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10 May2012

All You Need to Know About Covenants

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As well as describing the extent of a property and who owns it the title deeds (or land registry records for registered land, for the sake of this article we will use the terms “title deeds” and “land registry records” interchangeably) also contain information as to any third party interests affecting the property. These are things like easements, restrictions, notices, mortgages and covenants. Please note that this article deals only with freehold covenants. The rules relating to covenants in leases differ in terms of when and how they can be enforced and the consequences for breach.

A covenant is just a rule governing what can and cannot or must and must not be done on the land which is affected by (burdened with) the covenant. For registered land covenants are either set out in the Charges Register of the Official Copies or else in a separate document held by the Land Registry, in which case that document will be referred to in the Charges Register as containing covenants. They are imposed by the owner of land when it is sold, usually where the seller owns other land in the immediate vicinity and so wants to retain some control for the sake of this other land.

Positive Covenants and Negative (Restrictive) Covenants

A covenant can be either positive or negative. A negative obligation is often referred to as a restrictive covenant. Positive covenants are obligations to do something, such as keep contribute to a maintenance fund or maintain a wall. Restrictive covenants are rules preventing certain things from being done on the land, such as keeping animals or using the property for business purposes. Sometimes a covenant can be worded negatively but be positive or vice versa, for example “not to allow the fence to fall into disrepair” is really a positive obligation to maintain the fence. Conversely, a covenant to use the property only as a residential dwelling is actually a restrictive covenant not to use the property for any other purpose than a residential dwelling.

It is important to understand the difference between positive and negative covenants as not all covenants are enforceable and different rules on enforceability apply depending on whether the covenant is positive or negative.

Creating a Covenant

Covenants are usually contained in the same document that transfers ownership of a property from a seller to a buyer, so a TR1/TR2 (transfer of whole) or a TP1/TP2 (transfer of part) or prior to these forms becoming compulsory, a conveyance or transfer. Typically they will be imposed by the developer when a property is built or by a seller who is selling part of his land and retaining the remainder but can be imposed at any time.

A covenant can be created by separate deed (a Deed of Covenant). The deed will need to be protected by the entry of a notice on the register of title and needs to be signed by the covenantor though not necessarily by the covenantee.

Enforceability of Covenants

A covenant is essentially a contract between the covenantor (the owner of the burdened land) and the covenantee (the owner of the land which takes the benefit). As a result of a legal principle called “privity of contract”, the covenant will always be enforceable as between the original covenantor and covenantee, even after either or both have parted with the land in question. The same legal principle however (which simply means that a contract is private and binding only on the contracting parties) means that covenants are not always binding on or do not always benefit future owners.

For a covenant to continue to be enforceable after the original parties have parted with the land involved, both the benefit and the burden must “run with the land” at either common law or in equity. The rules which dictate whether the benefit and burden run differ depending on whether the covenant is positive or negative.

Enforceability of Covenants at Common Law

There are two basic systems of law in England & Wales – common law and equity. The Judicature Acts of the late nineteenth century basically merged the two systems but there are still some differences. In respect of covenants, for them to be enforceable, both the benefit and burden must run in common law or both must run in equity. So if the benefit runs in common law but the burden only runs in equity (or vice versa) the covenant will not be enforceable.

In order for the benefit of a covenant to pass at common law, four requirements must be satisfied

1. The covenant must “touch and concern” the land of the covenantee. This means that the covenant must be capable of benefiting any owner of the land and not just be a personal benefit to the current owner.

2. The covenantee must own the legal estate in the land to be benefited when the covenant is made. In other words, the original covenantee must have actually owned the land that benefits when the covenant was made – if for example he had only contracted to buy the land then it will not be enforceable. Usually new covenants are contained in the same deed that transfers ownership to the covenantee which deals with this condition.

3. The successor of the covenantee must have a legal estate. This just means that a future owner looking to take the benefit of a covenant must be the legal owner of the land which benefits.

4.The original parties must have intended that the covenant should run with the covenantee’s land. Not all covenants are intended to benefit future owners, some are purely personal. The intentions of the parties can usually be ascertained from the words used to create a covenant, for example words such as “the covenantor covenants with the covenantee his successors in title and those deriving title under him” confirm that it is intended that the benefit should run. Section 78(1) of the Law of Property Act 1925 implies similar words into any covenant created after the act came into force on 1 Januarym1926 with the effect that it is deemed that the benefit was intended to run. So pre-1926 a covenant has to explicitly say that it is intended to benefit future owners whereas from 1926 onward this is implied unless the wording of the covenant expressly states that it should not, for example by stating that the operation of s78(1) is excluded.

