Beware restrictive covenants

We recently acted on a case where a developer purchased a property with a view to demolishing it and building a much more substantial one. Only several months into the building schedule was it discovered that consent should have been sought from the adjoining owner. Construction ground to a halt when the adjoining owner not only refused consent but insisted on reinstatement, which meant the developer faced an 18-month delay, additional contractor and legal costs, and a very uncertain outcome. This could have been avoided if due diligence had been carried out at the very beginning.

Like many other sites in the country, this property was subject to a restrictive covenant. This means that the title is affected by a restriction on what can be done with the property. Common examples include:

• the type of use to which a property can be put, eg residential only
• not to carry out any development at all
• not to allow more than a certain number of properties to be built on a site.

Restrictive covenants can be both very old and obscure, or fresh and recently imposed. Clearly the effect that they will have on a development depends on the content of the covenant, but whenever there is a covenant in place, it is vital to seek advice before a site is purchased.The first step for a developer or builder to take is to instruct solicitors to review the Land Registry title and the title deeds, as this is where details of any restrictive covenant will be contained. The solicitors will advise whether the covenant is enforceable and the extent of its effect. For example, if the benefiting land is no longer identifiable, the covenant may no longer bite.

If the covenant is sufficiently modern, and/or has an obvious benefit, then the developer’s only option may be to try to negotiate compensation with the beneficiary. If the covenant is ancient and obscure, it might be enough to take out insurance against the beneficiary ever surfacing to take action.

However, most cases will not be so clear-cut. The restrictive covenant may itself be something of a grey area, or the developer may feel that the covenant is of no value, but the beneficiary might hold a very different view. In these cases, the developer might be in a position to apply to the Lands Tribunal to have the covenant discharged or modified.

The application process and the law in this area are very technical. In brief, there are four grounds on which to make this application:

• because the character of the property or the neighbourhood has changed materially, the restriction is obsolete
• the continued existence of the covenant impedes reasonable use of the land, money would be adequate compensation to the beneficiary, and either the covenant secures no practical benefit of substantial advantage or is against public interest
• the beneficiary has consented to discharge or modification
• the proposed discharge or modification will not cause loss to the beneficiary.

To advise on the prospects of success, the solicitors will consider factors such as the age of the covenant, the nature and location of the property and whether these have changed since the covenant was put in place; whether the beneficiaries can be traced, and the effect the covenant was intended to have. If it is possible to make an application under one or more of these grounds, and the beneficiary disputes the application, the parties can expect the process to take 12-18 months. Clearly this could have a significant impact for both contractors and developers.

The issue of planning permission can also be relevant. If permission for the development has already been granted, this can constitute evidence for the developer that the covenant is impeding a reasonable user. The argument will be strengthened if the local authority itself is the beneficiary of the covenant.

To prevent a development from sliding into this trap, it is important to ensure that a careful review is carried out on the legal title before committing to the project, and advice is sought on any covenants that come to light. If the advice is that an application would be needed, the additional time and costs must be factored into plans from the earliest possible stage.

Jill Carey is senior associate in the real estate disputes team at Taylor Wessing