Restrictive covenants have a long shelf life – often, apparently, continuing long after the reason for their original imposition has ceased to apply. Even if they now serve no useful purpose, they remain on the title, prompting purchasers to spend money on both legal fees for investigating their likely enforceability and premiums for restrictive covenant indemnity insurance.

However, if it can be shown that the covenant was intended only to operate for a specific period of time, or to be limited in its application by some other factor that has since ceased to apply, it may be that insurance is unnecessary.

The recent case of Sugarman v Porter & ors [2006] illustrates how such a situation may arise, albeit in certain very specific circumstances.

The Sugarman covenant

In Sugarman the restrictive covenant at issue was contained in a 1953 conveyance which was to the following effect:

For the benefit of:

(a) the vendor’s adjoining property or any part of it remaining unsold; and

(b) any part of such property subsequently expressly sold with the benefit of the covenant,

no building shall be built on the land except a detached private dwelling house with or without a private garage. Such dwelling house and garage shall be built only in accordance with plans approved by the vendor or the vendor’s surveyor.

The claimant (who owned the land that was the subject of the restrictive covenants) applied to the High Court for a declaration that the covenants could not be enforced by the adjoining owners (who had subsequently acquired the land referred to as the ‘vendor’s adjoining property’). The argument put forward was quite simple:

(1) the covenant was only imposed for the benefit of the then vendor’s retained land for so long as it remained unsold – limb (a) above of the covenant; or

(2) the covenant could be expressly assigned by the then vendor – limb (b); but

(3) it would not pass automatically – reference to the approval of the ‘vendor’ being the original vendor (not a successor in title) serving to emphasise the point. (In the absence of a contrary intention being expressed, s63 of the Law of Property Act 1925 provides that rights enjoyed by owners of property pass automatically to the transferee. Section 78 of the 1925 Act provides that the benefits of covenants are annexed to the land, thus automatically running in favour of successors in title of the person who originally had the benefit of the covenant.)

The decision

The Court agreed with the claimant’s arguments, holding that the adjoining owners did not have the right to enforce the covenant, and made a declaration to that effect. The basis on which the Court reached its conclusions may provide some useful pointers as to the running of covenants through statutory annexation and how this can be excluded by the transfer wording:

(1) previous Court of Appeal authority (Crest Nicholson Residential (South) Ltd v McAllister [2004]) clearly showed that a transfer expressing a covenant to be for the benefit of land unsold only applies while that land remains unsold, after which the benefit of the covenant can only pass if expressly assigned;

(2) the wording used led to the conclusion that the intention was for the original covenantee to retain exclusive control of the benefit of such covenants during that period;

(3) the wording of the transfer was therefore effective to prevent automatic statutory annexation as referred to above; and

(4) given the nature of the covenants, it would not make sense to suggest that there was some kind of ‘building scheme’ here (a building scheme being a plot sale structure where the developer sells off plots of land/ buildings, with the same set of restrictive covenants, with the intention that the individual purchasers can enforce the covenants directly against each other).

In summary, once the then vendor had sold off all her retained land (which had happened by 1957) and since the original vendor had not expressly assigned the benefit of the covenant prior to the final sale, the covenants ceased to be enforceable, as neither limb (a) nor limb (b) still applied.

The requirement for prior approval and reasonableness

Although not specifically at issue, as an aside, the Sugarman case referred to the requirement to obtain the vendor’s or its surveyor’s prior approval to the plans and drawings for such works as could be carried out.

This was, however, something which the High Court did have to consider in determining the operation of a similar restrictive building covenant in the earlier case of Sugarman v Mahon [2005]. In that case, a transfer of land imposed a covenant by the transferees:

… with the Transferors to the intent so as to bind the land hereby transferred and each and every part thereof into whosoever hands the same may come and to benefit and protect the Transferors’ property… and lands held therewith not to use the property hereby transferred for any purpose except that of a private garden and not to erect any building other than a greenhouse garden shed or domestic garage in accordance with plans which have been approved previously by the Transferors in writing.

Rejecting the argument that this was only for the benefit of the originally named ‘transferors’, the Court in Simms held that the requirement for approval of plans could and should be applied equally to their successors (who now held the benefiting property and were seeking to enforce that requirement).

On the further issue of the basis on which the approval of plans could be withheld, in considering what that covenant contemplated, the Court’s view in Sugarman was that the concept of approval implied at least a process of active consideration, that any plans would have to be considered in good faith, and that approval could not therefore be refused arbitrarily. Accordingly, the Court held that the requirement should be subject to an implied proviso that such approval should not be unreasonably withheld, in order to give business efficacy to the contract. CML and insurance requirements In terms of secured lending, although applicable for residential rather than commercial transactions, the Council of Mortgage Lenders (CML) Handbook gives some useful pointers and provides some insight into when an insurance solution for restrictive covenants may be called for. Even where solicitors are unable to give an unqualified certificate of title because restrictive covenants have been breached, the terms of the Handbook (Part 5, paragraph 5.7) provide that lenders will not insist that indemnity insurance is obtained provided that:

(1) the solicitors are satisfied that there is no risk to the security, ie no risk to the lender (the same may not be the case for the actual borrower – for instance, it may be more costeffective to get insurance anyway, even if strictly it is not needed, and thereby avoid lengthy and sometimes obtuse arguments with subsequent purchasers’ solicitors);

(2) the breach has occurred for more than 20 years; and

(3) there is nothing to suggest that any action is being taken or threatened in respect of the breach.

To insure or not to insure?

Although the likelihood (or at least the risk) of enforcement of a particular restrictive covenant may often call for protective action through appropriate insurance, Sugarman – albeit strictly applying only to its particular facts and the wording of the provisions in question – is nevertheless a good illustration that this may not always be the case. Sometimes, a considerable amount of money (and time) may be saved by a careful reading of the covenant. © Property Law Journal