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Restrictive covenants….or are they?

Posted on 16th August, 2021

The recent judgment of the Upper Tribunal (Lands Chamber) in Father’s Field Developments Limited v Namulas Pension Trustees Limited is a reminder about the issues surrounding the use of restrictive covenants.

Restrictive covenants are intended to restrict the owner’s use of the land. Often, this will specify a particular use which is not permitted on the land. Imagine you sell of a piece of your garden to the neighbour; you may want to specify that they cannot build on the land or use it for caravan storage. Why? Well, the use of the land for purposes other than garden land will potentially affect you as the neighbour. If your neighbour decided to build stables on the land it would possibly affect the view from your home and there would be the additional noise and smell too.

It is for reasons such as this that restrictive covenants are often imposed when land is sold off to someone else and the seller is retaining land or other property nearby.

In the case of Father’s Field, they had purchased a golf course extending to approximately 125 acres in 2001. In the transfer to Father’s Field, the seller, Namulas, had imposed restrictive covenants, including one which prevented the buyer from carrying out any residential development on the land without first obtaining the seller’s consent (unless the development was to be occupied by a family member or employee of the buyer).

Consent had been obtained from Namulas to a couple of sales off, but the process had been troublesome. As a result, in 2017, Father’s Field applied to Namulas for the covenant to be released. No reply was ever received.

In 2018, Father’s Field applied to Namulas for consent to the construction of 50 houses on the land. Consent was refused.

Planning permission for two new houses was then granted in 2019, and those houses were intended to be occupied by family members connected with Father’s Field. However, the director of Father’s Field wanted the option to be able to sell the new houses in the future if, for example, they needed to raise finance for the golf course business.

As Namulas had never responded about the possibility of releasing the restrictive covenants, Father’s Field instead relied upon Section 84 of the Law of Property Act 1925 (LPA 1925).

Section 84(1) of the LPA 1925 allows the Tribunal to discharge or modify any restriction which arises under covenant or otherwise on being satisfied that:

(a) “the continued existence [of the restriction] would impede some reasonable user of the land for public or private purposes”; or
(b) “that the proposed discharge or modification will not injure the persons entitled to the benefit of the restriction”.

The LPA 1925 goes on to say that the Tribunal can modify or discharge the restriction if it is satisfied that the use is being impeded by the restriction and either:

(a) the restriction does not secure a practical benefit of substantial advantage or value to the party with the benefit; or
(b) it is contrary to the public interest and that money will be adequate compensation to the party with the benefit of the restriction for the loss or disadvantage.

Previous case law has established that in deciding whether the Tribunal had jurisdiction to discharge a covenant, they had to decide if:

(a) the proposed use of the land is reasonable;
(b) whether the covenant impeded that use;
(c) whether the fact that the use was impeded brought practical benefits to the objecting party;
(d) if so, whether those benefits were of substantial value or advantage; and
(e) if they were not of substantial value or advantage, whether money would be adequate compensation for the loss or disadvantage to the objector.

Namulas conceded that the proposed use of the land for housing was reasonable, that the covenants impeded that use and also that money would be adequate compensation for the loss arising from the modification or discharge of the restrictive covenant.

Case law had previously established that the right to demand a price for consent under a restrictive covenant is not a benefit to the objecting party.

Because Namulas had not retained any land in the vicinity of the golf course, there was no land which could benefit from the restrictive covenant. Namulas admitted that their interest was purely of a financial nature and was happy for the covenants to be discharged provided they were compensated.

Namulas tried to argue that because this was a qualified covenant, which allowed them to consent to a potential breach, they had control over development on the land and that was in itself a benefit to them. The issue here was that this control was also purely financial. Namulas had no desire to be involved in dictating what type of properties were built – they simply wanted to be paid for providing their consent.

This case reiterates the point that the right to demand a fee for providing consent in not a practical benefit for the purposes of the Section 84(1) tests. The tests had been met.

What is important to remember is that Section 84 does not oblige the Tribunal to modify or discharge restrictive covenants where the tests are met. There is a discretion on the part of the Tribunal not to modify or discharge the covenants.

So, did the Tribunal exercise their discretion? Namulas asked them not to do so, but ultimately, the Tribunal found that there was no reason not to. As a result, they decided to discharge the covenants rather than modify them.

And was Namulas entitled to any compensation? Section 84 allows the Tribunal to award either:

(a) a sum to make up for any loss or disadvantage suffered as a result of the modification or discharge; or
(b) a sum to make up for any effect the restriction had at the time it was imposed in reducing the amount they received for the land at that time.

It had been established that there was no loss or disadvantage to Namulas, so nothing was due under the first limb.

The Tribunal came to the conclusion that there had been no discussions about the original sale going ahead without the imposition of the covenants and that the covenants had no impact upon the price paid by Father’s Field to Namulas. As a result, no compensation was paid to Namulas despite the covenants being discharged.

If you are looking to restrict use of land that you are selling and the reason is that you want to extract a payment from the new owner, you should consider imposing overage. This is especially important where you aren’t retaining any nearby land. Overage provisions are positive covenants, so they aren’t vulnerable to a claim under Section 84 of the LPA 1925.

The payment due under overage provisions is agreed at the outset, when both parties have bargaining power, rather than at the point that the party with the benefit of the covenant is able to demand a ransom.

Correctly imposing overage rather than seeking to rely on restrictive covenants will give you the peace of mind that the provisions will not be altered or set aside in the future, and you will know that you will receive the agreed sums if and when the time comes that the buyer wishes to develop the land.

 

Nicola Neilson, Partner and Head of Agricultural Property

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