Restrictive covenants: Potential for discharge or modification
Written by Erica Williams and Adrian Bennett
The recent case of Fathers Field Developments Ltd v Namulas Pension Trustees Ltd  has cast useful light on the potential for the discharge or modification of restrictive covenants. As a result of this case, sellers wishing to protect land they are selling, against particular development, may want to consider other mechanisms for achieving this.
Fathers Field Developments (Buyer) purchased a golf course in 2001 from Namulas Pension Trustees (Seller). The transfer imposed a covenant on the land, prohibiting any residential development for 30 years, unless the development was to be occupied by a family member or employee of the Buyer, or if the prior written consent of the Seller was obtained. Crucially, the Seller did not retain any adjoining land to the course, which could benefit from the restrictive covenant.
The Buyer built a groundskeeper's cottage and two additional houses on the land for the Buyer's director and a family member. The Buyer subsequently wished to build additional properties, which would not be occupied by its employees or family members, thus requiring the consent of the Seller.
The Seller refused consent and so the Buyer made an application to the Tribunal under s84 of the Law of Property Act 1925 (LPA 1925) to have the covenants discharged or, alternatively, modified to permit occupation by persons other than family members or employees of the Buyer.
The Upper Tribunal (UT) was asked to determine:
- Whether it had jurisdiction to discharge or modify the covenants
- Whether it should exercise its discretion and refuse the application and
- If the covenants were discharged or modified, whether the Seller should receive compensation.
Decision of the Upper Tribunal
1. On the first issue, the UT determined that under s84 the Tribunal has the power to discharge or modify a restriction, which impedes a reasonable use, when it is satisfied that the restriction does not secure a practical benefit of substantial value to the benefitting party.
The Tribunal was satisfied that development was a reasonable use of the land, that was being impeded by the covenant. Secondly, it determined that the Seller could not practically benefit from the restriction, other than in monetary terms and that the right to demand a price for consent did not constitute a practical benefit.
2. The Tribunal then considered how to exercise its discretion. The Seller contended that granting the application would set a precedent for future development applications. The Tribunal dismissed that argument, on the basis that applications would always be considered on a case-by-case basis.
Secondly, the Seller argued that the covenant was a longstanding one between the original parties. Again, the Tribunal dismissed this argument, recognising that the commercial needs of the Buyer had changed over time, ruling that the fact it was between the original parties had no bearing. Accordingly, the covenant was discharged by the Tribunal.
3. On compensation, the Seller argued that compensation should be equivalent to the share it would have received from the development, had it negotiated a release from the covenant with the Buyer. The Tribunal rejected this, stating that it was only appropriate to measure loss in this way if it is the only way, or best way to do so.
The Tribunal considered how the covenant impacted the value of the land. The value of the golf course when it was purchased in 2001 was not impacted by the covenants. The loss of the covenant did not reflect a missed increase in value that the Seller could have benefitted from. So, no compensation was awarded to the Seller.
What this case means
The case is a stark reminder that a right to demand a price for consent to use land for a specific purpose is not considered a practical benefit for the purpose of the LPA 1925.
Should a seller wish to restrict the future use of land by way of a restrictive covenant, it is wise to retain adjacent land that benefits properly from the restriction.
If any prospective seller is looking to claw back any value from potential development of the land, the appropriate mechanism to use is an overage clause. Overage, as a positive covenant, is not subject to s84, meaning that a Buyer cannot apply to have it disposed of. Additionally, negotiating overage when selling the land has the benefit of certainty; a Seller will know what they stand to profit ahead of time, and a Buyer can properly budget it into their costs.