A client recently came to me to talk about a proposed development. They had found a site, done the appraisal and worked out what they could afford to pay for the property.
They wanted to build a luxury hotel with a high end restaurant attached to it. Sound good? Well I was about to throw a spanner in the works.
As part of the due diligence we checked the official copies and all deeds relating to the property. We found a problem! The land, my client wanted to purchase, was subject to a restrictive covenant prohibiting the sale of alcohol on the land. Not what our developer wanted to hear considering his grand visions for the wine cellar!
What is a restrictive covenant? A restrictive covenant is an agreement in a deed that one party will restrict the use of its land in some way for the benefit of another’s land.
When I told my client this he said, “That doesn’t matter it was an agreement between those two people 25 years ago, the covenant won’t affect me will it?”
He was thinking about positive covenants. Positive covenants, unlike restrictive covenants do not often run with the land, namely they do not typically bind successors in title. Whilst a restrictive covenant restricts people from doing certain things with their land a positive covenant requires people to do things such as contribute to maintenance costs or erect a boundary fence.
I told him the bad news.
“What can we do about it?” he said.
Once you find a restrictive covenant you need to ascertain:
- The extent of any land benefiting from the restrictive covenant; and
- Is the covenant enforceable?
In this case we were able to ascertain the extent of the land and concluded that the covenant was likely to be enforceable.
So what were our options?
Whilst we could have looked at indemnity insurance or sought a ruling from the land tribunal neither of these scenarios worked particularly well for our circumstances.
Instead we spoke to the person who owned the land, benefiting from the restrictive covenant, and agreed an express release of the covenant. This should only be considered where:
- It can be established that the restrictive covenant does in fact burden the land.
- The full extent of the land that benefits from the restrictive covenant can be ascertained.
- All of the owners of the benefiting land can be identified and located.
- The restrictive covenant is still believed to be enforceable.
- The proposed development or activity will breach the restrictive covenant.
Our client ended up paying for the release of the covenant but in the context of the development as a whole felt this was a sensible compromise to allow him to proceed with the development.