Coping with covenants

Simply speaking, a covenant is basically a legally enforceable agreement to do, or not do, something on (or to) a property. It is a private agreement between land owners that dictates how a property can – or can not – be used and/or developed and can pass from owner to owner though each matter will depend on its’ own factors.

Restrictive covenants can be imposed by landowners that are disposing of property and wish to retain future control over what happens to it. Landowners can put whatever restrictive covenants they want on the land they are selling, although the terms have to be reasonable and capable of being adhered to.

Auction experts strongly recommend that property investors conduct thorough research to establish whether or not any covenants are in place on a commercial property before making a bid. This kind of due diligence can avoid significant expense or serious restriction of subsequent development plans.

We attend auctions across the UK and come across all manner of unusual covenants that dictate how commercial property can be used. Here are just a few of the covenants we have seen:
- Cars/caravans can not be parked at the property
- The property must not be painted pink
- Rubbish bins at the property must be hidden from street view
- Cars may only be repaired behind a screen
- The owner does not have the right to access the property – vehicles can not be taken from the public highway to the plot of land
- Nothing can be built within three feet of the border
- No alterations can be made to an existing property without obtaining consent from the appropriate third party, which will often be the original builder.

As demonstrated above, some of the restrictive covenants we see on properties are extremely unusual and make you wonder why they were put in place. However, even if they seem ridiculous, they may be legally binding and if so, must be followed. It may be the case that if you buy a property with a restrictive covenant at auction, it may have an expiry date. If the date isn’t too far into the future, this means investors may be able to secure a bargain at auction and then hold on to the property and carry out the renovations or reconstruction when the covenant expires.

The key is getting all the facts about a property early on so that you can make an informed decision about whether you want to buy.

Encumbrances
Restrictive covenants are an encumbrance and are registered at the Land Registry. They will be noted within the title of the property. It should be remembered that covenants can pass from one owner to another, though each matter must be considered on its own facts. Although developers often look out for them when buying residential property, restrictive covenants are commonly registered against commercial property. Covenants can restrict the height of structures or forbid the opening of certain businesses, for example, the business must be appropriate if it is to be near a residential area.

Amending covenants
The Lands Tribunal has power in certain circumstances, under Section 84 of the Law of Property Act 1925, to modify or discharge restrictive covenants where the original purpose of the covenant has become inappropriate over time (restricting the movement of flocks of geese or herds of animals, across the commercial property, for example) or where the land to which a covenant relates is not identified.

Section 84 sets out a number of grounds for an application to the Lands Tribunal but the most commonly used is Section 84(1)(aa) which permits the Tribunal to act where the restrictive covenant impedes a reasonable use of land, provided that the covenant does not;
1. Secure continuing practical benefits of substantial value, or
2. Is contrary to the public interest, or
3. Where monetary compensation will be an adequate remedy.

The third solution may not be quick or cheap to pursue. In a recent case, the Jolly Anglers pub in Reading was sold with a restrictive covenant which meant its license was surrendered. The building was restricted from operating as a pub when it closed in June last year.

If you have bought a commercial property with covenants in place, there are ways that you can overcome them:
- Deed of release – this involves obtaining the consent of the person who benefits from the covenant. If the covenant has been imposed during the last 20-30 years or so, it may be possible to trace the person. Be aware that many may charge for the release or modification of the covenants.
- Restrictive Covenant Indemnity Insurance – If you can’t find or don’t know the party that will benefit from the covenant, this type of insurance is available so that you can go ahead with plans. This will cover liability for the future breach of the covenant.
- Apply to the Lands Tribunal to change or discharge a covenant. If a covenant was put in place many years ago for a good reason, and this reason no longer exists, it may be possible to have the covenant removed or modified.
- Apply to the Court stating that the covenant is not effective.

Check the legal pack
It is important to check out any covenants on a property at the earliest stage possible. Many auction investors, who have gone ahead despite knowing what is in place have had cause to regret it as they have been taken to court for breach. As the above shows, it may well be the case that you can modify or discharge the covenant but every case is different so check this out before you buy.

Always ask your legal representative for advice if you’re unsure what is in place and the legal pack isn’t clear. It’s vital property investors realise that old laws might still restrict the use of new land, however outdated they may seem. If you have bought a property and realise there is a covenant in place, don’t despair as there are ways of overcoming them and they may well have an expiry date. The best advice is to read the legal pack with a fine tooth comb before bidding at auction and speak to your legal adviser for advice about overcoming any obstacles to your development plans.