The reasonableness of restrictive covenants

24th January 2014

Restrictive covenants continue to provide significant concern, difficulty and delay for developers. In the recent case of 89 Holland Park (Management) Ltd and others v Hicks [1] (Holland Park) the court was asked to consider the enforceability and extent of two restrictive covenants preventing specific activities in respect of development.

Background

Holland Park concerned two adjoining plots of land in Kensington. In 1965 the then owner of both plots sold the undeveloped site, subject to planning permission, for the construction of a single-storey dwelling. The 1965 Transfer (the Transfer) contained a positive obligation on the purchaser to develop the planned single-storey development within two years. The Transfer also contained a number of restrictive covenants, including covenants:

• not to make any planning application to modify the approved plan without approval by the seller
• not to commence development until the plans, workings and drawings had been submitted to, and approved by, the seller.

In each case these covenants were subject to a proviso that the seller should not unreasonably withhold approval.

The Supplemental Deed

The buyer failed to develop the land within the two year period permitted by the Transfer. As a result, the original parties to the Transfer entered into a Supplemental Agreement in 1968 (the Supplemental Agreement) which provided for the development of the undeveloped land in accordance with a new set of plans and designs, which had not at that time received planning permission, provided the development was completed within 18 months.

The Supplemental Deed imposed similar restrictive covenants to those outlined above but, crucially, these did not include the requirement for the seller not to unreasonably withhold consent.

The 2013 dispute

The claimants in the 2013 dispute comprised the freehold owner of 89 Holland Park (the land with the benefit of the restrictive covenants) and six of the long leasehold owners of the flats in the building (the Claimant). The defendant was the owner of the adjoining, burdened land. The defendant purchased the land in 2012 with the intention to develop it. The Claimant sought to enforce the restrictive covenants and the court was required to assess whether the covenants remained enforceable and, if so, whether or not the Claimant was subject to an obligation not to unreasonably withhold consent to development.

A number of arguments were put forward by the Claimant to show that the restrictive covenants were not subject to a requirement of reasonableness; these were, inter alia, that:

• the removal of the reasonableness wording was a deliberate action by the parties when drafting the Supplemental Deed and illustrated a clear intention to provide unqualified covenants. Counsel for the defendant even conceded that this argument had some force
• the commercial context of the transaction had changed since the Transfer. The Transfer had originally also included a positive obligation to develop, and restrictions on sale. The original purchaser had failed to comply with the positive obligation to develop and the previous restrictions on sale were lifted in the Supplemental Deed. As such, it was argued that the removal of reasonableness in the Supplemental Deed was a trade off for the additional options afforded to the purchaser
• the seller had shown himself to be reasonable in entering into the Supplemental Deed given the commercial context and, therefore, it was not surprising that the parties were content to enter into the Supplemental Deed as drafted.

The decision

As an initial point, the court found that the restrictive covenants were validly binding on successors in title. In reaching this decision they applied section 78 of the Law of Property Act 1925 [2]. The wording used in the Supplemental Deed was not sufficient to disapply section 78.

In considering whether the restrictive covenants were subject to the requirement of reasonableness, the court found that the third argument regarding the reasonableness of the seller’s conduct prior to entering the Supplemental Deed actually, “went the other way”. The court highlighted that, had the parties asked themselves whether the seller would, “be able to unreasonably withhold his consent”, the answer would surely have been no, since the clear intention had been to develop the undeveloped land. It would be pointless for the Deed to provide for a process for approval of the development if the Claimant could refuse consent for any reason, regardless of whether it was reasonable or not.

The court, therefore, implied a requirement of reasonableness into the restrictive covenants.

WM Comment

Holland Park illustrates that in specific circumstances, involving a dispute between successors in title, the courts are unwilling to accept that the original parties would have intended the vendor to unreasonably withhold consent to activities that are integral to the purpose for which the land was sold.

This decision is likely to be welcomed by developers, as it is often the case that requirements to obtain consent in freehold covenants are silent as to whether consent can be unreasonably withheld. This case which infers that, in certain circumstances, consent cannot be unreasonably withheld may provide a useful tool for developers.

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[1] [2013] EWHC 391 (Ch)
[2] “A covenant relating to any land of the covenantee shall be deemed to be made with the covenantee and his successors in title and the persons deriving title under him or them, and shall have effect as if such successors and other persons were expressed. For the purposes of this subsection in connexion with covenants restrictive of the user of land ‘successors in title’ shall be deemed to include the owners and occupiers for the time being of the land of the covenantee intended to be benefited.”