The nature and enforceability of covenants affecting the title to a property can often be misunderstood. This article explores the key points to consider when determining whether a covenant is enforceable and the potential solutions available where a covenant may impact a transaction
What is a covenant?
Covenants are agreements between owners of land which either restrict the use of land or impose an obligation on a landowner. They are therefore classified as either restrictive (negative) or positive.
When purchasing or lending against land, the title to that land should be investigated to determine, amongst other things, whether it is bound by any covenants. Generally, covenants are enforceable between the original contracting parties as a matter of contract law – however, whether a covenant continues to bind the land as a matter of property law is a different question.
Are they enforceable?
Just because the word “covenant” appears on the registered title to a property does not mean it is enforceable by or against the current registered proprietor. This is where the distinction between restrictive and positive covenants becomes relevant. Restrictive covenants are said to “run” with the land, meaning they will bind successors in title. Conversely, positive covenants do not generally “run” with the land.
One common way of making positive covenants enforceable against successors in title is by using what is known as a “chain of indemnity”. This is where each successive buyer gives an indemnity to the previous owner to bear the cost of complying with the covenant. This contractual mechanism is a simple means of passing the burden of positive covenants to successors in title, but the chain of indemnity will only be as strong as its weakest link. For instance, if one successor in title has given an indemnity but has since fallen insolvent, the chain will break and the burden will rest with the last solvent buyer.
In determining whether a covenant is positive or negative, the way the covenant is worded is largely irrelevant. It is the nature of the covenant that is of critical importance when determining whether it is enforceable against the proprietor. Once a covenant has been classified as truly restrictive, the next step is to identify which land enjoys the benefit and who currently has the right to enforce it.
Don’t get caught out…
Some examples of how the wording of covenants can be misleading are set out below. Where a covenant is expressed in a way that makes it sound like a positive obligation, it might, in fact, be restrictive – and vice versa:-
In order to create binding obligations on successors in title, there have been attempts to reclassify positive covenants as easements (which are proprietary rights which automatically “run” with the land). However, the recent case of Churston Golf Club v Haddock [2019] EWCA Civ 544 confirms that courts are still reluctant to find that positive obligations run with the land unless there is an appropriate contractual mechanism in the transfer.
How can I deal with a problematic covenant?
Developers choosing to implement planning permission in breach of restrictive covenants do so at their own risk and courts are not likely to favour parties who deliberately breach covenants.
A recent decision in the Alexander Devine case, where a developer constructed a housing development in breach of a restrictive covenant prohibiting building, serves as a reminder of the need to carefully consider the applicability of restrictive covenants and the potential solutions if a covenant is deemed to impact development.
If time allows, it may be possible to release or vary a restrictive covenant by agreement between the relevant parties or application to the Lands Tribunal. The decision in Hancock and another v Scott [2019] UKUT 16 confirmed that where a change in the circumstances of the surrounding area has rendered a covenant obsolete, the covenant may be discharged by the court. This is welcome news in the context of developments, where concerns can sometimes arise over whether a covenant (often historic) may impede development.
Where it is not practical for a covenant to be removed or modified and there is a risk that it may be breached (already or in the future), the risk of enforcement is usually dealt with by indemnity insurance. Policies typically cover the following losses:
> Reduction in the market value of the premises affected by the covenant.
> Damages awarded by the court to the party who benefits from the covenant.
> Cost of demolition or alteration of the part of the development which breaches of the covenant.
In practice, this is often the most cost-effective way of managing the risk of enforcement.
The bottom line
Covenants can sometimes seem archaic and unimportant at first glance, but failure to deal with them properly can lead to nasty surprises. If in doubt about the nature or enforceability of anything noted on the title of a property, you should seek legal advice
