grounds set out in the Law of Property Act 1925, section 84 applies. The most commonly used grounds are that the covenant has become obsolete or it impedes reasonable use or development of the burdened land. Depending on the circumstances, you may also seek an order from the court declaring that the covenant is unenforceable.
In short, my advice is not to ignore restrictive covenants but to employ solicitors that are experienced in development work to help you to identify possible legal issues, such as restrictive covenants, at the negotiation stage of your acquisition.
We are experienced in advising both developers and landowners on restrictive covenants. We work with them to identify possible issues at an early stage and to manage/overcome those issues.
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