Transmissibility of restrictive covenants: the potted guide

In this month’s potted guide, Jonathan Seitler QC guides practitioners through the basics of the law relating to the transmissibility of restrictive covenants TRANSMISSIBILITY OF RESTRICTIVE COVENANTS CHECKLIST What is a restrictive covenant? When are restrictive covenants transmissible between successors? How is the burden of a restrictive covenant transmitted? How is the benefit of a restrictive covenant transmitted? What is the meaning of and criteria for annexation? How does express assignment work? What are the criteria for a building scheme? How hard is it to establish the existence of a building scheme? What is a restrictive covenant? What is a restrictive covenant? A restrictive covenant is a restriction contained within an agreement which restricts the use of an owner’s land. Common types of restrictive covenant include restrictions to non-residential use only, restrictions on particular activities and restrictions on the density or footprint of development. Restrictive covenants are often imposed by vendors on the land they are selling, when the land they are selling is contiguous to land which they are retaining. Restrictive covenants are binding on the original parties to the agreement in which they are contained, simply as a matter of contract. When are restrictive covenants transmissible between successors? There are six conditions to restrictive covenants being transmissible between successors in title. The first is that the restriction is not expressed to be personal. Plainly, a covenant expressly for the personal benefit of the original covenantee was never intended to be transmissible. The second is that the restriction is truly a restriction, ie that it is negative rather than positive in substance. In order to be sufficiently negative, the covenant must restrict the use of the land rather than require something to be done (such as works) or money to be spent on it. This is an important distinction, though it is often open to somewhat pedantic manipulation: see Tulk v Moxhay [1848] EWHC Ch 34. The third is that, as well as having originally benefited identifiable retained land of the original covenantee, also, at the time the covenant comes to be enforced, it still benefits identifiable land owned by the person who wants to enforce it. If, therefore, the restrictive covenant was taken by the vendor for the benefit of contiguous land, it must still benefit that land itself rather being merely of financial value. The fourth is that the benefit of it has been transmitted to the successor of the person who seeks to enforce it. The fifth is that the burden of the covenant has been transmitted to the person against whom it is sought to be enforced. The sixth is that the restriction must be registered. In relation to unregistered land, this is by way of a Class D(ii) land charge. In relation to registered land, this is under the charges register. In each case, the purpose of the requirement is so that the person against whom it is being enforced will have had legal knowledge of it. How is the burden of a restrictive covenant transmitted? Where a person seeking to enforce the covenant and/or the owner of the burdened land are not the original parties to that covenant but are successors in title to the original contracting parties, the burden of the covenant, if registered, will bind successors in title where two conditions are satisfied. Firstly, the covenant must not be expressed to be merely personal in nature. By reason of section 79 of the Law of Property Act 1925, restrictive covenants are statutorily deemed to have been made not only on behalf of the original covenantor but also on behalf of its successors in title and those deriving title under it, unless a contrary intention is expressed. Secondly, the covenant must be capable of transmission in the sense that it “touches and concerns” the land owned by the person seeking to enforce the covenant by affecting the land itself and not merely being of personal benefit to the original contracting party: see P&A Swift Investments (a firm) v Combined English Stores Group plc [1988] UKHL 3 for the circumstances in which this is taken to have occurred. How is the benefit of a restrictive covenant transmitted? The benefit of a restrictive covenant which touches and concerns the land of the covenantee is transmitted to a successor in title in one of three ways: (a) annexation; (b) express assignment; or (c) scheme of development (building scheme). What is the meaning of and criteria for annexation? Annexation means “fixing” the covenant to the land rather than to the individual owner of that land for the time being. It can occur in two ways. The first is by statute, under section 