Restrictive covenants
Date: 23 October 2009
Authors: Malcolm Dowden
Issue: Vol 159, Issue 7390
Categories: Features, Property
Building schemes arise where land has been developed by being laid out in plots and then sold to different buyers. Each buyer enters into restrictive covenants with the common seller restricting the use of the particular plot for the benefit of the estate generally.
Their purpose is to preserve the value of the estate and to prevent, for instance, business use in a residential area. The owner for the time being of each plot is bound by the scheme and he can enforce its rules against all other owners governed by the scheme. Restrictive covenants contained within the scheme are also enforceable by owners of sub-divisions of land within the scheme (Brunner v Greenslade [1970] 3 All ER 833).
A building scheme requires: an intention to impose mutually enforceable restrictions in the interest of all the buyers and their successors; and a clearly defined area affected by the scheme, and known to the buyers.
A building scheme constitutes a local law, binding the buyers of the various lots included in the scheme and their successors in title. It is enforceable by each buyer and his successors in title against all or any of the other buyers and their successors in title.
Further, the seller and the buyers of any unsold lots within the development affected by the scheme are also bound, unless there is an express reservation on the part of the seller to exempt any unsold lots from the restrictions imposed by the development.
However, a building scheme carries no exemption from the requirements of registration. The restrictive covenants imposed by the scheme must be registered against the seller by each buyer. In the case of unregistered land the covenants are registered as D(ii) land charges.
A covenant which is registrable but unregistered is void against: a subsequent purchaser; for money or money’s worth; of a legal estate in the land charged with the covenant.
For post-1925 covenants, where the conveyance or deed imposing the covenant did not trigger first registration of title, it is worth checking whether the covenant was protected by entry of a D(ii) land charge. If it was not properly protected, the covenant is unenforceable, even if a note of it was entered in the charges register on subsequent registration of title.
In the case of registered land generally the building scheme will have been constituted in a transfer of part of registered land so that the entries will be made as a result of the application to register the transfer. Registration governs the running of the burden of the covenant against the seller, whereas the development scheme itself governs the running of the benefit.
Enforceability
For freehold and long leasehold land falling within s 84(12) it is possible to apply to the court under Law of Property Act 1925, s 84(2) for a declaration stating whether the land is affected by any restriction and, if so its nature, extent, and enforceability. Because an order under s 84(2) is binding on non-parties, the court must be satisfied that efforts have been made to notify all prospective interested parties of the claim.
This requires a letter to all such parties identifying the claimant, the land and what the claimant proposes to do. It should also set out the covenant explaining that the proposed development may infringe it and that the covenant is considered to be unenforceable and that the claimant intends to apply for an order under s 84(2). The proposed order should be set out and the recipient invited to consent, or indicate whether it wishes to be a party to the claim if it does not consent, and give details of others who might be interested in its property.
Costs
Even if successful, the claimant is likely to have to pay its own costs, and the costs of any defendant that acknowledges service, on the indemnity basis, to the point in the proceedings at which they have had a full opportunity of considering the matter and deciding whether or not to oppose the application (Re Jeffkins’ Indentures [1965] 1 All ER 608).
Risks
Section 84(2) provides a useful means of satisfying any potential purchaser or developer that a covenant is unenforceable. However, notifying all prospective interested parties can prompt claims or threats of action that, even if ill-conceived or vexatious, can delay or prevent a deal.
The letters required to notify potential parties before issuing a claim under s 84(2) generally precludes insurance cover for the restrictive covenants in question.
Consequently, if insurance is a potential solution, that avenue must be pursued before any steps are taken towards a s 84(2) application.
Malcolm Dowden, solicitor, LexisPSL
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