How clean is my title?
Date: 06 November 2009
Authors: Andrew Francis
Issue: Vol 159, Issue 7392
Categories: Features, Property
Take three cases.
First, your client is holding a site ripe for development in suburbia. But for the credit crisis, your client would have built and sold six houses on it and be sitting on a tidy profit. But the land is subject to a density covenant in favour of land retained by the former owner.
Second, your client is a rich investor snapping up small development sites held by developers who need to offload them and one site has covenants on it. These appear to impede profitable development, but because of historic breaches they may no longer be enforceable.
Third your client is a college which needs to expand its facilities on land affected by covenants. A local action group threatens to enforce them.
How should these three parties be advised? In the first two instances no-one has obtained planning consent, due largely to the cost of securing it. All advice must be given with an eye to the fact that money is tight.
In the current market the best practice is to clean up your assets if you can afford to do so and await the upturn to obtain the best price. You would do the same if you were selling your car, so why not clean up your land?
I start by looking at the options which may not be the best ones. I then look at the option which may be the right one.
The options which may not work
In many cases the first choice will be either a restrictive covenant indemnity policy, or the release of the covenant.
But what if the insurers will not issue pre-planning cover, or if the insurer is not prepared to assume risk at all, or at a fair premium?
What if you cannot find who may have the benefit of the covenant?
Suppose the original vendor’s estate (defined as having the benefit of the covenant annexed to it) is now fragmented into many plots?
What if there is real doubt as to whether anyone who might represent the original vendor has any land within the vicinity of the development site?
What if the action group is threatening an injunction, but will not bring such a claim? Releases may be impossible to secure.
What about the Lands Tribunal and the jurisdiction under Law of Property Act 1925 (LPA 1925), s 84(1) to discharge or modify covenants? But without a workable planning consent you will be wasting your client’s money.
The Tribunal will not look favourably on it without a clear idea of what is proposed and its effect on properties with an opposing interest; Re Davies’ Application; decision 13 August 2008; LP/65/2006.
So who is going to buy the site if not clear of the covenants?
Will the seller have to take a huge hit on the price because of the covenant, or will the cash rich buyer be able to name his price?
What can the college do to achieve its expansion without a threat to funding?
Is there a cost-effective way out?
The option which may work
The route to take where it is likely that the covenant is not enforceable, is to use LPA 1925, s 84(2). This is not a well known, or frequently used jurisdiction and there is not a lot of case law on it. But if engaged properly it will clean the title effectively.
The section states:
“The court shall have power on the application of any person interested:
(a) to declare whether or not in any particular case any freehold land is, or would in any given event be, affected by a restriction imposed by any instrument; or
(b) to declare what, upon the true construction of any instrument purporting to impose a restriction, is the nature and extent of the restriction thereby imposed and whether the same is, or would in any given event be, enforceable and if so by whom.”
The terms of s 84(2) provide a useful means by which the validity, or enforceability of covenants can be tested. In particular the jurisdiction allows covenants which are plainly unenforceable to be “cleared off”. The order will allow the Land Registry to remove the entry. The court must be satisfied that all those who may have standing to oppose the declaration sought, have the chance to do so. Hence the “circular” pre-claim letter referred to below. The order operates against the land affected.
Section 84(5) states: “Any order made under this section shall be binding on all persons, whether ascertained or of full age or capacity or not, then entitled or thereafter capable of becoming entitled to the benefit of any restriction, which is thereby discharged, modified, or dealt with, and whether such persons are parties to the proceedings or have been served with notice or not.”
(For reasons of space the alternative procedure under CPR Pt 40 r 20 and s 19 Senior Courts Act 1981 is not dealt with. There is no reason why this jurisdiction should not be used, especially in the case where a negative declaration against the right to enforce is sought; Greenwich Healthcare NHS Trust v London & Quadrant Housing Trust [1998] 1 WLR 1749).
Two recent cases show how the jurisdiction under section 84(2) worked to the satisfaction of the claimants who wanted to get rid of troublesome covenants which appeared to be unenforceable.
