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25th April 2013

Landowner's positive obligations in development agreements

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Development agreements can take many forms but, regardless of its specific purpose and legal form, a development agreement is likely to impose some obligations on the landowner.

These will generally include an obligation to sell or otherwise grant an interest in land to the other party and additional obligations. What happens to these obligations if the landowner sells the land before the development is complete?

The other party should have protected the agreement by registration. The buyer should generally then be bound both by the obligation to grant the interest and by any of the other obligations which are restrictive covenants, i.e. obligations not to do something, for instance, not to build on land. However it may be more difficult for the other party to enforce the additional obligations which are positive covenants against a buyer. A recent High Court case, Ridgewood Properties Group Limited v Valero Energy Limited, illustrated some of the issues which can arise in these situations.

Facts

The case involved various development agreements but in all of them Texaco (the landowner) agreed that, subject to planning permission, it would grant Ridgewood (the developer) building leases of various sites. Ridgewood was to apply for planning permission but Texaco was obliged to help Ridgewood obtain the permission and to facilitate access to the various properties.

Texaco then sold its interest in the properties. The sale was made subject to the agreements with Ridgewood. When the buyer failed to perform Texaco’s obligations under the agreements, Ridgewood brought a claim against Texaco, alleging that the sale put Texaco in breach of the agreements because it could no longer perform the obligations in them. Texaco defended the claim on the basis that in the transfer to the buyer it had required the buyer to perform the obligations. In a roundabout way, the Court agreed with Ridgewood. The judgment was quite long and technical but made several important points about the enforcement of positive covenants. Here we look briefly at some of the difficulties highlighted.

Problem 1 - No implied term not to dispose

Ridgewood argued that the agreements contained an implied term that Texaco would not sell its interest in the properties until the agreements had ended. The Court rejected this argument as they could not see a proper basis for implying a term to prohibit assignment of the agreements. The obligations could have been passed on to the buyer. The parties had already agreed that there was an implied term that Texaco would not do anything to prevent performance of the agreements. Therefore the question became whether Texaco had breached this term.

Problem 2 - Obligations do not necessarily pass to new owner

Under the Landlord and Tenant Act 1995, when land is sold subject to a lease, the landlord's covenants under the lease will usually pass to the buyer. This will also apply to the landlord's covenants in an agreement for lease. Texaco argued that, as a result, the burden of the positive covenants passed to the buyer so the buyer would have to perform these instead of Texaco. It argued that therefore it had not breached the implied term not to do anything to prevent performance of the agreements.

The Court ruled that the Act did not apply to the agreements in this case, so the obligations in the agreement had not automatically transferred to the buyer. This was because the Court considered that conditions precedent to the grant of a lease (such as assisting with planning permission and facilitating access) were not covenants which were part of the agreement for the lease (such as an obligation to grant the lease itself) and so did not follow the same rules.

Problem 3 - Neither is an indemnity covenant sufficient

Texaco’s alternative argument was that it could still bring about the performance of the agreements (and therefore was not in breach of the implied term not to prevent performance) because it could compel the buyer to comply with the positive obligations. This was on the basis that, in the transfers of the properties, the buyer had agreed with Texaco to observe and perform the covenants in the title register and to indemnify Texaco against any non-compliance.

The Court decided that this covenant only gave Texaco an indemnity in relation to any claims against it (so they could seek compensation from the buyer if it was found to have breached the agreements). The wording was insufficient to place the buyer under an obligation to actually perform the covenants themselves, even though the covenant required the buyer to “observe and perform” the covenants.

So, not only had the positive obligations not passed to the buyer but Texaco could not compel it to perform them on the basis of the indemnity covenant in the transfer. The result was that Texaco had breached its implied obligation not to do anything to prevent performance of the agreements. The important lesson is that a covenant just to observe and perform obligations in a development agreement and to indemnify the seller will not suffice in this situation. If the seller wishes to enforce obligations by specific performance, it should consider setting out the obligations in full in the transfer or state clearly that the covenant is not by way of indemnity only.

Conclusion

This case is a warning that positive obligations by a landowner in a development agreement will not always bind successors in title.

Perhaps the best way to avoid potential problems is to include provisions preventing the owner from disposing of the property until it has complied with its obligations in the agreement or until the buyer gives the other party a direct covenant that it will carry out the owner’s obligations.

This case has also cast doubt on whether registering a notice of an agreement on registered land is sufficient protection for the developer and we would recommend registering a restriction against the title at the Land Registry to err on the side of caution.

For more information, please contact Deborah Sharples on 01223 532757 or click here to email Deborah.