Are restrictive covenants enforceable?

Commercial property solicitor, Rosanna Clarke, takes a look at restrictive covenants and when they can be enforced.

The Upper Tribunal (Lands Chamber) saw a recent case which reinforced the importance of distinguishing between a positive and restrictive covenant and the potential impact that covenants can have on development and future use of property.

Blackhorse Investments (Borough) Ltd v London Borough of Southwark [2024] UKUT 33 (LC)

The Claimant in the case was a tenant under a 99-year lease of a commercial premises, which had been used as a pub. The tenant wanted to demolish and construct a predominately residential building. The tenant could not carry out these works do so without breaching certain covenants in their lease. The covenants included user covenants, such as:

• Covenant A: an obligation to keep the premises open and in use as a pub.
• Covenant B: an obligation to use best endeavours to renew the requisite licences to enable the property to be kept open as a pub.
• Covenant C: a restriction on tenant’s ability to assign or sublet parts of the property without consent of the landlord.

Having realised that they could not conduct the building works without breaching the covenants, the tenant applied to the Upper Tribunal to modify Covenant A, B and C.

The law on restrictive covenants

For a Claimant to be successful in modifying or discharging a covenant, they must satisfy one of the four statutory grounds contained in section 84 of the Law of Property Act 1925. The statutory grounds for removal or modification are in summary:

1. The covenant ought to be deemed obsolete;
2. The continued existence of the covenant would impede some reasonable use of the land for public or private purposes (here, the tribunal would need to be satisfied that impeding the use does not secure any practical benefits of substantial value or advantage to the person with the benefit of the covenant, or that it is contrary to the public interest, and that money would be an adequate form of compensation for the loss or disadvantage that a person may suffer from the discharge or modification);
3. The modification or removal would not injure those who are entitled to benefit from the restriction; or
4. Where all parties who benefit from the covenant give their express or implied consent to its modification or discharge.

If one of these grounds are met, the Upper Tribunal then has the discretion to modify or discharge the covenant. However, the Upper Tribunal only has the requisite jurisdiction to modify or discharge restrictive covenants as opposed to positive covenants.

What is the difference between restrictive and positive covenants?

Restrictive covenants prevent a party from doing something to or upon the land, such as restricting the number of properties which can be built on the land.
On the other hand, positive covenants place an obligation on a party to do something to the land for example to erect and maintain boundary structure or to contribute towards the cost of maintaining shared services.

The Decision

Covenant A expressed obligations which are both positive and restrictive in nature. It effectively prevented the property to be used for anything other than as a pub. However, where the practical effect of a positive covenant was in effect restrictive in nature i.e., to prevent the use of the land for any other purpose, that was not sufficient to enable the Tribunal to modify the covenant. Covenant B was also clearly positive in nature.

Section 84 concerns restrictions as to the use of the land, or the use of the buildings on the land. Covenant C was a restriction on an assignment of the lease to another party, which does not directly relate to the use of the land or the physical activity taking place on it. The Tribunal therefore did not have the power to modify this covenant, even though the practical effect of assignment might be that the use of the property is altered.

Practical Implications

This case distinguishes between positive and restrictive covenants, reminding us that it is not always easy to ascertain whether a covenant is positive or restrictive. Consequently, this case serves a warning to parties seeking to modify or discharge covenants that the Upper Tribunal cannot always provide a helping hand. The decision in this case was made notwithstanding the tenant had planning consent for the development and change of use. The wording of a covenant and its practical implications should be carefully considered on any property transaction to avoid potential dispute and or costs implications.

Holmes & Hills we have an expert team of commercial property, land and development and litigation lawyers that offer a solution-based approach to identifying, assessing and advising on the potential impact of covenants on land. We also have an expert team of litigators with a record of successful claims to the Land Chamber in relation to the release of restrictive covenants.