Update: agricultural law

Restrictive covenants are found in deeds to most agricultural property related transactions and can restrict the use and/or enjoyment of land for the benefit of another's land. They may for example limit the possible uses of land, say for agricultural purposes only, forbid potential nuisances or activities which may reduce the value of other land retained by someone selling off part.

Restrictive covenants can be binding on successors in title to the original parties, so long as a number of basic requirements are met. The most basic requirement is for the covenant to be registered against the burdened land. There are different rules about how a restrictive covenant can be registered depending on (a) whether the land is registered at the Land Registry and (b) when it was created.

Restrictive covenants created before 1 January 1926, when the first scheme for registering land in England and Wales was introduced by the Land Registration Act 1925, can be ascertained from an examination of the epitome of title or other title documents. Such covenants will only bind successors in title if a purchaser for value in good faith has notice of the covenant.

Those created after 1 January 1926 are only binding if they are protected by registration. Registration is deemed to comprise actual notice regardless of whether the buyer searches the land charges register (in the case of unregistered land) or the charges register of a title (in the case of registered land), as appropriate.

In the case of unregistered land, a restrictive covenant should have been registered as a class D (ii) Land Charge at the time the covenant was entered into, against the name of the owner of the burdened land.

If land is registered, a restrictive covenant is only protected if it is registered in the charges register; however, to further complicate the position, a restrictive covenant created after 1 January 1926 but prior to 13 October 2003 is only properly protected, and so binding on a purchaser for value, if it is registered as a minor interest. Since 13 October 2003, a restrictive covenant should be registered as a notice (either agreed or unilateral) in the charges register of the burdened land.

The passing of a validly enforceable covenant is a subject in itself; the purpose of this update is to examine how a restrictive covenant might be modified or discharged.

Land owners often want to amend or remove a condition placed on their use of the land some time ago, which is now redundant due to changes in the area since the restrictive covenant was first imposed, and this means either contacting that party with the benefit of the covenant for a release or in the case where the dominant land is not known, making an application to the Land Registry which can result in referral to the Lands Tribunal and then court.

Court-ordered modification or discharge

Because of the reluctance of the courts to discharge or modify such a covenant, s.610(1)(b) Housing Act 1985 gives developers a statutory mechanism to overcome limitations posed by restrictive covenants on proposed developments.

This method of modification has a very specific application, but is worth a mention and was recently examined by the Court of Appeal in Lawntown Ltd v Camenzuli [2007] EWCA Civ 949.

Section 84 of the Law of Property Act 1925 allows a restrictive covenant to be modified or discharged on one of the following grounds; (a) it ought to be deemed obsolete as it secures no 'practical benefit' which is 'of substantial value' to those entitled to enforce it or is contrary to the public interest, when financial compensation would be adequate for its discharge or modification and that its continued existence would impede a reasonable user of the land; (b) it has been agreed (expressly or by implication) by those entitled to its benefit to its discharge or modification or (c) that discharge or modification would not harm those entitled to its benefit. Practitioners should be aware that modification or discharge may incur Stamp Duty Land Tax liability.

Recent cases show that the courts apply a strict interpretation to s.84 and are unwilling to allow a modification or discharge of a restrictive covenant unnecessarily. In Re Hopkins' Application [2008] EW Lands LP/89/2006, an application to discharge or modify a covenant preventing the erection of more than one dwelling house on each plot

(a relatively common restrictive covenant when selling off plots of land for residential development) was rejected. The court took a broad view of what a 'practical benefit' of 'substantial value' meant to those entitled to the benefit of the covenant and referred extensively to the impact further building in the rear garden of the residential property concerned would be likely to have on the neighbourhood.

Specific mention was made to the possible interference of privacy and views enjoyed by neighbouring properties, reduction in the amount of sunlight in neighbouring gardens, increased risk of flooding, adverse impact on the general character of the residential close and even the risk that the modification of the covenant allowing the development may inspire others in the close to carry out similar developments. The court allowed hypothetical situations which may occur as a result of modifying or discharging the covenant to be considered and to influence its decision.

Similarly in Re Vince's Application [2007] LP/41/2006, the Lands Tribunal concluded that the combined effect of the likely increased occupancy, activity and vehicular movement together with some loss of daylight and sunlight to a neighbouring property if the proposed development was permitted and which the modification or discharge of the restrictive covenant prevented, was a sufficient loss of 'practical benefit' to the neighbouring property to reject the application and uphold the restrictive covenant in its original form.

