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Benefit of covenants

A person cannot enforce a restrictive covenant unless he has "the benefit of the covenant". If the parties are the original parties to the covenant there is no problem. The covenant can be enforced like any other contract. However, the covenant may have been entered into many years ago and the land may have passed through different ownerships. The person who is now the owner of the land with the benefit of the covenant may wish to enforce it. He may only do so if the benefit of the covenant has been successfully passed to him. There are three methods by which the benefit may be transferred:
  • Annexation.
  • Assignment.
  • Scheme of development
This page offers an explanation of each of these three methods and sets out details of some recent cases, in particular the very important case of Crest Nicholson Residential (South) Ltd v McAllister.

Annexation

This is the most common method by which a person will seek to show that he has the benefit of the covenant. The elements are as follows:
  • The person claiming the benefit must have an interest in the land to which the covenant refers.
  • The covenant must relate to ("touch and concern") the land retained by the covenantee (the benefited land).
  • The land which is intended to be benefited must be easily ascertainable, from a description, plan or other reference in the conveyance itself, but aided if necessary, by external evidence to identify the land so described. This last element is important and has been re-inforced by the recent case of Crest Nicholson Residential (South) Ltd v McAllister (see below).
(Note the following exception: Section 106 of the Town and Country Planning Act 1990 allows a land owner to enter into "a planning obligation" with a local planning authority restricting development etc. The obligation will be enforceable even though the planning authority does not own any adjacent land).


Pre 1/1/1926 covenants
    "In covenants made before 1926 it was necessary to show, by construing the instrument in the light of the surrounding circumstances, that annexation to the covenantee's retained land (or some part of it) was intended. Express words of annexation were not required." If on the construction of the instrument creating the restrictive covenant, both the land which is intended to be benefited and an intention to benefit that land, as distinct from benefiting the covenantee personally, can clearly be established, then the benefit of the covenant will be annexed to that land and run with it, notwithstanding the absence of express words of annexation". (Crest at para 23, citing Megarry and Wade).

Covenants entered into on or after 1/1/1926 - s78 of the 1925 Act

Section 78 of the Law of Property Act 1925 states:
    "(1) A covenant relating to any land of the covenantee shall be deemed to be made with the covenantee and the persons deriving title under him or them, and shall have effect as if such successors and other persons were expressed.

    For the purposes of this subsection in connection with covenants restrictive of the user of the land successors in title shall be deemed to include the owners and occupiers for the time being of the land of the covenantee intended to be benefited."

Crest Nicholson Residential (South) Ltd v McAllister
[2004] EWCA Civ 410

In this case, the CA pointed out that for s78 to apply the land which is intended to be benefited must be easily ascertainable, from a description, plan or other reference in the conveyance itself, but aided if necessary, by external evidence to identify the land so described. Chadwick LJ:
    "There is .. a statutory annexation of the benefit of the covenant to 'the land intended to be benefited by the covenant'" (para 29).

    "The question is whether the land intended to be benefited can be identified (from a description, plan or other reference in the conveyance itself, but aided, if necessary, by external evidence to identify the land so described, depicted or otherwise referred to) so as to enable the statutory annexation under s78(1) of the 1925 Act to have effect." (para 45)

    "It seems to me that there is nothing in the [conveyance] which enables the Court to identify, even with the aid of external evidence to assist general words of description, what land (if any) was intended to be benefited by the covenants." (para 50).
The practical importance of this case is that unless the person claiming the benefit can show what land was intended to be benefited by the conveyance, at the date of the conveyance, the covenant cannot be enforced. This is not always easy as the conveyance creating the covenant may not have a clear description or plan showing the land to be benefited. And, although the CA did also say that if necessary one can use other evidence, outside the conveyance itself, to establish what land was intended to be benefited, this can also be very difficult when the conveyances were entered into many decades beforehand.


Preventing automatic transfer of the benefit under s78

Sugarman v Porter
[2006] EWHC 331 (Ch)

Summary

Although s78 states that a covenant shall be deemed to include successors, it is possible to make a covenant personal to the original covenantee so that successors are not entitled to the benefit of the covenant unless it has been assigned to them.

The facts

A developer does not want to establish a building scheme (where the covenants will be mutually enforceable by plot owners) but does want to contain control of the development until the estate is finally completed. How does he do this?

