Restrictive covenants: hidden pitfalls and smart solutions

Imagine buying a prime development site, only to discover you can’t build on it because of a covenant buried in a deed from the 1800s. Restrictive covenants affect many properties in England – irrespective of age or type – and can dictate how that property is used, what it must look like and what can (or can’t) be built there.

It is crucial therefore, to identify any problematic restrictive covenants as early as possible. If there are covenants which could prevent you from redeveloping or using the property for your proposed purpose, this will need to be addressed before such development or use takes place. There is no ‘one-size-fits-all’ approach to resolving the issue and what will be the most appropriate course of action will depend on the circumstances you find yourself in.

Indemnity insurance

For older restrictive covenants, which date back many years and several prior owners, the most practical and cost-effective way to mitigate the risk of loss is often to obtain a title indemnity policy which would provide cover for legal costs and damages awarded in the event that someone with the benefit did seek to enforce a breach of the restrictive covenant. The policy premiums are often cost effective as insurers consider the likelihood of anyone bringing a claim for breach of covenant in such circumstances as slim. It won’t fix the title issue if there is still a breach of covenant, but it does look to mitigate your losses should someone seek to bring a claim. A specialist insurance broker (who your solicitors will liaise with on your behalf) will be able to advise on the terms of a policy which offers the best protection in the circumstance.

WARNING: for indemnity insurance to be available, no approach should be made to the person who might have the benefit of the restrictive covenant (the Covenant Beneficiary) at any time, so if you’re unsure of your position please speak to a legal adviser before contacting anyone.

Negotiating your way out

Where a restrictive covenant has been more recently imposed and the Covenant Beneficiary can be easily identified, title indemnity insurance is unlikely to be an option as there is a higher risk of the restrictive covenant being enforced. In these circumstances, an alternative option may be to negotiate an express release or variation of the restrictive covenant with the Covenant Beneficiary. Note our comment above regarding the likely non-availability of indemnity insurance where an approach has been made to the Covenant Beneficiary so you should liaise with your legal adviser to agree the best course of action at the outset (which will likely be to exhaust the option of indemnity insurance before any approach is made). Where an express release or variation is sought, it is likely that you will be required to pay a premium to the Covenant Beneficiary in return for such variation or release. How much money you will be required to pay will be a matter for commercial negotiation and will depend on respective bargaining power, but ultimately there is no obligation on the Covenant Beneficiary to agree to a release or a variation.

Application to the Upper Tribunal – a last resort

If insurance and negotiation are unsuccessful, a last solution may be to submit an application to the Upper Tribunal (Lands Chamber) under s.84(1) of the Law of Property Act 1925 (LPA) for the relevant restrictive covenant(s) to be modified or discharged. For an order to be made by the Upper Tribunal, one of the specified grounds will need to be satisfied (for example, if the covenant is obsolete or contrary to public interest). Even then, the power of the Upper Tribunal to discharge or modify a restrictive covenant is discretionary, so even where such grounds are made out, there is no guarantee that the Upper Tribunal will grant the variation/release. Such applications are time-consuming and expensive and there is no guarantee of the outcome, so this is a rare course of action and not something to jump into lightly.

Dangers of the ‘build first and apply later’ approach

With tight timescales and financial pressures often involved in the development of land, the temptation can be to press on with your development and hope the issue can be resolved later. However, caution should be exercised with this approach. In the recent case of Fosse Urban Projects Ltd v Whyte & Others, 2023 the property was subject to a covenant restricting the use of the property to garden land only. The applicant obtained planning permission to develop the property and applied to the Upper Tribunal for the restrictive covenant to be discharged. Crucially, however, they then decided to commence works in breach of the restrictive covenant before waiting for a decision to be made by the Upper Tribunal. The new dwelling was fully constructed (and occupied) by the time the Upper Tribunal reached its decision. Unfortunately (for the developer), while the Upper Tribunal agreed that the first two grounds of the application could be established, the application was ultimately rejected on the basis that the applicant commenced works in deliberate breach of the restrictive covenant. The outcome of the decision in Fosse re-emphasises the discretionary nature of the Upper Tribunal’s powers under s.84. A restrictive covenant cannot simply be ignored with the expectation that a deliberate breach will be capable of remedy at a later date and the Upper Tribunal will not view such actions kindly when considering a subsequent s.84 application. Therefore, think twice before building first!

Beware of building schemes

If you wish to dispute the validity and/or enforceability of the restrictive covenant instead, this will be a matter for the court to determine as opposed to the Upper Tribunal. An application would need to be made under s.84(2) of the LPA for a declaration as to whether the property is affected by the restrictive covenant. Again, this is likely to be a costly and time-consuming process and can come with its own pitfalls.

An example of this is in Hughes Family Property Co Ltd v No Defendant [2024], where the property was subject to a restrictive covenant from the 1970s limiting the number of houses that could be built on the property to one. The benefit of the covenant was expressed to be for the remainder of the developer’s estate. However, the developer did not own any other property on the estate at that time, and the benefit of the covenant did not appear to have been expressly assigned to plot purchasers. The applicant applied to the High Court for a declaration that the restrictive covenant did not have any beneficiaries and, therefore, did not apply. The High Court upheld the restrictive covenant as they determined that it had been imposed as part of a building scheme and so was intended to benefit all plot purchasers on the estate and was mutually enforceable by and against all plot owners from time to time.

The Birketts view

There is unfortunately no one-stop solution when it comes to mitigating the risks associated with restrictive covenants. Careful consideration will need to be given to all of the facts at hand to determine the most appropriate measure bearing in mind (among other factors) the age of the covenant and the nature and value of the development. The key takeaway is that being alive to these issues early on is vital to ensure you can identify the most suitable and cost-effective way for the restrictive covenant to be dealt with and minimise any impact on your proposed development. If you’re unsure whether your plans could be impacted by a restrictive covenant, please do get in touch with a member of our Commercial Real Estate team who will be able to advise you on your specific circumstances.