Early title due diligence is crucial for assessing the viability of a potential site for development of any kind. Among the most problematic issues are restrictive covenants, particularly if they prohibit or limit building or developing the land or use of the land for development.
Understanding how these covenants operate, the potential risks and the strategies for mitigation can save time, cost and risk.
What is a restrictive covenant?
A restrictive covenant is an obligation attached to land that limits how the land can be used by its owner. Covenants restricting development or use are typically imposed to protect the value or amenity of neighbouring land.
If enforceable, a restrictive covenant can prevent development altogether unless it is removed, modified or otherwise effectively managed. Identifying and assessing these risks at an early stage is therefore essential.
Pre 1925 restrictive covenants
Very old restrictive covenants created before the Law of Property Act 1925 can be particularly complex as they often lack clarity about where the benefiting land is and contain outdated language.
The Law of Property Act 1925 provides for the automatic transmission of the benefit and burden of restrictive covenants when land is sold on. Covenants created prior to 1926 however would only be transmitted to successors in title if expressly assigned. This means that in the absence of evidence that an express assignment has taken place when either the burdened or benefitting land has been sold on, the covenant may be unenforceable. However, proving this with certainty is likely to be challenging.
Building schemes
Even if a covenant is old or appears obsolete, it may form part of a building scheme—a type of mutual enforceability arrangement created when an estate was originally laid out for development.
A building scheme gives every plot owner (and their successors) the right to enforce covenants against every other plot owner within the scheme.
Indicators of a building scheme include:
- A clearly defined estate laid out in lots
- Consistent covenants imposed across all the lots
- A common vendor controlling the scheme at the outset
- The intention that covenants benefit all purchasers
If the covenant forms part of a building scheme, multiple third parties may be able to enforce it, making negotiations significantly more complex.
It may not be obvious from an initial review of the title that a building scheme is in play. An “estate” could be a row of plots some of which were never developed.
Dealing with a restrictive covenant
1. Indemnity insurance
It is often possible to obtain indemnity insurance protecting against the risk that the person benefiting from the restrictive covenant seeks to enforce it. This is often the quickest and most commercially viable solution. If insurance is an option, it should be investigated before any approach is made to the person with the benefit – insurance will not be available if the beneficiary has already been contacted or notified of the covenant. Consideration will need to be given to the cost of the premium and the amount of cover available in light of the potential development and the risk posed by the restrictive covenant.
2. Express release
If the beneficiary of the covenant is easily identified it may be possible to enter into direct negotiation with them to release or vary the covenant for a fee. However, it is possible that this could cause further delay and increased cost and would also remove the option of seeking title indemnity insurance further down the line.
3. Applying for modification or discharge under s84 LPA 1925
If a release cannot be agreed or if insurance is not available, an application could potentially be made to the Upper Tribunal (Lands Chamber) to discharge or modify the covenant providing one of the following applies:
a) The covenant is obsolete
aa) It impedes reasonable use of the land and does not give the PWB a “practical benefit of substantial value” – this is the most common successfully relied on ground. It is also beneficial if the land has been allocated in the local plan and for planning permission to have been obtained already.
b) The beneficiary will not be injured by the modification
c) The parties expressly or implicitly agreed to its release
This process is slower and more costly than insurance, and not guaranteed (the Tribunal’s power to discharge or modify the covenant is discretionary not mandatory), but it may be the only route if the beneficiary is known and opposed to the development. The Upper Tribunal has the discretion to award a modest sum of compensation to the beneficiary.
Final thoughts
Restrictive covenants—especially those restricting development—can have a significant impact on a development’s viability. Early, thorough title due diligence allows developers and promoters to understand constraints, assess enforceability, evaluate commercial risk, put mitigation strategies in place, and avoid delay and unexpected cost.
Whether the appropriate solution is insurance, tribunal modification, negotiation, or simply redesign, identifying issues as early as possible is essential to maintaining project momentum and protecting investment. It is also advisable for a landowner with strategic land considering marketing for promotion or sale to review their title before marketing to identify possible constraints.
If you are a developer, promoter or landowner who needs guidance in assessing potential restrictive covenant issues, please contact one of our team for specialist advice.