In this case the relevant covenant stated that it was "for the benefit and protection of the Vendor's said adjoining property or any part thereof remaining unsold and any part of such property hereafter expressly sold with the benefit of this present covenant". Could those words prevent the benefit of the covenants passing after the last plot had been sold, without an express assignment?

Is it possible to prevent the benefit of the covenant automatically passing?

As stated above s78 of the 1925 Act states (in part) that:
    (1) A covenant relating to any land of the covenantee shall be deemed to be made with the covenantee and his successors in title and the persons deriving title under him or them, and shall have effect as if such successors and other person were expressed.
It can be seen that there are no words such as "unless a contrary intention is expressed". This might seem to suggest that it is not possible to exclude the effect of the section (especially as s79 does contain such a phrase). However, it is established that it is possible to do so (Crest Nicholson Ltd v McAllister, above) and thus prevent the benefit automatically passing.

How do you do it?

Having established that it is possible to do so, the judge considered whether or not the wording of the covenant in this case was sufficient. The answer was yes. On the wording used the benefit of the covenant did not pass unless expressly assigned. Peter Smith J:
    "It seems to me that the effect of Chadwick LJ's judgment [in Crest Nicholson] is that in a conveyance where the benefit of the covenant is said to benefit the land that remains unsold from time to time of a vendor the effect is to annex the covenant to that land for the period in which the land remains unsold. Upon the sale of the land the covenant is not annexed and will only pass if there is an express assignment. It seems to me plain that the covenants were intended to enable Mrs Hart [the original owner who had the benefit of the covenants] to control so long as she was the owner from time to time of the land unsold. If she ceased to own a piece of land by sale the benefit of the covenant ceased to be annexed to that land upon sale unless it was expressly assigned when the benefit became enforceable by virtue of that assignment." (paras 25 and 26).
Conclusion

The person who wanted to carry out the current development owned the land that had been burdened by the covenant not to build more than a limited number of houses. However, those claiming the benefit were unable to enforce the covenant because the wording used prevented the benefit from passing automatically. Nor had the benefit been expressly assigned. They were therefore unable to prevent the development.


See also Norwich City College of Further and Higher Education v McQuillin [2009] EWHC 1496 (Ch) where it was held that restrictions in a conveyance that were for the benefit of particular land "or the part or parts thereof for the time being remaining unsold" were only intended to benefit the relevant land for as long as it remained unsold. Since all of the land had been sold by the original vendor, the court was made a declaration under s84(2) of the Law of Property Act 1925 that there was now nobody entitled to the benefit of the covenants.

Establishing order of plot sales

It is often difficult to show that the land which you now own has the benefit of a covenant by annexation where there are a number of plots sold at different times.
    Example: In 1950 five plots were sold off in succession. All are adjacent to each other and run up the road. They are numbers 1, 3, 5, 7 and 9 Hogwarts Road. Lord Snape sold no.1 first and retained the other four plots. The purchaser of no.1 covenanted not to build more than one house on the plot. The remaining land (plots 3, 5, 7 and 9) are clearly defined on a plan. Lord Snape can therefore enforce the covenant against the purchaser of plot 1. So can the subsequent owners of plots 3, 5, 7 and 9. Lord Snape then sold no.3. The conveyance contained the same covenant, and again the remaining land owned by Lord Snape (now plots 5, 7 and 9) were clearly defined on a plan. Lord Snape and the subsequent owners of plots 5, 7 and 9 can enforce the covenant against the owners of number 3. However, note that the owner of no. 1 cannot sue the owner of no.3 because the covenant in the conveyance to no.3 was not taken for the benefit of no 1. By the time Lord Snape had conveyed no.3 he was no longer the owner of no.1.

Assignment

In order to show that a person has obtained the benefit of a covenant by assignment it is necessary to establish a chain of assignments from the original covenantee to the person now making the cliam. I.e has the benefit of the covenant been expressly passed by each owner of the land benefiting from the covenant to the next owner? This can be very difficult. There are also difficult issues relating to the need or otherwise to give notice of the assignment under s136 of the Law of Property Act 1925 at each stage. (For an example see the reference to Federated Homes Ltd v Mill Lodge Properties Ltd (1980) in Crest at para 24). It is fairly rare to see a person establishing the benefit of a covenant by this method.