The burden of a covenant will not run at common law meaning that future owners of the burdened land will not be bound however the original covenantor will remain liable even after he has parted with his land. This rule was established in the case of Austerberry v Oldham Corporation [1885]. There are several exceptions:

1. A chain of indemnity covenants can be created. Where a piece of land burdened by covenants is sold it is usual for the seller to require that a clause be included in the transfer to the buyer whereby the buyer agrees to indemnify the seller against any claims for breach of any of the covenants. The owner of the land which has the benefit of the covenant can still sue the original covenantor for breach of contract however the original covenantor can then sue his buyer on the indemnity. If that buyer has since sold the property and obtained an indemnity from his purchaser then he can sue him and so on down the chain of ownership. In theory a chain of indemnity covenants can continue indefinitely however in practice it will come to an end either on the disappearance of the original covenantor or where the chain is broken (by a transfer taking place that does not incorporate an indemnity covenant).

2. The rule in Halsall v Brizell [1957], also known as the doctrine of mutual benefit and burden, states that a person cannot continue take the benefit of a deed without subscribing to the obligations under it. What this means is that if a deed grants the owner of a property the right to, for example, use a private road but the same deed also contains a covenant to contribute toward the cost of the upkeep of the road then the owner cannot exercise the right to use the road without contributing to its upkeep.

3. The burden of covenants contained in a lease will generally run therefore granting a lease out of the freehold title instead of simply conveying the freehold title is a useful way to ensure the covenants remain enforceable.

4. An estate rentcharge can be imposed, whereby the owner of the property is obliged to contribute an annual sum toward the repair and maintenance of shared facilities. If this is coupled with a right of re-entry for non-payment this ensures the covenant to contribute should not be breached.

Enforceability of Covenants in Equity

If a covenant cannot be enforced under common law rules then it may still be enforceable under equitable rules. As with common law rules, where the original covenanting parties have parted with their respective land it will have to be shown that both the benefit and the burden has passed to their respective successors in title. Unlike common law, it was established in the case of Tulk v Moxhay [1848] that the burden of a covenant can run in equity provided five conditions are met:

1. The covenant must be negative (restrictive). This means that it must prevent an action rather than compel an action to be performed. Sometimes a positive covenant will be phrased negatively or vice versa, for example “to keep the area between the building line and the highway open and unbuilt upon” is worded positively but is really saying “do not build on the land between the building line and the highway”. Conversely, a covenant “not to allow the wall between the land and the highway to fall into disrepair” is really a covenant “to repair and maintain the wall between the land and the highway”. The burden of positive covenants does not, as a general rule, run either at common law or in equity, though see the exceptions above in relation to common law.

2. There must be a benefited and a burdened land and the two must be “reasonably close together” – close enough for the benefited land to be genuinely adversely affected by a breach.

3. The covenant must actually benefit the benefiting land. In Re Gadd’s Land Transfer [1966] it was stated that a “benefit” must be “something affecting either the value of the land or the method of its occupation or enjoyment”. This is important because many old covenants cease to have any material benefit as the nature and character of the surrounding area changes over time.

4. It must be the original parties’ intention for the burden to run with the land. Unless the wording of the deed contains an express contrary intention it will be assumed that the burden was intended to run. This is confirmed by s79(1) of the Law of Property Act 1925.

5. The purchaser of the burdened land must have had notice of the covenant before buying the land. In unregistered land, if the covenant was created after 1 January 1926 then in order to be binding it would need to have been registered as a Class D(ii) land charge. If the covenant is registered in this way then the purchaser is deemed to be aware of it even if he did not actually search the Land Charges register prior to his purchase (s198 Law of Property Act 1925). Conversely, if it is not registered then he will not be bound even if he actually knew of the covenant (s199 Law of Property Act 1925). For covenants relating to unregistered land created before 1 January 1926 a purchaser of burdened land will be bound unless he is an arm’s length purchaser for value (meaning he is not connected to the seller and pays more than a nominal sum for the land) and he has no notice of the covenant. Notice can either be express, i.e. he can be told, implied, i.e. if it is or should be obvious from a reasonably careful inspection of the land or imputed, i.e. if his legal advisor or surveyor is aware, even if the information is not passed on to him. In registered land, a covenant must be protected by the entry of a notice in the register to be binding.

