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23rd October 2013

Tribunal holds landowner cannot use restrictive covenant to "Capture Value"

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The Upper Tribunal of the Lands Chamber has the power to discharge a restrictive covenant in the various circumstances set out in section 84 of the Law of Property Act 1925.

The Upper Tribunal of the Lands Chamber has the power to discharge a restrictive covenant in the various circumstances set out in section 84 of the Law of Property Act 1925. This includes where the following test is satisfied: 1. The covenant impedes some reasonable use of the land; 2. The covenant does not give anyone entitled to the benefit of it “any practical benefits of substantial value or advantage to them”; and 3. Money would be adequate compensation for any loss or disadvantage anyone entitled to the benefit would suffer from the discharge. When it discharges a covenant, the Tribunal may order the person applying for the discharge to pay compensation. The compensation will either be for any loss or disadvantage suffered due to the discharge or any effect which the covenant had, at the time it was imposed, in reducing the consideration then received for the land affected by it. The case of Re Tate concerned a restrictive covenant imposed in a 1980 conveyance. The purchaser had covenanted "That the property hereby agreed to be sold will not be used for any purpose other than for agricultural use or as a Riding School and Livery Stable". The new owners of the land subject to the restrictive covenant applied to remove the restriction as they had plans for a residential development on the site. A company (who is part of a large housebuilding group) owned neighbouring land and was entitled to the benefit of the covenant. It objected to the application for the removal of the covenant. Among other things, the company argued: 1. That the new homes could be occupied by people who would object to the company’s plans to develop its own land; and 2. That an increase in the number of residents could increase demands on local infrastructure and services and could have a negative impact on any planning application made by the company. As a fall back, if the Upper Tribunal did release the restrictive covenant, then the company sought £250,000 compensation. In fact, at the Tribunal, it actually conceded that, as far as it was concerned, a restrictive covenant was a commercial mechanism to "capture value" from someone else’s development of the site! In their judgment, the Upper Tribunal found that the only benefit of the restrictive covenant to the company was that it enabled it to demand money for allowing the site to be developed. This did not count as a benefit for these purposes. Therefore, the restrictive covenant was discharged. Perhaps more significantly from a commercial perspective, the Tribunal only awarded the company £3,000 in compensation for the release of the covenant. It decided that, as the covenant was of no practical benefit to the company, the question of compensation for loss suffered due to the discharge did not arise. In the absence of better evidence on the point, the Tribunal concluded that £3,000 represented the effect the covenant had had on reducing the price paid for the site when it was first imposed in 1980. This Tribunal decision may offer encouragement to those seeking to be released from restrictive covenants. It’s also a reminder that landowners would be unwise to view a restrictive covenant benefitting their land as a form of commercial lever as this company did. For more information, please contact Kate Webster on 01604 233233 or click here to contact Kate. For further information on our commercial property solicitors, please click here.