Restrictive covenants

A restrictive covenant requires the covenantor not to do the thing specified, whether that is building on or using the land for particular purposes. Unlike 'positive' covenants, the burden of a restrictive covenant is capable of 'running with the land', so that successive owners or occupiers are bound by the restriction.

Who has the benefit?

It can be extremely difficult to identify who has the benefit of a restrictive covenant. Even where the initial description was clear, the sale of land in parts can produce a situation in which the benefit is (notionally at least) divided among a large number of owners and occupiers.

The Land Registry has no obligation or power to enter the benefit of a restrictive covenant on the register of title to the dominant land. The result is that a vast number of covenants fall into limbo as it is impossible to discover who (if anyone) is entitled to enforce them.

For post-1925 covenants this problem was compounded by Federated Homes v Mill Lodge Properties [1980] 1 All ER 371 which indicated that the benefit of a covenant would be automatically and irrevocably annexed to each and every part of the land for which it was originally taken.

In Crest Nicholson v McAllister [2004] 2 All ER 991 the Court of Appeal helpfully found that effect can be given to words that are intended to reduce the land with the benefit of a covenant as parts are sold off, and that the benefit a covenant might fall away entirely once the developer has sold off the last plot.

The burden of a restrictive covenant

The requirements for the burden of a covenant to run in equity are:

• the covenant must be restrictive in nature

• there must be land benefited ('touched and concerned') by the covenant

• the burden of the covenant must have been intended to run, and

• the successor in title to the covenantor must have notice of the covenant. For covenants created on or after 1 January 1926, registration has taken the place of notice. In the case of:

• • unregistered land - a restrictive covenant entered into after 1925 must be registered as a D(ii) land charge

  • registered land - a notice must be entered in the charges register of the burdened land

Covenants can also be mutually enforceable between the owners of plots on an estate where they were originally imposed as part of a 'building scheme'. There must be:

• a common seller

• who laid out an estate in lots subject to mutually binding restrictions

• intended to benefit the other lots in the scheme, and

• who sold the lots to purchasers who take on the footing that the restrictions are to bind them for the benefit of the other lots

Discharge or modification

The Lands Tribunal has jurisdiction to discharge or to modify a restrictive (but not a positive) covenant where the applicant can show that one of the grounds set out in Law of Property Act 1925, s 84 applies. The most commonly used grounds are that the covenant has become obsolete or where it impedes reasonable use or development.

Where a covenant is discharged or modified the applicant will usually have to pay compensation. Even if successful the applicant will have to pay his own costs. If the application fails then he is also likely to face an order to pay the other parties' costs.

As well as the Lands Tribunal's power to discharge or modify a covenant it is possible to seek an order from the county court declaring that a covenant is unenforceable. The main drawback of this approach is that the court procedure requires notice to be given to anyone who might have the benefit of the covenant requesting confirmation that they agree that the covenant cannot be enforced. Once notices have been given in connection with court or Lands Tribunal proceedings it becomes impossible to obtain restrictive covenant insurance cover. Consequently, before taking any procedural steps it is always worth considering whether insurance might be a quicker and less expensive alternative.

It is sometimes possible to negotiate a release or modification of the covenant. The starting point for negotiating a release is often taken to be the 'Stokes' percentage (33-35%) of the increase in value or development profit that would result from the release. Although widely used, case law demonstrates that the 'Stokes' percentage is no more than a starting point. Awards in disputed cases have ranged from 5- 50%. This is an area in which advice should be sought from a specialist.

It is also essential to remember that negotiating a release from one or more of those who appear to have the benefit of a covenant will not bind anyone else who might be able to enforce it. The Land Registry will not remove a notice relating to a restrictive covenant without conclusive evidence that it has been entirely discharged or released. On receiving a deed of release the Land Registry will generally add a supplemental note to say that the deed 'purported' to end the covenant. The original notice remains on the title, and so the risk of some other claiming entitlement to enforce will remain.

Enforcement

The main remedy for breach (or threatened breach) of a restrictive covenant is an injunction. Where the breach has yet to be committed the court is very likely to award an injunction. A recent ruling (Mortimer v Bailey [2004] 1 EGLR 75) served as a useful reminder that an injunction might be awarded even after a building has been completed. It is not safe to assume that once a building is up the court will award damages instead of ordering demolition. The court has power to award damages in lieu of an injunction.

As with private negotiations, the 'Stokes' percentage is often taken as the starting point for assessing damages but other factors can significantly increase or decrease that figure.