Emily Lam, Collyer Bristow, explains how to manage and overcome restrictive covenants on development sites.
Sites are often subject to restrictive covenants which limit the use and enjoyment of the land, impacting on development. Such covenants can be varied, restricting, for example, the height of buildings or the number of dwellings or forbidding certain uses. Restrictive covenants may not always be enforceable and could be overcome.
When encountering a restrictive covenant, it is first worth exploring if there are grounds to challenge its enforceability. For instance, if the covenant is too uncertain or ambiguous, is contrary to public policy, or is prohibited by competition law, it may be unenforceable.
If enforceability is not open to challenge, there are three main routes that are frequently used in overcoming restrictive covenants.
Negotiating the express release or variation of a restrictive covenant is one option, if proposed development would breach such covenant. The land benefitting from the covenant and its owners must first be established. Payment, however, may be demanded by the covenant’s beneficiaries.
Another avenue is obtaining indemnity insurance to protect against the risk of any beneficiary of a restrictive covenant trying to enforce it. Such insurance would typically cover the policy-holder’s successors in title and mortgagees. Insurance is advantageous due to its speed and low cost – a policy would normally be cheaper than applying to the courts or the Upper Tribunal (Lands Chamber). Insurance may additionally be valuable if the beneficiary of the covenant cannot be determined. Moreover, a lender may require such insurance.
“policy drivers for efficient land use and more homes may improve the process of dealing with restrictive covenants”
An insurance company would want to know whether any approach has been made to any third party benefiting from the covenant, and may be unwilling to provide cover if so, meaning caution should be exercised in commencing negotiations of an express release or variation.
A third possibility is applying to the Upper Tribunal (Lands Chamber) for the modification or discharge of a restrictive covenant. This, though, is usually a long and time-consuming process, which, even in the event of no dispute, can take at least three months.
The restrictive covenant can be discharged or modified if the Upper Tribunal (Lands Chamber) is satisfied that one of a number of particular grounds applies. Such grounds include that the covenant is obsolete or the covenant hinders reasonable use of the land. It should be noted that the Upper Tribunal (Lands Chamber) can order that compensation is paid to the beneficiary and the courts may decline to modify or discharge the covenant where the applicant is already in breach.
The good news for developers is that reform is planned, and policy drivers for efficient land use and more homes may improve the process of dealing with restrictive covenants, decreasing their effect on development. The Government made clear in 2017 its aim to simplify the restrictive covenant system, with the Law Commission remarking in its annual report (2017-2018) that it is aiding the Government in preparing its draft bill.
In the meantime, the costs of managing and overcoming restrictive covenants, along with the lack of certainty of positive results, should be taken into account when evaluating development sites subject to such covenants. As always, it is key to ascertain and consider any issues with prospective development sites as early as possible.