Freehold covenants

Freehold covenants Cameron Stewart (thanks to Jim Helman and Shae McCrystal – errors are mine)

Introduction • 19thC – rising middle class, development and property ownership • Little government control over development • Need for environmental regulation • Contract as the model • Contractual agreements regarding land bind the parties – but that is of little use into the future when the property changes hands • The movement from contract to property

Introduction • Covenant – The term covenant, at law, refers to a promise made in a deed – so a term of a deed. However, in practice we use the term covenant more loosely to refer to a contractual obligation affecting a land owner – so could arise under a contract not effected by deed.

Introduction • Positive Covenant – A covenant that requires an act to be done. • Negative Covenant – A promise that requires an act not to be done. • Covenantor – Person making the promise • Covenantee – Person taking the benefit of the promise

Introduction • Burden of the Covenant – The burden of the covenant is the obligation to act or not to act under the covenant. So if a person bears the burden of the covenant then they are the person who is required or restrained from acting in respect of their land. The person subject to the burden is called the ‘covenantor’ (the person who has covenanted to act or not to act).

Introduction • Benefit of the Covenant – The benefit of the covenant is the benefit that flows from the other party bearing the burden. So this is the benefit that flows from that person acting or not acting in a certain way with respect to land. The person who obtains the benefit of the covenant is the ‘covenantee’ (the person who has sought the promise that the other person will act or not act).

Introduction A (Covenantor) B (Covenantee) C D Burden of Covenant Benefit of Covenant

Annexation of covenants • When will the burden of a covenant run with the land such that the original covenantee can enforce the covenant against successors in title to the original covenantor – in law and at equity; • When will the benefit of a covenant run with the land such that a successor in title to the original covenantee can enforce the benefit against the original covenantor? – in law and at equity • When will successors in title of the original covenantee be able to enforce covenants against successors in title of the original covenantor?

Passing the burden at law • Austerberry v Corporation of Oldham (1885) 29 CH D 750. The case involved a private road. A man called John Elliot conveyed some land to a company for the purpose of building a road. The company covenanted that it would build the road and then maintain and repair the road at its own expense. The company subsequently sold the land to the Corporation of Oldham. Was the burden of the covenant between Elliot and the company (the obligation to maintain and repair the road at their own expense) enforceable against the Corp of Oldham?

Passing the burden at law • No - The court found that the covenant did not bind the Corporation of Oldham. The court said that the Corporation of Oldham was only bound by a covenant which ‘ran with the land’. The court found that the burden of a covenant does not run with the land: “A mere covenant to repair, or to do something of that kind, does not seem to me, I confess, to run with the land in such a way as to bind those who may acquire it” per Lindley J

Passing the burden at law • Section 70A(1) was inserted into the ConveyancingAct • It appears at first reading to change the common law position with respect to the burden of covenants: • A covenant relating to any land of a covenantor or capable of being bound by the covenantor by covenant shall, unless a contrary intention is expressed, be deemed to be made by the covenantor on behalf of himself or herself and the covenantor’s successors in title, and the persons deriving title under the covenantor or the covenantor’s successors in title, and, subject as aforesaid, shall have effect as if such successors and other persons were expressed. • Does this override Austerberry?

Passing the burden at law • No – the section deems a covenant to be made by a covenantor on behalf of the covenantor and his successors in title – thus providing a legislative presumption that a covenantor intends to bind successors in title, but does not actually say that the covenantor CAN bind successors in title. As the common law says that they can’t, simply saying that we will deem them to have that intent, does not overcome the common law rule. In other words, the section allows conveyancers to not have to write out that successors are intended to be bound • It is a conveyancer’ s short hand which does not change the common law position: Rhone v Stephens [1994] 2 WLR 429 per Lord Templemen – the English equivalent of the section is only intended to remove conveyancing difficulties and makes it unnecessary to refer to successors in title.

Ways around Austerberry • Chain of personal covenants in deeds • This method involves creating a chain of covenants between the original covenantee and covenantor and all their successors in title. The original covenantor always remains liable to the original covenantee – aim is to extend the liability: • The first covenantor agrees to ensure that each subsequent purchaser will enter into an identical covenant with the next purchaser. This means that the obligation is recreated in each deed; • When the first covenantor sells, the purchaser agrees to be liable under the contract if the original covenant is broken. That purchaser then requires the same promise from the person they sell to and so on. This means that if the covenant is broken and the first covenantor is sued, they can seek indemnity down the chain.

Ways around Austerberry • Under s 134 of the Conveyancing Act NSW, a lease granted over property which is granted for a term of not less than 300 years, and has not less than 200 years to run, may be enlarged into a fee simple estate provided that the lease does not require rent or more than nominal rent to be paid. Section 134(5) provides that where this occurs, • The estate in fee simple so acquired by enlargement shall be subject to all the same trusts, powers, executory limitations over, rights, and equities, and to all the same covenants and provisions relating to user and enjoyment, and to all the same obligations of every kind, as the term would have been subject to if it had not been so enlarged. • Leasehold covenants will be upgraded

Ways around Austerberry • The Principle of Benefit and Burden • Another suggested mechanism for enforcing the burden of covenants against successors in title is the principle of benefit and burden. This is an old principle of the law of deeds that provides that a person who wants to claim the benefit conferred by a deed, must submit to any burdens that are also imposed by the deed. • This obligation comes from the fact, as we will discuss later, that unlike burdens, benefits DO run with the land (and we will discuss how and why later). The idea here is that if a successor in title wants to claim any benefits that have run with the land, then they should also be subject to any burdens that come with it.

