Restrictive Covenants In Property Transactions
This article explores Restrictive Covenants in property transactions in detail, covering the following areas:
- What are Restrictive Covenants?
- First Case Study – Investigation vs Insurance
- Considerations for Conveyance
- Diving Deeper into Restrictive Covenants
- Second Case Study – Value of Indemnity Policies
What are Restrictive Covenants?
Restrictive Covenants is a legal and binding obligation written into the property deeds or contract by a seller. The Restrictive Covenant regulates what a homeowner can or cannot do to the building or the land under specific circumstances. These normally arise when the seller imposes certain terms on buyers, to protect the land they are selling on the grounds of what they deem to be important.
These Restrictive Covenants are then placed on the new title and persist when ownership changes hands. Common examples include:
- The prevention of owners altering the property or turning it into apartments.
- Halting the demolition of the building.
- Restricting the number of dwellings or volume of residences built on a property.
- Prohibiting redevelopment.
- Disallowing any structure to be built on a section of land.
- Preventing any form of trade or business operating from the property.
- It can even include approval needed to prune or plant trees.
The reason these Restrictive Covenants come into play is, when the vendor wants to protect the land or property they own or retain in the area. This often includes land that has been sold off, ensuring the covenant runs through the land with future purchases. Covenants are often drafted to uphold particular requirements in respect of residents within an estate.
Housing developers and property management companies will often apply Restrictive Covenants to inhibit owners starting work or practices that may impact the neighbourhood. This is done to maintain a level of uniformity and character between the properties. This could include anything from paint colour, shutters, double glazing, satellite dishes, and CCTV cameras to parking caravans or trailers in front of the property and not owning livestock.
There are also Positive Covenants such as the maintenance of a boundary fence, which do not pass on to future purchasers. Once the land is sold, these covenants can no longer be enforced.
First Case Study – Investigation vs Insurance
The first case study revolves around Restrictive Covenants put in place to limit certain forms of development and trade. It’s also an example of the imbalance of power that sometimes arises around covenants, where one party has considerably more knowledge of the topic than the other. This is an example of where the presence of a Restrictive Covenant Legal Indemnity is beneficial in supporting the homeowner.
It’s not uncommon for land agents, claiming to have the benefit of covenants, to send letters with minimal explanation to individual property owners requesting money to have the covenants removed. Whilst the covenants usually do exist, they would often date back to when a housing estate was constructed and have little relevance, especially to a property owner who has made little or no alterations to their property.
Homeowners, having limited knowledge of property law, may feel inclined to pay after receiving one of these letters. Fortunately, holding one of our Restrictive Covenant policies, means they can bring in an expert to review the request, removing that power imbalance. The claim handler can then assess the enforceability of the covenants.
In this example, a company sent a letter to a CLS policyholder claiming they had breached a Restrictive Covenant by adding satellite dishes and aerials to the property and parking trade vehicles on the driveway. The company in question was asking for £300 to enter a deed of variation with the policyholder who in turn, notified CLS claims. The CLS handlers were able to challenge the company in question to prove their ability to enforce the covenant.
Needless to say, they did not respond, the policyholder did not have to pay the £300, and their perpetuity policy remains in place to protect them going forward.
Considerations for Conveyance
It’s important that Restrictive Covenants, whether they are historical oddities or fundamental to current occupiers, are dealt with immediately. Some of the issues surrounding these covenants can also be technical in nature and therefore it’s advisable to seek legal advice. This is when a conveyancer will be responsible to review the relevant covenants that are recorded on the land charters register, as well as checking the wording of the covenant to ensure it is correctly drawn up and enforceable.
It is generally held that if a Restrictive Covenant has been breached without challenge for more than twenty years, then the enforcement of that covenant, by whoever benefits, is unlikely to succeed. The case most commonly cited is Hepworth vs Pickles in 1900 where a building acted, uninterrupted, as a tavern for twenty-four years, at which point the beneficiary of the covenant challenged the use. He was unsuccessful due to the longevity of breach. The UK Finance Handbook, Section 5, states that if breach is unchallenged for more than twenty years and did not have indemnity insurance insisted on, the Restrictive Covenant would generally be enforceable between the original contracting parties as a matter of contract. However, there can be situations where this is not the case.
- Where the covenant is too ambiguous to be capable of enforcement.
- Where the covenant is prohibited by competition law and therefore unenforceable.
- When the covenant is contrary to public policy such as contravening equality laws.
For the covenant to be enforceable or enforceable between the successors entitled to the original parties, the following rules for passing the benefit apply:
- The covenant benefits land owned by the person seeking to enforce it.
- The covenant must touch and concern or relate to the land owned by the person seeking to enforce the covenant.
- For example, the covenant affects the nature, quality or value of the land.
- The person seeking to enforce the covenant must either be the legal owner or have some recognised interest in the equity.
- The beneficiary of a will would be an example of the latter.
Having established the possible enforceability of a restrictive covenant, a conveyancer would usually look for options where insurance could be obtained to cover the liability of any further breach of contract. These liabilities could include:
- Damages or compensation
- Alteration costs
- Reduction in value of the property as well as legal expenses incurred.
