Restrictive Covenants: Key considerations for developers

For developers, restrictive covenants can be an unwelcome complication and may be one of the biggest impediments (alongside rights of light) to the viability of any development project.  They are often buried in title deeds but can be the deciding fact as to whether, and how, a site can be developed.  According to B P Collins’ property disputes team, overlooking a covenant at the due diligence stage (when purchasing land for prospective development) can lead to costly disputes, injunctions, and even stalled schemes.  

The burden of a restrictive covenant runs with the land: a developer who acquires a site subject to a restrictive covenant acquires it subject to the risk of enforcement by whoever has the benefit. That risk does not disappear because a development has been granted planning permission, or because the covenant is old, or because the developer was unaware of it at the time of purchase. Understanding whether a covenant is enforceable, by whom and at what cost, and how that risk can be managed or eliminated, is an essential part of the pre-development process.

What are restrictive covenants?

Restrictive covenants are legally binding promises that limit the way land can be used.  They are usually imposed by deed and ‘run with the land’, meaning they bind successive owners – the land they purchase will be subject to the restrictive covenant).

Common examples include:

• Use restrictions: “no commercial use” or “residential use only.”;

• Building restrictions: limits on the height, size, or number of dwellings; and

• Prohibitions: banning particular activities (trading, keeping animals, operating certain businesses).

Covenants restricting the use of land imposed by a seller may be divided into three classes:

1. covenants imposed for the seller’s own benefit;
2. covenants imposed as owner of other land, of which the land sold formed a part, and intended to protect or benefit the unsold land; and
3. covenants on a sale of land to various buyers who, with their respective successors in title, are intended mutually to enjoy the benefit of, and be bound by, the covenants.

The first category of covenants is personal to the seller and only enforceable by them, unless expressly assigned.

The second category ‘run’ with the land and are enforceable without express assignment by the owner for the time being of the land for the benefit of which they were imposed.

The third category is most usually found in sales under building schemes.  They are enforceable where it was the parties’ intention that the various buyers from a common vendor of parts of a defined area of land should have rights to enforce the covenants against each other.

Why restrictive covenants matter to developers

Restrictive covenants can have a significant impact on development projects. 

• Planning vs property law: Even if planning permission is granted, a covenant can still block a development.

• Enforcement risk: Neighbours with the benefit of a covenant may seek an injunction to prevent works (an unwelcome surprise if you weren’t aware of the covenant prior to breaking ground).

• Delay and cost: Negotiating with multiple beneficiaries or applying to court ortribunal to release or amend the covenant to permit the development can hold up delivery and increase costs, impacting profitability.

• Onward sales: Even if the covenant is not enforced during the course of the build, building the development in breach of the covenant may cause unwanted complications when selling the development and seeking to realise your investment.

Enforcement and remedies

The beneficiaries of a restrictive covenant can apply for:

• Injunctions – to stop or undo development works. Courts have historically been willing to enforce covenants strictly, even against schemes of significant value.  However, a benefiting owner who stands by while a developer carries out works in breach of a covenant, and only seeks an injunction after those works are substantially complete, may find that the court declines to grant mandatory relief requiring demolition and instead awards damages in lieu.

• Damages – sometimes awarded instead of an injunction, particularly where monetary compensation is a fairer outcome.  Where a developer has built out a scheme in breach of a covenant, the damages award can include a sum representing the proportion of the development profit that the benefiting owner could reasonably have negotiated in exchange for a release – sometimes called the ‘negotiating damages’ or Wrotham Park measure.  This can result in a very substantial award and is a powerful incentive for developers to address covenant issues before construction commences.

Developers cannot assume that damages will be the court’s preferred method of resolving disputes. Unlike rights of light claims, recent cases show that courts will still grant injunctions if appropriate, even after construction has finished.  It is not safe for a developer to assume that once a building is complete the court will award damages instead of ordering demolition.

Practical steps for developers

1. Assess early: Check whether there are any restrictive covenants that impede the potential development of the land in question (ideally this should be done during the due diligence phase when the developer is exploring the purchase of the land).  Even if there are restrictive covenants noted against the land’s title, it does not automatically mean that those covenants are valid and/or enforceable.
2. Planning: If covenants are discovered, can the development be redesigned to work around covenants, avoiding direct breach and minimising conflict.  Before assuming a breach is inevitable, the developer should also consider whether the proposed works fall within the scope of the covenant as properly interpreted. Covenants, particularly older ones, are not always as broad as they appear, and a careful analysis of the covenant’s language and the circumstances in which it was imposed may reveal that the proposed development does not constitute a breach at all.
3. Explore insurance:Restrictive covenant indemnity insurance can cover the risk of enforcement, including damages and legal costs.
4. Negotiation and release: Often the most straightforward approach is to negotiate with beneficiaries of the covenant for a deed of release (only after insurance options have been explored and, assuming insurance has been obtained, the insurer’s consent to make such an approach has been granted).  This can be costly and time-consuming, especially if there are multiple parties, but it provides certainty.  The amount payable to secure a release will depend on the extent to which the covenant benefits the neighbouring land and the degree to which its release enables a more valuable use or development.
5. Section 84 of the Law of Property Act 1925:  Developers can apply to the Upper Tribunal (Lands Chamber) to modify or discharge a restrictive covenant. Grounds include: ground (a), the covenant has become obsolete by reason of changes in the character of the property or the neighbourhood; ground (aa), the covenant impedes some reasonable use of the land for public or private purposes and either confers no practical benefit of substantial value or is contrary to the public interest, and that money will be adequate compensation; ground (b), the persons entitled to the benefit have agreed to the discharge or modification; or ground (c), the discharge or modification will not injure the persons entitled to the benefit.  Ground (aa) is the most relied upon in development cases and is often the critical battleground: the benefiting owner will argue that the covenant protects the character and value of their land, while the developer will contend that any such benefit is limited or theoretical.  The court normally takes a strict view of covenants that provide genuine benefit to neighbours, particularly in residential contexts.  However, section 84 is not toothless, and the court has shown willingness to modify or discharge covenants where they frustrate modern development needs.

Restrictive covenant issues can have a serious impact on the feasibility and, ultimately, the successful completion of any prospective development if not explored and addressed.  B P Collins’ specialist teams advise both developers and property owners on how to manage these risks at the outset of any prospective development, resolve conflicts if they arise and help bring development projects to fruition.  

The property disputes team wants to get to the heart of the issue, understanding the objective and managing the dispute to analyse the risks and achieve a resolution as swiftly, efficiently and as cost effectively as possible.  The team’s ethos is simple: solve the problem.  To contact the team for further information and advice please email enquiries@bpcollins.co.uk or call 01753 889995.