What are some development considerations for restrictive covenants?

Delays in the planning process are often cited as a hindrance to development. However, people tend to be less aware of the problems, cost and delays that can be caused by often outdated historic restrictive covenants affecting land. The government desires increased housebuilding on brownfield sites, and Sadiq Khan recently announced that thousands of homes will be built on small sites across London, including gardens and end-of-terrace plots.

Restrictive covenants prevent a landowner from doing something specific with a property, such as developing a site or using it in a particular way. It is not uncommon to see a restriction against building more than one house on a site that could accommodate 4 or more.

For restrictive covenants to be binding and enforceable the properties with both the benefit and the burden of the covenant must be clearly identifiable. The covenant must also touch and concern the land (rather than the benefit being of a personal nature) and that land may be unclear.

The general practice for dealing with restrictive covenants is by one of the following:

1. Obtaining the consent of the person with the benefit of the covenant which may attract a financial payment
2. Obtaining restrictive covenant indemnity insurance
3. Application to the Upper Tribunal (Lands Chamber) (Tribunal) for the discharge or modification of that covenant.

Will lenders lend on development properties subject to restrictive covenants?

Lenders are unlikely to lend on properties subject to restrictive covenants without suitable indemnity insurance in place. It can be difficult to obtain indemnity insurance until planning has been obtained leaving a developer with the dilemma of spending a considerable sum on planning costs with the possibility of not being able to proceed.

Even if insurance is obtainable, premiums can be high and do not remove the issue. Insurance will cover the cost of defending a claim for breach of covenant and the costs of any settlement agreed, but a claim will cause delays to the development.

A Bill was proposed following a Law Commission recommendation last year to help developers and to allow the Tribunal jurisdiction to discharge and modify restrictive covenants.

The Tribunal can discharge or modify a covenant where:

• A restriction is obsolete
• It impedes the reasonable use of the land and there does not appear to be any practical benefit
• Monetary payment will provide adequate compensation.

A number of cases in the last year have considered the enforceability of restrictive covenants and whether they are capable of modification or discharge.

A case example

In Hennessy v Kent, a 1961 covenant prevented more than one dwelling on the land requiring plans to be approved by the original seller or its successors. Hennessy proposed to build a replacement dwelling (the original having been destroyed by fire) with two further properties and applied for a modification of the restrictive covenants. Kent objected.

The Tribunal held the development was reasonable because the site was within the village boundary and the covenants did prevent the proposed development.

The Tribunal considered that the covenants did not have any practical benefit or substantial value to Kent. However, as there would be some detriment to Kent’s property this could be compensated by a payment of £21,000.

In Derreb v Blackheath Cator Estate Residents Limited the Tribunal considered public policy matters as well as the restriction and agreed to modify the restriction with conditions to enable the scheme to proceed.

In both Sutton and East Surrey Water PLC (Sutton) v Tilby and Doberman v Watson (Doberman) the objectors needed to establish they had the benefit of the restrictive covenant by:

1. The assignment of the benefit of the covenant having passed to it; or
2. That a building scheme was in place for the mutual enforceability of the covenants; or
3. That it had annexed for the benefit of the land held by the objector.

In each instance, the objectors were unable to satisfy the Tribunal that they had the benefit of the covenants and the Tribunal allowed the modification of these.

Why restrictive covenants should not be ignored

The Tribunal does seem to take a common sense approach to the application and sometimes will be required to include public policy reasons in its decision making process. The Tribunal may also take into consideration the behaviour of both parties in reaching its decision.

Restrictive covenants should not be ignored and must be reviewed early on when considering whether a site is suitable for development. The cost of dealing with restrictive covenants can be high and needs to be considered in any development appraisal.

Written by Kate Turnham, originally published in: The Negotiator.

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