Diving Deeper into Restrictive Covenants
Enforceability of covenants is a complex area, which is why insurance would be the preferable option for speed and expense as opposed to investigation. If insurance cannot be obtained, then investigation is the next step.
The owners of the property could approach the individual with the benefit of the covenant in order to obtain a retrospective consent for the works. If that person cannot be traced, this commission seeks compensation for the breach or charges a fee, which is prohibitive. Then the owner can apply to the Upper Tribunal of the Lands Chamber to modify or discharge the restrictive covenant.
However, the process can be costly and time consuming with no guarantee of success. Even if one was successful, cost would not be paid by the beneficiaries of the covenant. In fact, if their projections were successful, the owner may be forced to pay the cost as well as be lumbered with a “now confirmed” covenant, which is far from ideal.
If a Restrictive Covenant is deemed to be unreasonable, an application can be made to the Land Tribunal to have it modified or discharged. For example, if the covenant is considered out of date or if there is an agreement to discharge between all of those with the benefit of restriction. This could amount to a lot of parties if you consider a covenant which benefits a housing estate, permission would be needed from each homeowner.
A covenant can also restrict a reasonable use of land depending on the original motives around the covenant. There has been a case limiting the sale of tea from a building and even though the building may not have anticipated the rise of café culture, even if tea sales don’t come close to coffee, it may be a reasonable use for the building intended.
Another discharge consideration is that no injury will be caused to those entitled to the benefit of the covenant by reason of discharge or modification. However, proceeding with works while ignoring a Restrictive Covenant can be extremely risky. In the worst-case scenario, the work may need to be completely undone, and compensation has to be paid to the beneficiary of the covenant.
If the choice is to investigate and attempt to resolve the issue with the original covenantee, you may exclude the possibility of insurance or at the very least, create a situation where premiums may be higher or there may be some amendment or restriction associated with the insurance term. If investigation is impractical or unwarranted, then the legal indemnity insurance may be preferable for a number of reasons.
The covenant may be old, the original covenantee may be deceased or a defunct company, or alternatively, the benefiting party may be known but not agree to a release or modification. This could be costly and take a long time, potentially causing the chain to break down or a prospective seller to look for an alternative buyer.
An insurance policy that protects the uninsured from costs involved in the event of the claim against a breach of a covenant is an acceptable method to set up alternatives to investigation.
Second Case Study – Value of Indemnity Policies
This case study highlights the value of indemnity policies in dealing with neighbours who turn out to be less than helpful. In this example, the indemnity policy enabled a project to progress, with costs to be covered that might otherwise have led to a six-figure loss on the part of the insured party.
The policyholder owned a house on a large plot in the Midlands and decided to build a new house on the part of that plot to sell on. Neighbouring properties were believed, correctly, to have the benefit of a Restrictive Covenant that could restrict development on the land, so cover was put in place. However, it initially didn’t look like a claim was likely throughout the planning process and even well into the building of the second property.
The neighbour, who was the main risk, had verbally given their blessing for the development after initially putting in a written objection to the planning authority. At the point when the property was virtually built and the buyer lined up, the neighbour changed their mind and wrote to the insured, claiming to have the benefit of the covenant.
The insured party – now concerned that they might lose the buyer or have to take down the property – contacted us and instigated the claims process under the policy. The CLS claims team instructed specialist solicitors, whose first move was to assess the enforceability of the covenant and put together a report for the insurer. The report also investigated the likely development profit of what a court might typically award the beneficiary of the covenant in lieu of an injunction. A court can typically award in the region of 30% to 50% of the profit in these instances.
It was decided that the fragility of the insured sale meant that a quick initial offer to the neighbour would be the best move. An initial offer, covered by the policy, was made of £20,000. The offer was refused, but at least the message was sent to the neighbour that there was a desire to resolve this in a timely fashion. After the initial offer was rejected, it became difficult to get the neighbour to re-engage. Our concern was that they simply wanted to block the sale of the newly built property.
There was a continued effort on the part of our claims experts to engage with the beneficiary of the covenant, even offering to meet in person with the neighbour and their solicitors (shortened sentence). Eventually their persistence paid off with a deal being struck for £50,000 in exchange for the release of the covenant as well as the neighbour’s reasonable legal costs. This offer was also covered by the policy,
While this was a larger sum than first offered, this was approximately what a court would reasonably have been expected to award the neighbour. The claims team and panel solicitors were aware that prolonging the dispute by going to court would have taken several months. It would have lost the buyer for our insured and would have seen a further deterioration of the relationship between the insured parties who we were representing the neighbour.
The £50,000 settlement allowed the insured to get his sale completed, the new owner to move in, and everybody to move on within six months of the claim being notified. The insured also benefited from around £12,000 worth of expert legal advice and case handling from our panel of solicitors, under the cover of the policy.
Had the insured not had a Restrictive Covenant policy in place, resolving the issue would have been challenging, as they would have been personally liable for both the legal costs and any settlement. They would also have had to navigate the nuances of the case and the legal system themselves.
If you would like any further information about Restrictive Covenants or any related subject matter, please don’t hesitate to contact CLS.
This article was submitted to be published by CLS Property Insight as part of their advertising agreement with Today’s Conveyancer. The views expressed in this article are those of the submitter and not those of Today’s Conveyancer.