The beginning of the end or a new dawn?

Restrictive covenants are the bane of most developers' lives, restricting and limiting residential property development.

However, their days may be numbered if the next government accepts the Law Commission's recommendations to overhaul the whole of the law relating to easements and restrictive covenants.

You only have to look at the amount of cases that have gone to the High Court and Court of Appeal relating to restrictive covenants in the last ten years to realise what a huge headache they are for developers and landowners.

According to Land Registry statistics for December 2005, 65 per cent of freehold titles are subject to an easement and 79 per cent of freehold titles are subject to a restrictive covenant.

The Law Commission, which published a consultation document on 28 March 2008 entitled 'Easements, Covenants and Profits à Prendre', identified several defects with the current law relating to restrictive covenants:

• The burden of a positive covenant does not run with the land and bind the covenantor's successors in title. Such devices as are available to circumvent this rule are complex and insufficiently comprehensive.
• The burden of a restrictive covenant can run in equity under the doctrine of Tulk v Moxhay, but only if certain complex and technical conditions are met.
• The benefit of a restrictive covenant can run at law and in equity; but according to rules which are different and which are possibly even more complicated than the rules for the running of the burden.
• There is no requirement that the instrument creating the covenant should describe the benefited land with sufficient clarity to enable its identification without extrinsic evidence.
• There is no requirement to enter the benefit of a covenant on the register of title to the dominant land.
• The contractual liability which exists between the original parties to a covenant persists despite changes in ownership of the land. It is therefore possible for a covenant to be enforced against the original covenantor even though he or she has disposed of the land.

The backdrop to these reforms is to enable three million homes to be built by 2020 in accordance with the Housing Green Paper. Even if there is a change of government next year, it is unlikely that this imperative will alter because the situation has become even more serious: the major housebuilders have not been building to any great degree (in some cases not at all) for nearly two years. So the prospect of chronic housing shortages in the next five to ten years is highly likely.

Due to the economics of supply and demand, this is likely to drive up house prices to their previous turbo-charged levels, which raises the prospect of a repetition of the 'boom and bust' scenario which is so damaging to the economy and especially to retail.

The consultation period for the commission's report closed on 30 June 2008 and it is likely that the major housebuilders will have made detailed responses to the consultation. The Law Commission says that they will be publishing their report and a draft Bill at the end of 2010 or early in 2011. So, this could be on the statute book in a couple of years.

But what about commonhold? Might this be a possible solution to the problem?

Commonhold, implemented by part 1 of the Commonhold and Leasehold Reform Act 2002, was introduced to enable developments of flats, non-residential units and homes with shared facilities to be sold with freehold title. Commonhold combines freehold ownership of a unit in a larger development with membership of a commonhold association (a company limited by guarantee) that owns and manages the common parts of the development. Together with the security of freehold ownership and the ability to control and collectively manage common areas, commonhold enables unit holders to apply positive obligations to every successive owner of the individual units in the development. The government was hopeful that when it introduced commonhold a lot of the problems with regards to restrictive covenants would be solved going forward.

However, as the Land Registry itself admits, commonholds are extremely rare and so not only are the various local Land Registry offices inexperienced at dealing with them but there are few lawyers who have any experience of dealing with setting up schemes. Most clients would be unwilling to pay large legal fees while their lawyer 'learnt on the job' how to set up and run these schemes.

Furthermore, commonholds are suited to blocks of flats where there is a need to communally manage common parts, car parks and estate roads, but it is unlikely that developers would want to go to the expense and trouble of setting up commonholds where there are no common parts.

Land obligations

The Law Commission has proposed replacing positive and negative covenants with 'land obligations'. This concept first emerged from the Law Commission's report in 1984, but the commission has updated the original concept to take into account changes in the law with regards to land registration and commonholds.

