For The Modification or Discharge of Covenants, Remember This Number: 84

No, not another telephone enquiry service, but a reference to a (still) relevant provision of the law of Property Act 1925, Section 84. For those faced with problems as a result of the existence of restrictive covenants, perhaps you should read on.

The legal bit
The Lands Chamber has power to modify or discharge a restrictive covenant with or without the payment of compensation where, even in cases where the party with the benefit of the covenant have not agreed to release the covenant, due to changes in the property or neighbourhood or other circumstances, the restriction is deemed to be obsolete.

In addition to showing that the restriction is obsolete, a party seeking to rely on Section 84 also has to demonstrate the following.

1. Either the covenant impedes some reasonable use of the land because the covenant does not secure any practical benefits of substantial value or advantage, or it is contrary to public interest. In either case, money must be deemed adequate compensation

2. Those with the benefit of the covenant have given implied or express agreement to the modification or discharge

3. No injury will be caused to those with the benefit of the covenant. The existence of a planning permission is often considered an important factor influencing the Lands Chamber to take into account the development plan and any pattern of the grant or refusal of planning permissions in the relevant areas.

The Section goes on to require the Lands Chamber to take into account the period of time and context in which the covenant was created or imposed, as well as any other material circumstance.

The compensation
Compensation is available if a covenant is modified or released, and the Lands Chamber has discretion in its awards, calculating compensation as either:
a. A sum to make up for any effect the restrictive covenant had when it was imposed in reducing the consideration (in general terms, the price) paid, or
b. A sum to make up for loss or disadvantage suffered as a consequence of the discharge or modification.

Interestingly, the general approach to compensation under b. is to assess this by reference to the reduction in value of the land with the benefit of the covenant, RATHER than the loss of opportunity to extract a share of the development value of the applicant's land.

Section 84 and development overage covenants
This last point will undoubtedly have already caused alarm bells for would be developers and those who have or are in the process of securing overage payments. An area of concern in practice is the extent to which a restrictive covenant imposed to secure overage is susceptible to modification and discharge.

If a restrictive covenant has been or is used to protect overage rights (particularly if overage is not secured by any other means), then Section 84 can have very serious impact. An order may still be made under Section 84 even though there may be a loss of a right to a future payment or bargain. This is the case even though the modification could permit the development that the restrictive covenant is limiting or prohibiting, subject to payment of overage.

So for a piece of legislation that came into force almost 90 years ago, the fact that its scope is still the subject of litigation, demonstrates that as a mechanism, Section 84 still has relevance today and can be easily overlooked as a potential solution (or hazard). Needless to say, if you are contemplating a situation where you think Section 84 may be useful, expert advice is needed.

For further information, please call Suzanna Stephenson on 01908 202150 or email at sstephenson@woodfines.co.uk

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