Ways around Austerberry • In Hallsall v Brizell [1957] Ch 169, a housing estate of 174 lots was created in 1851. The owners of the land kept ownership of the common roads, sewer system, a sea wall and a promenade area and covenanted with each purchaser that they would make an annual contribution to the maintenance and upkeep of those common areas. In 1950, the current owner of one of the houses challenged the amount he had been charged that year as his contribution and the matter ended up in court. The initial question was whether or not the owner was legally obligated to make the payment at all. Justice UpJohn began by noting that the burden of a covenant is not enforceable against successors in title of the covenantor.

Ways around Austerberry • Lord Upjohn held that it is ancient law that a man cannot take a benefit under a deed without subscribing to the obligations contained within the deed. While originally the rule only applied as between the actual parties to the deed, the rule had been expanded under English common law to apply to successors in title of the covenantor where they take a benefit under a deed to which they are not a party • The principle of burden and benefit was restated by the House of Lords in Rhone v Stephens [1994] 2 WLR 429 – This case involved a house and a cottage which shared a roof. When ownership of the house and cottage was divided, the owner of the house covenanted to be responsible for repairing the roof. There were also mutual covenants for support of the adjoining properties.

Ways around Austerberry • Lord Templemann (with whom the other Lords agreed) stated that the rule was not that any party deriving any benefit from a deed must accept any burden that is contained in the same document. Instead, the burden must be relevant to the exercise of the rights granted. Therefore, the important thing is that the burden must relate to the reciprocal benefit claimed and not be a separate independent provision. Here, the benefit of support from the neighbouring house was independent of, and separate to, the covenant to repair the roof.

Ways around Austerberry • Not popular in Australia • Justice Branson of the NSW Supreme Court stated that “the principle of benefit and burden has not become established as a general principle” (Clifford v Dove [2003] NSWSC 938 [67]) and similar criticisms were made before the HOL decision in Rhone by Justice Brooking in the Vic Sup Court in Government Insurance Office (NSW) v KA Reed Services [1988] VR 829.

Ways around Austerberry • Nevertheless In Rufa v Cross [1981] Qd R 365 (3) a party wall was constructed on a common boundary between properties. Subsequently, the owners agreed by deed to grant easements over the site of the wall and included covenants that either owner by notice to the other could extend the wall and that if the other owner later decided to use the extended portion of the wall that the second owner would pay for part of the cost of construction. • The District Court judge found that the right to extend the existing wall and the right to use that extended portion were rights capable of forming the subject matter of a grant of easement and that where the appellants took the benefit of the deed, they were bound by the conditions in it. This was so, despite their not being parties to the deed. The Queensland Full Court dismissed an appeal from the District Court.

Ways around Austerberry • Kneipp J.: It is laid down in Coke on Littleton, 230b, that “a man who takes the benefit of a deed is bound by a condition contained in it though he does not execute it”: per Cozens-Hardy M.R., arguendo, in Elliston v. Reacher [1908] 2 Ch. 665 at 669. It is sometimes put in Latin: qui sentit commodum sentire debet et onus. Examples of its application are Aspden v. Seddon (1 Ex. D. 496). Westhoughton U.D.C. v. River Douglas Catchment Board [1919] 1 Ch. 159, 171, and Halsall v. Brizell [1957] Ch. 169. It seems that the easements in the present case were executed under seal, but in any event they had the effect of a deed on registration: Real Property Act of 1861, s. 35. In the present case, the building of the defendants in at least one respect encroaches on to that part of the wall which stands above the plaintiff’s land. If it is assumed, as I think it should be, that this is justified by reference to the relevant easement, then I think that they should bear the obligation imposed by that instrument to pay half the cost of the wall. I think, therefore that the appeal should be dismissed with costs.

Ways around Austerberry • Where a covenant is created as an essential component of the grant of an easement, the burden of the covenant may be enforceable if the covenant is considered to be an ‘incident’ or ‘essential part’ of the easement. • Frater v Finlay (1968) 91 (WN) NSW 730 – Two owners of adjoining pastoral land held under Crown leases agreed that one could draw water from a well on the servient land through a pipe connected to the dominant tenement. The grant of easement contained a requirement that the owner of the dominant tenement pay for half of the upkeep of the well and the pipes. The successor in title to the owner of the servient tenement sought payment of half the cost of the upkeep from the successor in title of the dominant tenement.

Ways around Austerberry • DCJ Newton found that while an easement imposes no active obligation on the owner of the servient tenement to repair the site of the easement, the owner of the servient tenement may voluntarily bind himself to repair or maintain the site as a term of the grant of the easement. He said that it follows from this that, per Newton DCJ at 735: • “[I]f the grantor of an easement can bind himself and his assignees to repair by the grant then, a fortiori, the owner of the dominant tenement can bind himself and his assignees to repair or contribute to the cost of repairs”.