The benefit of a covenant will run in equity provided it actually benefits the land and it was intended by the original parties for the benefit to run. Intention can be either express (i.e. the wording of the covenant states that it is intended to benefit successors of the original covenantee), or since 1 January 1926 by statute under s78 of the Law of Property Act 1925.

Consequences of Breaching a Covenant

Where it is established that a covenant binds a landowner and the covenant has been breached, the Courts can award one of two remedies. They can either order an injunction to prevent the breach from continuing or they can award damages to the injured party.

Damages can only be awarded where a payment of money is sufficient to compensate the injured party and where the award required is small. The compensation should be calculated on the basis of the loss of the covenantee’s bargaining position. In other words, the Court needs to decide what the covenantor might reasonably have paid the covenantee to secure release of the covenant (and what the covenantee might have reasonably accepted).

Where the loss to the covenantee cannot be easily measured in financial terms or where only a large sum would be sufficient compensation then the Court may award an injunction. This is an order against the covenantor to bring the breach to an end. Where a structure has been built in breach of a covenant then this will mean removing that structure.

Removing or Modifying a Covenant

Under s84(1) of the Law of Property Act 1925, an application may be made to the Lands Chamber of the Upper Tribunal (formerly the Lands Tribunal) to remove or modify a covenant. In order to be successful, the applicant must show that one or more of the following criteria apply:

1. A change in the character of the neighbourhood or property, other material circumstances, means the covenant is obsolete. As an example, a covenant not to build any structure so as to obstruct the covenantee’s view which was imposed when the land surrounding the benefiting land was open countryside may be considered obsolete if a housing estate has since sprung up around the land or;

2. The continuance of the covenant would impede the use of the burdened land for reasonable purposes without there being a positive benefit resulting or;

3. The beneficiary under the covenant has, either expressly or impliedly agreed to its removal or modification. Agreement might be implied from actions of the beneficiary which suggest, with no other reasonable explanation, that he intended to for the covenant to be removed or modified or;

4. The proposed modification or discharge would not actually injure the beneficiary.

The Tribunal may, where a covenant is modified or removed, award compensation to the beneficiary. Unlike compensation for breach however this is based on actual loss of value to the beneficiary’s land and not loss of bargaining position.

As well as by application to the Tribunal, a covenant may be removed by a deed granted by the beneficiary for the benefit of the burdened land.

If a breach has continued for a long enough period without any objection being raised, it may be treated as having been abandoned under the principle of estoppel. The leading case to support this is Hepworth v Pickles [1900]. In that case the breach had continued for 24 years before an attempt was made to take enforcement action. In later cases a shorter period has been accepted by the Courts and 20 years is now generally considered acceptable. Indeed, the Council of Mortgage Lenders at point 5.10.2 of its Handbook (a set of standard instructions to conveyancers) states that provided the breach has subsisted for more than 20 years, you are satisfied that there is no risk to their security and there is nothing to suggest enforcement action is being taken or threatened, then the lender will not insist on indemnity insurance (see below).

Indemnity Insurance for Breach of Covenant

Where a covenant has been breached, it appears still to be binding, it is not possible or practical for it to be removed or modified and nor does the rule in Hepworth v Pickles [1900] apply then it may be possible to obtain indemnity insurance. Indemnity insurance provides cover against loss sustained by the insured as a result of a legal risk. In the case of a breach of covenant, this means the insured would be compensated against loss, such as loss of value to his property, the costs of remedial works or the cost of legal action, should the beneficiary attempt to enforce the covenant.

Unlike a standard insurance policy, the premium is payable just once and that generally provides cover, for the homeowner, his mortgage lender, successors in title of the homeowner and successive mortgage lenders for the life of the property. Premiums are charged on a sliding scale depending on the value of the property. At the time of writing for properties under, say, £500,000 the premium would be somewhere between £100 – £250.

Indemnity insurance is frequently used in conveyancing as the practical requirements of the seller and buyer often don’t allow time for an application to the Lands Tribunal, which may take several months to be determined and even then may not be successful. Indemnity insurance can only be arranged by solicitors or licensed conveyancers, insurers are not permitted to deal directly with the public.

In order to agree to offer cover, the insurer will need the conveyancer to confirm that certain conditions are met. Usually they are that the breach has continued for at least 12 months, the property has been used for residential purposes for the last 12 months and will continue to be so used and there is no evidence of enforcement action being taken. If these points are satisfied an “off the shelf” policy can be obtained online without the need for assessment by an underwriter. If they are not, and even where insurance is required in respect of a contemplated future breach, then it may still be possible to obtain a bespoke policy, though the premium will generally be higher.

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