In the case of Crowe v Heaton [2008] LP/34/2006, the Lands Tribunal agreed with the applicants that a restrictive covenant preventing any permanent structure to be erected in the garden of a dwelling house was of no 'substantial benefit' to the land entitled to the benefit. It allowed the restrictive covenant to be modified but refused to award any monetary compensation to be paid to the owner of the land who was previously entitled to the benefit of the covenant, as in its view, there was no real or practical loss to be compensated.

Grazing licences, agistments and business property relief

Landowners and tenant farmers often enter into agreements, whether formally documented or a purely informal arrangement, with locals who have farming interests allowing them to graze their animals on parcels of land (which are generally of little productive value to the farmer/landowner) on a seasonal basis. Sometimes these arrangements amount to grazing licences; it is clear that the landowner gives authority to someone to use an area of land for a specific purpose and it is accepted that this is a personal arrangement, which does not confer any exclusive possession of the land on the person(s) to whom permission is granted. If such arrangements are documented they are likely to amount to a contractual licence, where permission to use the land is granted for a defined period of time; at the end of which the licence will end automatically.

An agistment is a special type of licensing arrangement and differs from a licence, insofar as it is effectively a contract of bailment; the bailer is contractually bound to take reasonable care of the animals entrusted to his care. Agistment is rarely seen today but was widely used until the mid-20th century.

Nevertheless, agistments do still exist today and agricultural practitioners need to be aware of their significance, particularly in relation to tax reliefs that may be available to their farming and landowner clients. The recent case of McCall & Keenan (PRs of McClean) v Commissioners of HMRC [2008] UKSPC 00678 examined the position of an agistment in relation to whether this amounted to a business activity and whether a landowner would therefore be able to benefit from the application of business property relief (BPR).

This case concerned land that was not farmed by the landowner, Eileen McClean (Mrs McClean), and was let on seasonal agreements, described as agistments, to local farmers whose animals grazed on the land; the lettings were arranged by a local agent. From at least 1986 to 1990, Mrs McClean managed the lettings but as her health deteriorated her son-in-law (Mr Mitchell) took over this role completely. Mr Mitchell continued to organise the lettings through the local agent for the majority of the years between 1991 to 1998, however he found grazers himself in a number of these years. Mr Mitchell also tended the fields and undertook necessary maintenance work, amounting to approximately one hundred hours a year.

The grazing rents were banked by Mr Mitchell and not sent to Mrs McClean, who had since moved away from the area to live with other relatives. The agent presumed he was still working for Mrs McClean, but that Mr Mitchell was acting for her, however he did not report back to Mrs McClean and took his sole instructions from Mr Mitchell.

Mrs McClean died in 1999 when the agricultural value of the 33 acres was £165,000. At the time, the local authority had zoned the land as development land and the market value soared to £5.8m. It was accepted that the land was agricultural property, and the agricultural value of £165,000 would be relieved from inheritance tax pursuant to agricultural property relief (APR). Mrs McClean's personal representatives claimed that the property was a relevant business property and so should be entirely relieved of inheritance tax through BPR.

The Commissioner found that Mr Mitchell's work on the land, together with the not insubstantial rents taken, was enough to qualify as a business, but noted that the simple letting of land on a seasonal agistment would not be sufficient.

It was also held that Mrs McClean was still running the business; Mr Mitchell was acting as her agent and taking the profits from the lettings on which he held trust for her. However the land was held as an 'investment' rather than as an active business venture which disqualified it from BPR.

The moral of this tale is to ensure one's agricultural clients are properly advised and are aware of the hoops they need to jump through to ensure any land let under what is referred to as an agistment, or grazing licence, meets the necessary criteria for either APR or BPR.

In this case while the APR criteria was met, this relief only extended the agricultural value of the land and not its development value. If the claim for BPR had succeeded the whole of the development value would also have been relieved. This is clearly a case where Mrs McClean and her son-in-law would have benefitted from professional advice, since matters could quite easily have been structured, even possibly through the use of an agistment, where such agistment involved an element of care and husbandry of the grazing animals so as to qualify for BPR.