As a property developer, being aware of restrictive covenants and how they can affect your ability to develop a new residential site can be crucial. Restrictive covenants can render a development unviable, even where planning permission has been granted. In this blog, we look at what a restrictive covenant is, how they can affect a new build development and how problematic covenants can be dealt with at the outset to ensure a smooth development.

What is a restrictive covenant?

A restrictive covenant is a covenant on the legal title to land which prevents the owner of that land from doing something with or carrying out specific actions on their land. Due to their nature, they ‘run with the land’, meaning that if a restrictive covenant binds title to a property, a future owner of that property will still be bound by the covenant.

Common practices which restrictive covenants can prohibit are:

• Construction on the land
• Building on land without the consent of a 3rd party
• Banning the land from being used for certain uses such as residential development, businesses or trades

Why can these covenants cause problems for developers?

• Covenants can be enforced by a beneficiary at any time

Even if work on a development has started or completed, a beneficiary of the covenant (this could be a neighbouring landowner but this is not always the case) can take enforcement action against a developer for breach of restrictive covenant. A court could decide that the covenant is to be upheld. The remedies the court  could order include the developer having to pay damages and/or stopping the work on the development, rendering the development unviable.

• Restrictive covenants can cause concern for buyers and lenders

If a restrictive covenant which binds the development land is not dealt with prior to the development and sale of the properties, buyers and their lenders may be unwilling to proceed unless the covenant is sufficiently dealt with.

How can problematic restrictive covenants be dealt with?

• Depending on the nature of the covenant, it may be possible to obtain an indemnity insurance policy to financially protect the developer and future buyers against loss arising as a result of a party with the benefit of the restrictive covenant taking action due to the breach of the covenant. Whether or not this will be sufficient to satisfy buyers and/or their lenders will depend on a number of factors including the severity of the breach and the likelihood of a beneficiary of the covenant taking enforcement action.
• A Deed of Release could be entered into by the beneficiary of the covenant. This would release the restrictive covenant from the title, meaning that it would no longer bind the developer or future owners. Problems may be encountered however if it is difficult to establish all beneficiaries of a covenant as this could result in uncertainty as to whether the covenant has been fully removed.

Clearly, restrictive covenants have the potential to create serious problems for developers if they are not fully considered and correctly dealt with at the outset of a development. At Switalskis, we identify these risks early and find solutions to ensure developers can proceed with their projects as planned.