28-03-2008
Restrictive Covenants - Advice for developers
All developers should pay heed to the risks posed by restrictive covenants on development land.
A property developer may find the perfect development site, only to be told that it is burdened with a restrictive covenant, such as a covenant not to build more than one residential unit.
Developers often obtain indemnity insurance to protect against enforcement of breach of such covenants. However, insurance may not be available before obtaining planning permission or if there have been adverse discussions with or objections from people with the benefit of the covenant(s).
There are alternatives to insurance – the developer can either negotiate a release from the covenant, which can be expensive, or apply to the Lands Tribunal to have the covenant modified or released. The latter approach may prove considerably cheaper.
Several recent court cases have awarded damages for actual breaches of restrictive covenants based on a hypothetically negotiated share of the increased value of the development land (“buy-out damages”). Such damages were paid where the developer actually developed its land in breach of covenant.
The Court of Appeal recently confirmed that, where a developer applies to the Lands Tribunal to discharge a covenant, the objecting landowner should be paid compensation which reflects the decrease in value of his property (ie. his loss), rather than reflecting a share of the developer’s profit.
The Court of Appeal case confirms that compensation for the modification or discharge of a restrictive covenant may cost a developer a lot less than paying damages for building in breach of covenant.
This may encourage developers to make more applications to the Lands Tribunal, rather than pay inflated prices to be released from restrictive covenants.
The lessons to be learned for all budding developers are: (a) think it through; (b) talk to a lawyer; (c) weigh up the costs.
Richard Spencer is an Associate within BPE's commercial property team. Developers wanting advice should contact him on 01242 248 232 or email richard.spencer@bpe.co.uk
A property developer may find the perfect development site, only to be told that it is burdened with a restrictive covenant, such as a covenant not to build more than one residential unit.
Developers often obtain indemnity insurance to protect against enforcement of breach of such covenants. However, insurance may not be available before obtaining planning permission or if there have been adverse discussions with or objections from people with the benefit of the covenant(s).
There are alternatives to insurance – the developer can either negotiate a release from the covenant, which can be expensive, or apply to the Lands Tribunal to have the covenant modified or released. The latter approach may prove considerably cheaper.
Several recent court cases have awarded damages for actual breaches of restrictive covenants based on a hypothetically negotiated share of the increased value of the development land (“buy-out damages”). Such damages were paid where the developer actually developed its land in breach of covenant.
The Court of Appeal recently confirmed that, where a developer applies to the Lands Tribunal to discharge a covenant, the objecting landowner should be paid compensation which reflects the decrease in value of his property (ie. his loss), rather than reflecting a share of the developer’s profit.
The Court of Appeal case confirms that compensation for the modification or discharge of a restrictive covenant may cost a developer a lot less than paying damages for building in breach of covenant.
This may encourage developers to make more applications to the Lands Tribunal, rather than pay inflated prices to be released from restrictive covenants.
The lessons to be learned for all budding developers are: (a) think it through; (b) talk to a lawyer; (c) weigh up the costs.
Richard Spencer is an Associate within BPE's commercial property team. Developers wanting advice should contact him on 01242 248 232 or email richard.spencer@bpe.co.uk
