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31st January 2018

Upper Tribunal Refuses to Discharge Restrictive Covenant in Return for Payment

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In a recent case, Barter’s Application [2017], the Upper Tribunal considered whether to permit the discharge of a restrictive covenant that had been imposed in a transfer of a property in January 2013.
When the buyers purchased a house from the county council, they covenanted not to construct an additional residential building in the grounds.   However when the property was originally marketed, it was advertised to be of “interest to residential and commercial developers”. The buyers subsequently obtained planning permission to convert the house into flats and to erect a new building containing 13 two-bedroom units in the grounds.

The buyers were informed that the council was prepared to negotiate to release the covenant, and that the covenant was imposed to ensure that the council would share in the development value. The buyers offered to pay the council £5,000 for the covenant’s release, but the parties did not reach an agreement on a price.

In January 2017, the buyers applied to the Upper Tribunal for the discharge of the covenant on the following grounds: (1) the restriction impeded reasonable use of the land; (2) it did not secure any practical benefit to the council; and (3) the proposed discharge would not injure the person who benefits from the covenant, subject to that person possibly receiving compensation for the discharge.

The Upper Tribunal declined to exercise its discretion to discharge the covenant. The covenant did not prohibit the buyers from splitting the house into flats; it only prohibited the development of an additional building and this was reflected in the price originally paid for the residence.

The Upper Tribunal noted that the council did not own any nearby land apart from the highway and it was possible that the highway might not be capable of enjoying any ‘practical benefit’ from the covenant. The Tribunal held that a purely financial benefit (in this case to the council) derived from the imposition of a covenant does not constitute a ‘practical benefit’ for these purposes.

So, in other circumstances this might have meant that this particular covenant did not provide a ‘practical benefit’ to the person who imposed it and thus it might be discharged by the Tribunal.   However,  in this case, the Tribunal considered the facts and decided that covenant was still enforceable between the council and the buyer as the parties had willingly entered into it less than four years before the application for its discharge. This case serves as a reminder that restrictive covenants alone are not a good way to protect development value uplift. It is better if the parties agree an overage agreement which sets out what is to be paid and is protected by restrictions on title.

Patricia Kempson is a partner in the Real estate team. For further advice on restrictive covenants, overage agreements or other commercial property issues contact Trish on 01604 463352 or click here to email.