Mitigating the impact of restrictive covenants
26 November 2020
A restrictive covenant is an obligation on the owner of land not to do something made for the benefit of other land and lasting forever unless released. The recent case of Alexander Devine Children’s Cancer Trust v Housing Solutions Ltd is a reminder of the impact a restrictive covenant can have on development of land. This article takes a look at some measures that can be put in place to mitigate the risk of restrictive covenants when developing land.
Obtain title indemnity insurance
A common step to mitigate against enforcement is to take out title indemnity insurance. Most policies cover a variety of matters linked to any breach of covenant claim including the costs of defending a claim in court, reduction in market value and the costs in settling any claim. They are therefore a useful tool in the arsenal but some points to remember about indemnity policies are:
- They do not prevent a claim being made for breach of restrictive covenant. Just as car insurance does not prevent you being in an accident, a title indemnity policy does not prevent a breach of covenant claim – it only helps deal with the fallout of that claim. Therefore there could still be a delay to any proposed development whilst the insurer seeks to resolve the claim with the beneficiary.
- The indemnity policy will usually only cover the use of the property as explained to the insurer at the time the policy was taken out. If a property is developed for a different use that breaches the covenant and a claim is made, the policy is unlikely to cover that claim. So before considering any change of use (and certainly before making any planning application for change of use) developers should liaise with their solicitor regarding any indemnity policies that may already be in place for the property.
- Indemnity insurance is almost always harder to obtain, and more expensive, where the insurance provider is being asked to cover a use that does not yet have planning permission. This is because the planning process is very public so more likely to encourage people to review their titles to see if there is anything they can use to prevent the proposed use, or extract some ransom value.
- Indemnity insurance will include a limit on the amount that will be paid out and whilst this is usually index-linked, it is always worth checking that the limit continues to be sufficient for the nature of the development being carried out at the property.
Obtain a release
Whilst theoretically a release is the best mitigation step to take, in practice it can be complicated and even detrimental because:
- It is often very difficult to identify everyone who has the benefit of a covenant, particularly where the covenant is historic. This is usually because the documents imposing the covenant are not clear as to what land originally benefited and even if they are, it is likely that the land has changed ownership many times as well as been split into multiple parcels of land since it was originally imposed. In order for an effective release to be given, it is likely that every owner of the parcels of land will need to enter into the release and this is often not practical or even possible. For example, if the original benefiting land has since been sold and turned into 250 houses, it will not be feasible to get 250 people to release the covenant.
- Approaching anyone who might have the benefit of a covenant can invalidate any existing indemnity insurance and prevent any new insurance being put in place.
However, this does not mean that a release has no place in mitigating the effect of restrictive covenants particularly if it is possible to identify all parties with the benefit and they agree to the release. It can also be useful where one or more of the beneficiaries has already made it clear that they know of the covenant and so insurance would not cover claims from them in any event.
Develop around the restrictive covenant
Restrictive covenants can only affect part of the land being developed therefore it may be possible to plan the development around the covenant. For example, if there is a covenant affecting part of the land which prevents the sale of alcohol and the development includes the construction and subsequent use of a bar, it could be possible to structure the layout of the site so that the bar is located on land that is not subject to that covenant.
Applying to the Upper Tribunal (Lands Chamber)
There is always the option of going to court to apply for a modification or release of a covenant. However, this is often seen as an option of last resort as it is a lengthy and costly process with no guarantee of success.
Whilst the above are steps that can help mitigate the risk of enforcement, they are only usually effective if they are put in place early on in the development process and so developers should seek input from their legal advisers at an early stage on any restrictive covenants. Please contact our Commercial Property Team if you have any questions regarding how restrictive covenants may affect you.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at November 2020.