Building schemes

The essential requirements of a building scheme were set out in Reid v Bickerstaff [1909] 2 Ch 305 at 319:
    "What are some of the essentials of a building scheme? In my opinion there must be a defined area within which the scheme is operative. Reciprocity is the foundation of the idea of the scheme. A purchaser of one parcel cannot be subject to an implied obligation to purchasers of an undefined and unknown area. He must know both the extent of his burden and the extent of his benefit. Not only must the area be defined but the obligations to be imposed within that area must be defined. Those obligations need not be identical. For example, there may be houses of a certain value in one part and houses of a different value in another part. A building scheme is not created by the mere fact that the owner of an estate sells it in lots and takes varying covenants from various purchasers. There must be notice to the various purchasers of what I may venture to call the local law imposed by the vendors upon a definite area".

Whitgift Homes Ltd v Stock
[2001] EWCA Civ 1732.

In order to establish that restrictive covenants are binding by reason of a building scheme it is essential to show that there is a defined area within which the scheme is operative. On the facts of the case it was impossible to define the area.

Proper evidence of the scheme required

Birdlip Ltd v Hunter[2016] EWCA Civ 603

Summary

The Defendants (D) had not provided sufficient evidence of the existence of a building scheme. Consequently, they could not enforce a restrictive covenant preventing the Claimants (C) from building two additional properties on their plot, which adjoined D’s land.

Facts

C and D were owners of adjoining plots of land. These plots were originally sold by the same vendor as part of several lot sales over a century ago, subject to restrictive cove-nants not to construct more than “one or two detached residences” on each plot. C’s plot already had one house on it and C obtained planning permission to construct two more. C sought a declaration that it was not bound by the restrictive covenant.

Issue

Whether the properties formed part of a “scheme of development” so as to entitle D to enforce the restrictive covenants.

First instance

The High Court found for D and held that the covenant was binding on C by virtue of a valid development scheme. The Judge found that the “estate has many of the classic features of a building scheme”. In particular, there was a defined estate and it was laid out in lots, which was “cogent evidence of an intention that the covenant shall be for the common benefit of purchasers”. Furthermore, there were substantially common covenants (any variations between the covenants were immaterial), which had existed for over 100 years and had been successfully upheld in previous litigious disputes. These covenants also provided value to the purchasers of the plots, not merely to the vendor. C appealed to the Court of Appeal.

Decision on appeal

The Court of Appeal allowed the appeal and held that held that the land did not form part of an established building scheme and so was not burdened by the restrictive cov-enants. Lewison LJ set out the characteristics of a building scheme as follows:
    ‘‘(i) It applies to a defined area;
    (ii) Owners of properties within that area have purchased their properties from a common owner;
    (iii) Each of the properties is burdened by covenants which were intended to be mutually enforceable as between the several owners;
    (iv) The limits of that defined area are known to each of the purchasers;
    (v) The common owner is himself bound by the scheme, which crystallises on the occasion of the first sale a plot within the defined area, with the conse-quence that he is not entitled to dispose of plots within that area otherwise than on the terms of the scheme;
    (vi) The effect of the scheme will bind future purchasers of land falling within the area, potentially forever.’’
Considering whether the parties had intend-ed to enter into a scheme of mutual covenants, observed, Lewison LJ observed that:
    ‘‘One would have thought …. that in the case of a scheme of mutual covenants designed to last potentially forever, that that intention would be readily ascertainable without having to undertake laborious research in dusty archives searching for ephemera more than a century old.’’
The original conveyances of the C and D’s plots did not define the estate. Contract plans that were referred to in evidence that did define the boundaries of the estate were inconsistent. This suggested that there was no intention to create a scheme and the Judge’s speculation about what may have happened at first instance ‘‘went far beyond permissible inference’’. Consequently, D’s evidence ‘‘fell far short of what was required to prove the existence of a scheme of mutual covenants’’.


Letting scheme - business leases

Williams v Kiley (t/a CK Supermarkets Ltd)
[2002] EWCA Civ 1645

Restrictive covenants in leases of shops. A newsagent sought to rely upon the covenants to prevent the neighbouring supermarket from selling confectionary and tobacco products.

Held: The leases were part of a letting scheme. The obligations in the leases were reciprocal and the area covered by the covenants was clearly defined. Thus one tenant could enforce the covenants directly against other tenants, without involving the landlord. On a construction of the particular covenant there had been a breach. The court noted that it was highly unusual to have a letting scheme in the context of business leases but there was one here. There was some discussion as to the possible competition law aspects of the arrangement which had not been raised in argument.


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