Developers: restrictive covenants and your options

Restrictive covenants are a nuisance for developers and landowners and their existence can be catastrophic in the road to bringing forward a development.

Is there any such thing as an “easy” site? Even if you find land with reasonable planning prospects, an absence of gas pipelines, electricity wires, pylons or contamination, it is so often the case that the title will be peppered with a number of outdated and potentially defunct covenants.

What to do if there is a covenant that is hampering the development potential of land

The first thing to consider is whether the covenant is actually enforceable. Broadly speaking, the covenant must benefit land owned by the person wanting to enforce it, the covenant must be genuinely restrictive in nature (not a positive covenant “dressed up” as a restrictive covenant – “not to allow the southern boundary to fall into disrepair” really means “keep the southern boundary in good repair”), it must have been registered correctly and the burden must have been intended to run with the land.

There are instances where a covenant can be removed from the Land Registry title. For example, where it is clear that the land benefitting from the covenant and the land burdened by the covenant has at some point been in the same ownership, the covenant will have fallen away. However, in many instances, too much time has passed or the land has changed ownership on too many occasions to provide enough evidence to the Land Registry that the covenant has fallen away.

You could approach the party with the benefit of the covenant (assuming you can trace them) with a view to negotiating the removal of the covenant. The dangers with this are:

• They will want a chunk of cash for releasing such covenant; or
• They could refuse to remove it at all.

By contacting them you would be tipping them off that your development would breach the covenant.  This would make the availability of any indemnity insurance near impossible to obtain so this approach is rarely used in practice, unless the covenant is modern and the land ownerships have changed little or not at all since the covenant was imposed.

Can I get a restrictive land covenant modified?

There is a procedure under Section 84 Law of Property Act 1925 to make an application to the Land Tribunal to modify or discharge a restrictive covenant. The Tribunal may decide that the covenant in question is obsolete due to changes in the character of the burdened land, changes in the character of the neighbourhood, or other material circumstances. This will invariably be a time consuming and costly exercise although it is a route used by some to clear the title. A recent case Geall, re Vine Cross [2018] UKUT 154 (LC) confirmed that the tribunal could modify or discharge a restrictive covenant, even where the original party who entered into the covenant still owned the land, so there is still hope of success even where the land has not changed hands.

Indemnity insurance

For the most part, unless you can remove the covenant from the Land Registry without involving the party with the benefit of the covenant e.g. by proving it was not registered correctly or that the benefit and burden of the covenant have legally merged, then the best (and definitely quickest) course of action for a restrictive covenant would be to put in place an indemnity insurance policy.  Depending on the proposed use, nature of the covenant and estimated gross developed value of the land can range from a few hundred pounds to tens of thousands of pounds. Unfortunately, policies are not always available to purchase before planning permission is granted, which leaves the developer open to risk. This can be mitigated by structuring the purchase documentation on a conditional basis but the developer is still incurring planning costs which could be significant and so if the party with the benefit of the covenant does show up, then the developer is already out of pocket and several months have been wasted.

Take careful consideration

There really is no universal cure. That is not to say that restrictive covenants cannot be used properly where there is a genuine need. Indeed, they can be very useful in such cases where a seller wants to protect the amenity of its retained land. However, all parties should act sensibly when drafting restrictive covenants going forward. In 100 years’ time or even 40, it is likely that the world will have changed so much that the covenants will not be relevant any more, and the future developers and lawyers will still be wrestling with more covenants and even more “untidy” titles.

Registered providers: Modifying and releasing restrictive covenants

Restrictive covenants can delay and complicate transactions, particularly where they relate to land earmarked for development and the covenants stand to threaten the development and intended use of the land.

However, restrictive covenants can become redundant and obsolete over time, such as where a covenant restricts reasonable use of the land in return for minimal benefit or where the covenant is contrary to public interest.

In these circumstances, the restrictive covenant can be modified, discharged or released but how do these affect registered providers (RPs)?

Discharge or modification of restrictive covenants

A covenant burdening land can be modified in order to make it less restrictive, or it can be discharged so it is removed from the land altogether. This is done via an application to the Upper Tribunal of the Administrative Appeals Chamber.

Where a developer or registered provider applies to the tribunal to discharge or modify a covenant, it has to prove one of the following:

• The covenant is obsolete;
• The covenant restricts reasonable use of the land without providing public benefit;
• The person who benefits from the covenant consents to the discharge or modification; or
• The discharge of the covenant would not harm the person with the benefit of the covenant.

A recent Supreme Court case -The Alexander Devine Children’s Cancer Trust v Housing Solutions Ltd [2020] UKSC 45 evidenced that the court will not allow a covenant to be modified where a development was deliberately and cynically carried out in breach of that covenant. In this case, the developer was aware of a covenant prohibiting building structures on part of the land. The developer disregarded this and proceeded to construct a 23-unit social housing development. Despite the public benefit of the development, the Supreme Court ruled against the developer and stated that, even though it would have been possible to modify the covenant, this will not be permitted where the court considers that the covenant was purposefully disregarded.

Therefore, it is crucial to pre-empt any potential breach before it occurs and, if appropriate, apply to discharge or modify the offending covenant before starting the development.

Earlier this year, Housing Solutions v Bartholomew Smith [2023] UKUT 25 (LC) featured a developer constructing a residential housing development on a plot of land that was burdened by a covenant prohibiting building on the land. However, in this case the court allowed the covenant to be modified, on the basis that the court’s function was not to punish a covenant-breaker where modification of the covenants will not injure the beneficiary.

In this instance, the court exercised its discretion to modify the covenant, even where it was deliberately breached. However, this decision should not be viewed as a ‘rule of thumb’ and developers and registered providers should be mindful of breaching covenants in this manner.

Release of restrictive covenants

This often becomes relevant where a developer or registered provider has acquired housing stock from a local council in the past. The housing stock will usually be subject to archaic covenants that benefit the local authority. These covenants often become redundant or prohibit the intended development of the land. In this situation, indemnity insurance may not be appropriate, particularly if the council has granted planning and is therefore ‘aware’ of the development proposals.

In these circumstances, the developer or registered provider should approach the council to negotiate a release of the relevant covenants in order to continue with the residential development. Negotiating a release of covenants often comes with a consideration.

Key Take aways

Registered providers should take careful note of restrictive covenants but also be aware that covenants that may at first appear to impede development plans can potentially be modified or released. It is important to pre-empt any potential breach of covenants and identify the most viable solution before commencing any re-development.

We’re here to help

If you would like guidance or advice about restrictive covenants with any of your developments, or you need support with any other property matter, then please contact Yasmine on 0116 281 6943 or by email at yasmine.lansiquot@shma.co.uk.