The first was Southwark Roman Catholic Diocese Corporation v South London Church Fund & Diocesan Board of Finance; 20th May 2009; HHJ Kaye sitting as a deputy judge of the Chancery Division. “The Southwark case”. The other, a month later, was Norwich City College of Further and Higher Education v McQuillin & Ors [2009] EWHC 1496 (Ch); “the Norwich case”.
The Southwark case concerned covenants imposed in 1888 regulating the use of a Parish Hall in Brockley, South London for Divine Worship only. Since the 1960s it had been used as a Parish Hall only. There were no express words of annexation in the indenture imposing the covenants.
The only evidence regarding annexation (in the absence of express words) linked the benefit to the house of the original vendor in a street about a quarter of a mile to the east of the Hall. As the claimant wanted to sell the Hall at a price reflecting its development potential, the claim was made under s 84(2) to declare that the Hall was no longer affected by the covenants. The judge made the Order holding that there was no evidence of annexation and that the covenant imposed in 1888 had been impliedly released by non-observance for over 40 years.
In the Norwich case the claimant wanted to redevelop its campus, needing the declaration that the covenants imposed in 1936 (which, if enforceable, would have impeded that redevelopment) were not enforceable by local residents. There were express words of annexation.
Kitchin J held (applying Crest Nicolson v McAllister [2004] 1 WLR 2049) that the covenants were in favour of the unsold land of the original vendor and his successors in title and not in favour of the owners of land sold off since 1936. In the event there was no-one entitled to the benefit of the covenants and the College won its declaration.
So how should you advise your client to make use of section 84(2)?
Practical steps to take when using s 84(2)
Clearly you need to exhaust the other possibilities (insurance, releases etc.) first.
If the covenant is plainly enforceable by someone and unless you have secured a release do not use s 84(2)—unless the defendant is keen to give in. If s 84(2) is a possibility you must do some homework. Use office copies and other title documents (pre-registration abstracts or epitomes) to work out who might have the right to enforce. Where is the land located? What words of annexation are used? Do the words limit the annexation to the vendor’s land “for the time being remaining unsold”? Is this is a consent proviso case; if so who might have the benefit of that?
At the end of the research you will have an idea who might have the right to object. Send the “circular letter” to them stating what order you propose. This was used in the Norwich case.
Quite apart from the use of the circular letter, it is always prudent to consider how far early disclosure of the case for and against enforcement is borne out by the potential parties’ titles and the factual evidence; eg of breach of covenant over many years.
Litigation requires a “cards on the table” approach and with open Registers many potential disputes as to enforceability can be dealt with early. The sooner open communication starts with potential defendants the better. That leads to the release of the material covenants on agreed terms.
Once you have the responses and you can advise that s 84(2) can be used, you can start the claim, generally using Pt 8 claim procedure; a witness statement and exhibits will set out the titles and why you should have your order.
How long will it take and what will be the cost?
The advantage of using of s 84(2) is that once you have marshalled your evidence and issued the claim form it should not take a long time to be heard finally. In the Chancery Division in London the time for a hearing of one day or less will normally be about 3-4 months from the first CMC; for trials of up to five days to about nine months, but it is rare for these claims to last more than a day.
If there is some exceptional urgency, or if the claim is unopposed, the claim will be heard and a final order made well before that time. The cost of such an application will depend upon its complexity and the scale of opposition. But claims under s 84(2) should be far less costly than, for example, fully contested applications under s 84(1).
It is usual for the claimant, even if successful, to pay his own costs and to pay the defendants’ costs down to a time when they are able to decide whether or not to oppose the claim on the evidence supplied; Re Jeff’s Transfer [1965] 1 WLR 972.
If the defendants unsuccessfully oppose they will have to bear their costs thereafter. If the claimant loses he would normally be expected to pay the defendants’ costs under CPR Pt 44 r3. The cost of cleaning up one’s title is a price one has to pay. As ever, the circumstances of each case may lead to different costs orders being made outside the general principles set out above.
Andrew Francis, barrister, Serle Court, Lincoln’s Inn. (Author of Restrictive Covenants and Freehold Land—A Practitioner’s Guide 3rd Edn (August 2009) (Jordans)).
E-mail: afrancis@serlecourt.co.uk.
Website: www.serlecourt.co.uk/
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