78 of the Law of Property Act 1925, which deems a covenant to be made with the covenantee’s successors in title and persons deriving title under them and has effect as if so expressed: see Federated Homes Ltd v Mill Lodge Properties Ltd [1980] 1 EGLR 113 and, more recently, Bryant Homes Southern Ltd and others v Stein Management Ltd and others [2016] EWHC 2435 (Ch); [2016] PLSCS 273. In relation to such covenants, and as long as it is not expressly contracted out from, section 78 usually effects the necessary annexation as long as the plot to be the subject of such annexation can readily be identified: see Crest Nicholson Residential (South) Ltd v McAllister [2004] EWCA Civ 410; [2004] 2 EGLR 79. The second is expressly, by words which show that the covenant is being fixed to the land. Usually for this to arise, the words of the covenant need to expressly recognise the need for annexation to the land and expressly say that this is what is intended. How does express assignment work? Express assignment requires a deed of assignment between the relevant owners of the land which explicitly spells out that the benefit of the covenant is to pass to the assignee. Obviously, a chain of such deeds of assignment are necessary if there have been successive relevant assignments. What are the criteria for a building scheme? A building scheme will be found to exist if two conditions are satisfied. Firstly, if the historic circumstances which can be pieced together suggest an understanding among the parties giving the covenants (the original covenantors) of a “reciprocity of obligations”, ie evidence from which can be inferred an intention to impose a scheme of mutually enforceable restrictions, known to all parties and in the interests of all the parties and their successors. What needs to be discerned (if necessary by inference) is an acceptance by each purchaser of part of the land from the common vendor of this level of reciprocity. The reciprocal obligations need not be identical, but they must be sufficiently similar that such local law can be inferred from such similarity. Secondly, the land to which the scheme relates must be capable of clear identification. This requirement, however, is just a particularly important aspect of the requirement of reciprocity, because a purchaser of one plot cannot be taken to be subject to an implied obligation to purchasers of an undefined and unknown area – such purchaser must know both the extent of their burden and the extent of their benefit. The rationale is that, under a building scheme, the covenants are taken to be enforceable by successors as part of “local law”, regardless of when the covenants were entered into or individual plots sold off. No formalities are required to annex the benefit of the covenants to the plots – the “annexation” is proved from those surrounding circumstances. How hard is it to establish the existence of a building scheme? It is difficult in practice to satisfy the two requirements for a building scheme: see Birdlip Ltd v Hunter and another [2016] EWCA Civ 603; [2016] EGLR 42, in which the case for a building scheme floundered on various bases: in essence, the historic evidence did not show enough “joined-up-ness” to establish a building scheme. In Birdlip, Lewison LJ set out the six characteristics of a building scheme: (i) it applies to a defined area; (ii) it relies on a common vendor; (iii) each property must be burdened by restrictions intended to be mutually enforceable; (iv) the limits of the defined area must be known to each of the purchasers; (v) the common vendor is himself bound by the scheme from the point it crystallises (meaning he cannot dispose of plots within the defined area otherwise than on the terms of the scheme); and (vi) the effect of the scheme is that it will bind future purchasers within the area, potentially forever. The case is a salutary reminder of the rigidity of the criteria for the establishment of a building scheme: see also Small v Oliver & Saunders (Developments) Ltd [2006] EWHC 1293 (Ch); [2006] 3 EGLR 141 and Turner v Pryce [2008] EWHC B1 (Ch). SEITLER’S LEADING PRACTITIONERS Simeon Fenn, BrookStreet des Roches David Gervais, Dechert LLP Emma Humphreys, Charles Russell Speechlys Danielle Miller, Berwin Leighton Paisner Nick Mumby, Fladgate Andrew Olins, IBB Solicitors David Wise, Kerman & Co LEADING AUTHORITIES Tulk v Moxhay [1848] EWHC Ch 34 P&A Swift Investments (a firm) v Combined English Stores Group plc [1988] UKHL 3 Federated Homes Ltd v Mill Lodge Properties Ltd [1980] 1 EGLR 113 Crest Nicholson Residential (South) Ltd v McAllister [2004] EWCA Civ 410; [2004] 2 EGLR 79 Birdlip Ltd v Hunter and another [2016] EWCA Civ 603; [2016] EGLR 42 Jonathan Seitler QC is a barrister at Wilberforce Chambers