Restrictive covenants and overage payments: a “touching concern”

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Following the decision in a recent case we look at the basic principles of the enforceability of restrictive covenants and whether these are appropriate in protecting overage arrangements.

What makes a covenant a restrictive covenant?

A restrictive covenant is an agreement between two parties whereby one of the parties agrees to restrict the use of its land for the benefit of the other party.

For example, Mr Jones decides to sell some land adjoining his house to Mr Smith. Mr Smith plans to open a coffee shop and Mr Jones is keen to ensure that no alcohol is sold from the shop (as he is fearful of the anti-social behaviour this may cause). Mr Smith and Mr Jones therefore agree that Mr Smith will not sell alcohol from his premises and a restrictive covenant is inserted into the transfer.

Mr Smith’s land has the “burden” of the covenant (he can’t sell alcohol from his premises), and Mr Jones’ land has the “benefit” of the covenant (his land will benefit from the fact that Mr Smith can’t sell alcohol).

Enforcement of restrictive covenants

If Mr Smith decided to open a pub on his property, Mr Jones can take legal action against Mr Smith to enforce the benefit of the covenant. This is because they are the original contracting parties to the covenant and Mr Jones’ claim against Mr Smith is contractual.

But what if Mr Smith sells his land to Mr Campbell, and Mr Campbell decides to open a pub – can Mr Jones enforce the restrictive covenant against Mr Campbell?

To enforce the benefit of a restrictive covenant against a subsequent owner, the covenant must “touch and concern” the land with the benefit of the covenant. What does this mean for Mr Jones? It means that the covenant must relate to the land owned by Mr Jones and affect the nature, quality, mode of user and value of the benefiting land. Therefore, if Mr Jones can show the use of his land is enhanced by the restrictive covenant (ie, it prevents antisocial behaviour caused by the selling of alcohol) then he should be able to show that the covenant “touches and concerns” his land and will be able to enforce the covenant against Mr Campbell.

Cosmichome Ltd v Southampton City Council

This case highlights the problem that can occur if a restrictive covenant does not “touch and concern” the benefiting land.

In 1989 the BBC purchased land from Southampton City Council. The transfer from the council to the BBC contained a restrictive covenant not to use the property for anything other than a broadcasting centre. The transfer allowed for the release of the restrictive covenant in the event that planning consent was obtained for a use other than as a broadcasting centre on the proviso that the Council received an overage payment representing 50 per cent of the uplifted value from the owner of the property.

The BBC sold the land in 2004 to Cosmichome and Cosmichome applied to court for a declaration that the council could not enforce the benefit of the restrictive covenant against them.

The court had to decide whether the restrictive covenant “touched and concerned” the council’s benefiting land. They concluded that the payment of money was not in the nature of a restrictive covenant and that it did not touch and concern the council’s land as it did not protect or preserve the amenity or value of the council’s land. The council would not be able to enforce the payment of the overage.

Lesson learned

If the purpose of the restrictive covenant is to secure the payment of overage there will always be a risk that the covenant is not enforceable against successive owners of the burdened land. This is because the payment of money is not something that benefits the land (it actually benefits the person with the right to claim payment).

In the case of overage payments it is far safer to secure these by either a restriction on the title of the burdened land (preventing the land from being disposed of without the new owner contracting to pay overage), or by taking a legal charge over the burdened property.

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