Not a bartering tool: discharging restrictive covenants

Here we look at a case where the Upper Tribunal (Lands Chamber) considered an application to discharge a covenant which restricted the development of the applicant’s land.

In the decision of Barter (Re Ivy House) the Upper Tribunal (the Tribunal) considered an application to discharge a restrictive covenant imposed on the applicants less than 4 years before their application.

Section 84 of the Law of Property Act 1925 (the Act) gives the Tribunal the power to discharge or modify restrictions affecting land where certain grounds are satisfied. In this case the applicants applied for discharge on the basis that:

• the continued existence of the covenant would impede some reasonable use of the land for public and private purposes; and
• the proposed discharge would not injure the beneficiary of the covenant (additional consideration is sufficient compensation for the loss incurred by discharge).

The Tribunal will give consideration as to the practical benefits, value and advantage of the covenant or whether the covenant is contrary to the public interest. The Tribunal will also have regard to the period and context in which the restrictive covenant was imposed when considering whether the grounds for discharge are satisfied.

A substantial house and additional grounds were transferred to the applicants by Somerset County Council (the Council) subject to a covenant, for the Council’s benefit, not to erect an additional residential building within the property. The applicants subsequently obtained planning permission to divide the existing house into flats and erect a new building containing 13 flats.

The purpose of including the covenant was to ensure the Council would have a share in the development value of the property. The applicants offered £5,000 to the Council, which was refused, and the parties did not reach an agreement prior to the application to the Tribunal for release of the covenant.

The Tribunal held that the grounds for discharge of the covenant were satisfied. The proposed use of land was reasonable, as otherwise planning permission for the erection of the new building would not have been granted. As the Council did not own any land in the vicinity of the property other than highway land, the covenant did not secure any practical benefit for the Council, as intended by s.84 of the Act. The Tribunal took the view that the benefit the Council tried to secure was purely a financial one.

However, the Tribunal felt unable to discharge the covenant and dismissed the application. It took into account the age of the covenant and that the applicants accepted the burden of the covenant as a condition of their purchase. The more recent the covenant and the more immediate the applicant’s role in the creation of the covenant, the greater the weight the Tribunal will give to them when conducting the balancing exercise, although in this case it was not a decisive factor.

The Tribunal held that the consideration paid by the applicants for the property did not account for the potential development of the new building and there was insufficient evidence provided of what would be appropriate compensation to account for the reduced consideration received by the Council for the property.

What can we take away from this?

It is for the applicant to provide all evidence and persuade the Tribunal to exercise its discretion to extinguish a covenant which includes providing sufficient evidence to quantify the appropriate compensation for the respondent.

Compensation must be assessed and evidenced clearly to the Tribunal. Under s.84(1) of the Act, compensation is assessed by reference to the ‘diminution of the value of the land with the benefit of the covenant rather than the loss of opportunity to extract a share of the development value of the applicant’s land’ (Stockport Metropolitan Borough Council v Alwiyah Developments [1986] 52 P&CR 278).

It is possible to modify or extinguish a restrictive covenant if one of the grounds in s.84 of the Act is satisfied. When evaluating the practical benefits of the restriction the Tribunal will consider whether any land genuinely benefits from the restrictive covenant. Obtaining planning permission will support any application to the Tribunal as this shows the proposed use of the land is reasonable.

Whilst the Tribunal is required to take into account planning considerations and any grant of planning permission, it is not bound to modify or discharge a covenant merely because of such considerations or grant. As a result, an application to the Tribunal can often be a lengthy, costly and uncertain process. Even where no objections are raised, an application can still take several months and much longer if the application is disputed.

Care should be taken when using covenants of this nature instead of overage arrangements, as generally the courts will not enforce restrictive covenants where the principal aim is to obtain payment for its release, as opposed to preserving the amenity of the land. In addition, any seller must retain some land which genuinely benefits from the restrictive covenant, if the covenant is to be enforceable.

See more on the case here.