Court cases relating to rights of pre-emption and overage arrangements are not very common. To have one case which covers both a pre-emption arrangement and also an attempt to protect overage by way of a restrictive covenant is very rare. However, the recent High Court case of Cosmichome Limited v Southampton City Council [2013] EWHC 1378 is one of those rare cases.

In 1989 a property in Southampton was transferred by Southampton City Council to the BBC for use as a regional broadcasting centre. The transfer contained a restrictive covenant preventing the property from being occupied other than by the BBC for the purpose of a broadcasting centre. The covenant was subject to a proviso that it could be removed by the written agreement of the Council and if a further covenant was entered into to pay a development sum comprising 50% of the increase in value of the land following a change of use. In addition the transfer contained a pre-emption right requiring the BBC to offer to sell the property to the Council if it became surplus to the BBC’s requirements or the BBC ceased to require the property for broadcasting purposes. In 2004, the BBC sold the property to the claimant, Cosmichome Limited, and took a lease back for a term of 25 years.

Cosmichome commenced proceedings in relation to two issues. Firstly, they sought a declaration that the restrictive covenant which secured the development payment was not enforceable against them as the successors in title to the BBC. There has always been an issue in terms of how best to ensure that overage obligations are passed on to successors in title to land. Sometimes mortgages are relied on. More often there are provisions for direct deeds of covenant and restrictions registered against the land registry title to ensure that these deeds of covenants are delivered. The use of restrictive covenants, where the person with the benefit of the overage owns adjoining land, is another device which has been used in the past. However, the Court took the view that the restrictive covenant was not enforceable against successors in title to the BBC. The Court felt that the covenant did not benefit the Council’s adjoining land when it was imposed, it did not benefit that land now and the reason for imposing the covenant was purely to secure a financial advantage if the BBC ever ceased to occupy the land. It was therefore not a restrictive covenant which should bind the BBC’s successors. Therefore the Council could not rely upon the covenant.

The second issue was the enforceability of the pre-emption against Cosmichome Here the Court agreed that the sale and lease back to Cosmichome did not trigger the right to exercise the pre-emption right because the BBC continued to occupy and use the Property for broadcasting purposes after completion of the sale and leaseback. In terms of whether the pre-emption was still enforceable, the Court had to consider the rules relating to perpetuities. In brief in relation to options to acquire an interest in land (and this includes pre-emptions) contained in any agreements entered into on or after 16 July 1964 and before 6 April 2010, there is a 21 year perpetuity period. The question was when this 21 year period commences. In the past, the Courts have accepted that the perpetuity period runs from the date of the document itself. However, the Court here decided that the 21 year period commences only when the option to acquire arises and not when the document is entered into. As the sale and leaseback had not triggered the pre-emption right, the 21 year period has not started to run. Therefore on the face of it the Council have not lost the right to enforce the right of pre-emption. However, the Court found that because the Council had failed to protect the pre-emption right by registration at the Land Registry, the BBC’s successors in title would not be bound unless the Council could produce evidence that some form of constructive trust had arisen.

Clearly the two messages for the real estate sector are do not rely on restrictive covenants as a way of trying to secure overage obligations and always make sure you register pre-emptions and options which you have the benefit of at the Land Registry. Failure to do so will generally make those rights unforceable against successors in title.