Beware a breach of restrictive covenants as the potential liability could be severe
Restrictive covenants are agreements or obligations to refrain from doing something which are binding on the party giving the covenant and restrict the way in which a party can act, such as the way in which land may be used.
Common examples include restrictions on use. There may be a covenant contained in a transfer or lease prohibiting the sale of alcohol or restricting the property being used for anything other than a specified use, such as commercial or industrial use. It is common to see covenants restricting what can be built on a property. For example, the party giving the covenant may be prohibited from building anything on a property other than a single private dwelling.
Restrictive covenants are enforceable by the owner of the land benefiting from the covenant against the owner of the land burdened by the covenant.
Remedies for breach of covenant include monetary compensation for breach, injunctive orders stopping the owner of the burdened property from continuing to breach the covenant or specific performance requiring the owner of the burdened land to repair the wrong. In extreme examples, there may be an order to pull down a building erected in breach of a restrictive covenant. Leases can be forfeited for breach.
The potential liability for breach can be severe and costly. It is critical when buying a property, your solicitor properly advises you about any covenants on title which may affect your intended use of the property.
One solution when buying a property is to approach the party benefiting from the restrictive covenant and seek a variation or release of the covenant. This approach should ensure the covenant is no longer enforceable.
However, the party benefiting from the covenant will probably seek some sort of payment which could be thousands of pounds, as well as having their legal costs paid. The party seeking release of the restrictive covenant determines whether the cost of any variation or discharge makes commercial sense.
Alternatively, the owner or prospective owner of the burdened land can apply to the Lands Tribunal to modify or extinguish restrictive covenants. The tribunal requires the application to be advertised in local and national newspapers. The tribunal will want to see evidence that sufficient enquiries have been made to track down the owner of the benefiting land and they may require expert evidence to assist it to reach a determination.
At the hearing, the tribunal will examine previous decisions and consider if the covenant beneficiary secures a practical benefit from the covenant and if there would be a material prejudice suffered by the beneficiary or adjoining owners by modifying or discharging covenant. Where there is an application to build, having the relevant planning permission seems to strengthen the applicant's position.
Obtaining title indemnity insurance covers the insured in the event of a claim being made or any loss of value in the property as a result of the defect. Obtaining title indemnity insurance is quick, relatively inexpensive and satisfies most lenders.
However, it doesn't fix the defect. It is relatively untested in Northern Ireland and there is the risk the insurer may dispute the claim, or not pay out for the full amount.
Title indemnity policies are becoming more and more commonplace in Northern Ireland and in certain circumstances are a viable and pragmatic way of getting around certain restrictive covenants.
However, each scenario needs to be assessed on its individual merits to determine whether or not it is suitable.
The law around restrictive covenants is complex and advice should be taken from an experienced property solicitor who will report to you on any issues.
Michael Duffy is a solicitor in the Commercial Department at Worthingtons Solicitors, Belfast with experience in a broad range of property transactions including sales and purchases, commercial leases, secured lending and residential conveyancing. Michael also acts for clients with property interests in England and Wales.