These would have the following features:

• A land obligation could be a restrictive obligation (imposing a restriction on the doing of some act on the burdened land) or a positive obligation (such as an obligation to carry out works or provide services).
• A land obligation would have to be expressly labelled as a 'land obligation' in the instrument creating it.
• A land obligation could only be created expressly over registered title.
• The express creation of a land obligation would require the execution of an instrument in prescribed form; i.e. containing a plan clearly identifying all land benefiting from and burdened by the land obligation, and identifying the benefited and burdened estates in land for each land obligation.
• The creation of a land obligation capable of comprising a legal interest would have to be completed by registration of the interest in the register for the benefited land and a notice of the interest entered in the register for the burdened land. A land obligation would not operate at law until these registration requirements were met.
• A land obligation could subsist as a legal or as an equitable interest in land, but would normally subsist as a legal interest in land.
• A land obligation would have to have a dominant and a servient tenement (that is, there should be separate benefited and burdened estates in the land).
• The benefit of a land obligation would be appurtenant to the benefiting estate in the dominant land. The burden of a land obligation would attach to the burdened estate in the servient land.
• A land obligation would have to 'relate to' or be for the benefit of dominant land.
• There would have to be separate title numbers for the benefited and burdened estates, but there would be no need for the benefited and burdened estates in the land to be owned and possessed by different persons.
• A land obligation could be enforced by legal remedies (such as damages) and by equitable remedies (such as an injunction or specific performance).
• Subject to certain defined exceptions, it would no longer be possible to create new covenants which run with the land where the title to that land is registered.

The consultation paper can be found at https://www.lawcom.gov.uk/docs/cp186.pdf. It is exceptionally detailed and highly complex, but worth reading to prepare for the changes to follow. If they become law in a few years time, there will need to be a huge amount of training for the legal profession as this represents a radical overhaul of the whole area of the law relating to easements and covenants.

Insurance: the easy solution?

Can most issues be resolved by developers taking out indemnity insurance policies? The trouble with commercial developments is that funding is often sought before the planning application has been submitted for the development and most funders' solicitors will not proceed without indemnity insurance in place before drawdown.

Pre-planning policies (policies obtained prior to obtaining planning permission) are fiendishly expensive, with premiums rising every month as the credit crunch bites hard. Indemnity policies also often stipulate that cover is not available if the covenant is less than ten years old. Any approach to the person having the benefit of the policy will not usually mean indemnity insurers will not cover.

Also, does your client want an indemnity policy which ultimately will produce a sum of money which will be grabbed by the lender? Imagine you have built a 40-house development; your sales team are working flat out to sell the houses and disaster strikes! A person purporting to claim the benefit of the covenant obtains a court injunction. The negative publicity for your client could be extreme, especially if deposits have been taken and contracts exchanged.

Lands Tribunal to the rescue?

The big problem with the Lands Tribunal is that cases involving restrictive covenants are the most complex that the tribunal deals with, and almost invariably require senior counsel plus expert witnesses. A disputed case can take years to be resolved by the time the matter gets to final hearing.

It is possible to make an application to the county court under section 610 of the Housing Act 1985 if a conversion of the premises is prohibited by the provisions of the lease of the premises, or by a restrictive covenant, or in any other way and either:

• owing to changes in the character of the neighbourhood in which the premises are situated they cannot readily be let as a single dwelling-house but could be readily let for occupation if converted into two or more dwelling-houses; or
• planning permission has been granted for the use of the property as converted into two or more separate dwelling-houses instead of a single dwelling-house.

The court has power to vary the terms of the lease or other instrument imposing the restriction subject to such conditions and upon such terms as the court thinks fit.

The future

While we await the major law reforms proposed by the Law Commission, developers and landowners may feel that indemnity insurance is the most practical and economic solution to restrictive covenants where this is possible. A change in law would make conveyancers' and solicitors' lives a lot easier in many ways. How many times have you had to search endless adjoining plots to try to find out who owns the benefit of a restrictive covenant? Even when a covenant is purported to be released, sometimes it is not possible to establish whether all of the persons having the benefit of the covenant have released it.

Since 2002, the Land Registry has permitted searching historic records to establish the extent of covenants, but this is a laborious and costly process for clients. Also, how do you explain to a client who has parted with all interest in the land that they are still liable on contractual principles for covenants relating to land?

It is hoped that the future government gives the new legislation priority so that registered titles are simplified and the law in this area is brought up to date.