Restrictive Covenants: how well do you know what you own?
We sat down with Andrew Entwistle, Partner and Head of Valuations at George F. White, to discuss his approach to buying property and the advice that he would give to others in regards to restrictive covenants.
I frequently joke with a friend who happens to be hopeless with anything technical or mechanical on his attitude to paperwork and instructions. I maintain his first step, when buying anything new, is to immediately locate the instructions in the box and then throw them away. He then proceeds to try to get the item to work on pure luck and guesswork. He usually fails and then asks me for help.
I can relate this to my work. When giving advice to clients for the first time, I usually ask, where are your deeds? The reason I ask is because I typically find that most clients don’t know what is in their deeds. I am looking for restrictions in how their property can be used as the client usually has a proposal to consider, perhaps a sale, a new building or development project, or, is looking to raise some money. Restrictions can have a big impact on value; therefore, time after time such restrictions are forgotten about, or, in some cases simply not known about.
There are many different types of restrictions, claw backs, statutory/planning, and pre-emptions but for this article I will concentrate on restrictive covenants.
Restrictive covenants are, in simple terms, a promise not to do something on your land so as not to detrimentally affect land that was in the same ownership (retained land) from the person you acquired from. Such covenants are commonplace and it is rare to see the conveyance without them. Prior to the introduction of claw backs/overage they were used as a method of extracting extra value from land that had been previously sold on the basis the previous owner needed to give consent for a particular activity. For example, if there was a restrictive covenant that said land can only be used for agricultural purposes, only then consent would be needed before that land could be developed for housing. Such consent would normally only be granted in return for a high price.
At the start of the 19th century the government realised that national infrastructure was being inhibited by previous landowners demanding large ransom sums to release restrictive covenants in cases when development would have no detrimental effect on retained land. The Law of Property Act 1925 put in place a mechanism where restrictive covenants could be modified or removed with compensation being payable to the previous owner on the basis of their loss, not on the basis of the increase in value due to development. The Upper Tribunal (Lands Chamber) deals with these cases and a person affected by restrictive covenant can apply to have it modified or removed to allow their proposals to proceed. The practical issue is that with any litigation, such action can be costly and take a considerable amount of time. There are also important pre-requisites before making such an application such as obtaining planning consent for your proposals.
In some cases it is possible to insure relatively cheaply against any restrictive covenant issues, particularly if the covenants are old. However if you ‘break cover’ and contact the owner of the covenant, the insurance opportunity may be lost. If insurance is not possible then informed and intelligent negotiations at an early stage can protect you and save you being put into the position where you are held to ransom for a large payment in order to realise your development.
“Time spent in reconnaissance is seldom wasted” and I apologise for using this cliché yet again. Most restrictive covenants can be dealt with providing you are aware of them and have time to take the appropriate actions to reduce their cost implications.
To find out more, contact Andrew on 0797 751 8156 or firstname.lastname@example.org