The Operator - Restrictive covenants, a new industry rift?

3 March 2011

Restrictive Covenants

A new industry rift?

In this article, we look at the status quo and how operators can live with restrictive covenants, or how they can remove or modify them. We also look in more detail at whether the days of the covenant are now numbered.

Considered to be ‘anti-community’ by campaign groups, and with a schism evident within the Licensing, Hospitality and Leisure industry, Government awareness of the benefits of outlawing the use of restrictive covenants in the sale of licensed premises, is evident from the proposals outlined in its publication of “Sustainable Communities Act 2007: Decisions on proposals submitted following the 2008 invitation”. The Government has announced it is to undertake a public consultation on the issue of restrictive covenants by June 2011, with a particular focus on understanding the impact they have on pubs and communities, and seeking views on the necessity and form of powers to restrict their use.

The status quo

How to overcome or modify a restrictive covenant?

It is not uncommon to encounter a covenant which prevents the sale of alcohol, or, as older styled covenants are worded, prevents the sale of “intoxicating liquor” from the premises. However, just because there is a covenant in place, does not mean to say that the matter ends there – the restrictive covenant may not be enforceable at law and those who wish to buy a property and get round the covenant have a number of ways of doing so. Whether a restrictive covenant is enforceable or not depends on whether the ‘burden’ of the covenant has attached itself to the property being acquired and whether there is other property that ‘benefits’ from the covenant. If the answers to those questions are “yes”, then there are steps that a buyer can take to reduce or remove the effect of the covenant.

The Burden

Whilst the original contracting parties to a covenant will continue to be bound by it, it will not necessarily bind those acquiring the title. In the case of Tulk –v- Moxhay (1848), the Court held that the burden (or obligation that the covenant imposes) of a covenant will stay with the land if it “touches and concerns” the land as opposed to it being a purely personal covenant. This is provided also that the covenant was entered into for the benefit of the retained land and is capable of benefitting that land. The buyer must also have ‘notice’ of the covenant. The majority of land in England and Wales is now registered at the Land Registry and ‘notice’ for these purposes will consist of an entry in the registered title setting out the terms of the covenant or referring to it as set out in another document. In the case of unregistered land, the restrictive covenant should have been protected by a land charge against the name of the owner at the time it was entered into.

The Benefit

A properly drafted covenant will make it clear that it is being entered into for the benefit of each and every part of the retained land and is intended to bind successors in title. If it does not do that then there is a real risk that the covenant will be unenforceable, or will become so in the future. The proximity between the burdened property and the benefitting property is crucial. For instance, it has been held that covenants binding land in Hampstead were too remote to benefit land in Clapham. Just how close the burdened and benefitting land needs to be will depend upon the facts of each particular case, but generally speaking, the closer the physical proximity, the harder it will be to show no benefit.

Buyer removal

If a covenant is still enforceable there are three main alternatives which can be deployed by buyers wishing to remove or reduce the restrictive covenant:

(a) Indemnity insurance

(b) Release of the covenant by deed

(c) An application to the court for modification or discharge

(a) Indemnity Insurance

It is usually possible to take out an insurance policy upon payment of a single premium, to provide for compensation to be paid if it is ever enforced together with all associated costs. The benefit of the policy will generally be available to a mortgagee and should be freely assignable to future buyers. However, buyers may not have considered the appropriate level of cover that might be required, particularly if the enforcing party is able to obtain an injunction effectively preventing the property being used as licensed premises. As with any injunction the sooner it is applied for the more likely it is that it will be granted in favour of the person applying.

(b) Release by deed

It may be possible to agree a release or a variation to the covenant with the person or persons who hold the benefit. In order to be fully effective however all the parties who hold the benefit of the covenant should enter into the deed. The Land Registry will need to be satisfied that the covenant has been fully and effectively released and if there is any doubt as to whether or not the release has been effective, then the Land Registry will make it clear in the registered title to the property that the deed of release purports to release the covenant as opposed to actually doing so. It is fundamentally important that the question of whether indemnity insurance should be put in place is effectively ruled out prior to making an approach to any adjoining landowners for a release. It is invariably a condition of such policies that no approaches be made to other landowners in connection with the covenant for which insurance is being required. If this happens then this may well void the policy or may mean the insurers refusing cover should a policy be required at a later stage.

(c) Application for modification or discharge

An application may be made to the Upper Tribunal (Lands Chamber) (formerly known as the Lands Tribunal). The court may discharge or modify a covenant on a number of grounds, the most common being where the covenant is deemed to be obsolete or impedes the reasonable use of the land. The court may award compensation to the party with the benefit of the covenant to reflect losses suffered as a result of its modification or discharge. Such an application is likely to be a last resort given the likely costs and the lengthy time scale between making the application and obtaining a judgment.

The future

Will this mean an end to restrictive covenants as we know them?

The tone of the Government’s web-page, dealing with this issue, (http://www.communities.gov.uk/news/corporate/1809054) suggests that there is a real drive in the executive to take forward a ban on the use of restrictive covenants within the licensed trade. There is no reference to any pitfalls to this ban and as such it would appear that the conclusion of the consultation will be approval of the ban. For those in the industry who seek to retain restrictive covenants, it remains to be seen how they will lobby the Government to preserve, what is for some, an important business tool in difficult economic times.

The consultation adds to the impetus given to community concerns by what is said to be the Government’s “flagship” initiative, the Localism Bill. This Bill aims to stem the tide of pubs which are sold for development by giving the community the power to delay any sale until they are able to raise a fighting fund and make their own bid. Organisations such as CAMRA argue that the loss of any pub deprives the community of a vital asset, whereas the larger operators have argued that such sales (and indeed the imposition of covenants) are the only means of preserving a viable pub industry in the future. Government ministers have been keen to stress that they are not “anti-development”, but that the Localism Bill, by harnessing the support of communities, will make the development that is carried out far more sustainable in the future.

In view of the economic climate that currently prevails, there is certainly more of an opportunity for debate in this area, particularly at a time when Councils are facing severe budgetary constraints, which may not allow for the involvement in community assets which would be required to push forward the re-opening of pubs within the local community. We therefore await with interest the results of the consultation, reaction to publication of the detail of the Localism Bill, and the debate which will ensue.

Neil McAlistair, Real Estate

Vicky Lord

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