Ways around Austerberry • Clifford v Dove [2003] NSWSC 938 in a dispute involving an easement granted in which the owner of the dominant tenement was given the right to use cattleyards belonging to the owner of the servient tenement. The owner of the servient tenement tried to enforce a covenant to pay for repairs to the cattle yard against the owner of the dominant tenement, arguing that it was an essential part of the grant of the easement. Justice Bryson refused to follow Frater v Findlay on the basis that the obligation was imposed on the grantee – not as an essential element of the grant of easement but as an additional covenant providing for a contribution to repair.

Ways around Austerberry • Justice Bryson stated that the decision of the House of Lords in Rhone v Stephens makes it clear that the burden of covenants does not run with the land – and as this was an additional covenant separate to the easement – it did not run. • Burden/benefit principle didn’t work as servient tenement owner got no benefit • Result : not enforceable • Lesson? Make the obligation an essential part of the easement

Ways around Austerberry • s 88BA was introduced into the CA in 1996 covering positive covenants for repair or maintenance. • 1) A covenant may be imposed requiring the maintenance or repair, or the maintenance and repair, of land that is the site of an easement or other land that is subject to the burden of the easement (or both) by any one or more of the persons from time to time having the benefit or burden of the easement.

Ways around Austerberry • (2) Such a covenant may be imposed: • (a) by registration under this Act or the Real Property Act 1900 (as the case may require) of the instrument indicating the persons bound by or including the terms of the easement, if the terms of the covenant are included in that instrument, or • (b) by registration under the Real Property Act 1900 of a memorandum of positive covenant in the form approved under that Act that includes the terms of the covenant, if the site of the easement is under the provisions of that Act, or • (c) by registration under Division 1 of Part 23 of a deed expressed to be made under this section and including the terms of the covenant, if the site of the easement is not under the provisions of that Act.

Ways around Austerberry • ((3) The instrument including the covenant must clearly indicate the land which is to be maintained or repaired, the land to which the benefit of the covenant is appurtenant and the land which is subject to the burden of the covenant. If the land is subject to an easement without a dominant tenement created in favour of a prescribed authority (as referred to in section 88A), the instrument must indicate the name of the prescribed authority.

Ways around Austerberry • Rentcharges - A rentcharge is an annual or periodic payment charged on and payable by the owner of land from time to time. The payment is made to a person who owns the rent charge – and the person who owns the rentcharge owns it personally – it is not connected to land. • Rent charges developed when subinfeudation was prohibited. Since landowners could no longer make persons to whom they sold land offer up feudal duties, they would instead, when they sold land, reserve to themselves the payment of rent on the sale of the land. So – I sell you this fee simple and in return you agree to pay $x and then $x per year.

Ways around Austerberry • The rentcharge is owed to a person, but attaches to the land and is imposed on the owner of the land from time to time. The rentcharge can be enforced through entry into possession of the land in the case of old system land or sale in the case of Torrens. Using a rentcharge as a mechanism for enforcing the burden of covenants at law was recognised in Austerberry v Corporation of Oldham (1885) 29 CH D 750 – per Lindley LJ – “If the parties had intended to charge this land forever, into whosesoever hands it came, … there are ways and means known to conveyancers by which it could be done with comparative ease; all that would have been necessary would have been to create a rentcharge and charge it on the tolls”.

Passing the burden in Equity • Tulk v Moxhay (1848) 2 Ph 774; 41 ER 1143: In this case the plaintiff, Tulk, sold land called ‘Leicester Square Garden’ to a man called Elms. In the contract of sale there were two covenants: • That Elm would maintain the land as a garden and not erect any buildings on it; • That Tulk would pay rent to Elms for access to the garden for Tulk and Tulk’s tenants. • The case came to court when Tulk tried to enforce the covenants against a purchaser of the fee simple from Elms, who was proposing to erect buildings on the site. The purchaser of the fee simple had notice of the Covenants. The court found that equity would enforce the burden of the covenant against a purchaser of the land who takes the land with notice of the covenant. The court said that if a purchaser takes the land with notice of a covenant, then they will receive a reduced purchase price to take the covenant into account and it would be inequitable to allow them to escape the obligation in those circumstances.

Passing the burden in Equity Equity will enforce the burden where: • The covenant is negative in effect • The covenant benefits the land of the covenantee; • The burden of the covenant was intended, by the original parties to the covenant, to run with the land; and • The successor had notice of the covenant

Only negative covenants • Haywood v Brunswick Permanent Benefit Building Society (1881) 8 QBD 403 which held that equity would only intervene to enforce a negative covenant of which a purchaser had notice: • Brett LJ at 408 – “an assignee taking land subject to a certain class of covenants is bound by such covenants if he has notice of them … covenants restricting the mode of using the land only will be enforced”. • Rhone v Stephens [1994] 2 WLR 429 - In considering whether the court would enforce a covenant to repair a roof against the successor in title of the covenantor, Lord Templemanstated that: • “[E]quity cannot compel an owner to comply with a positive covenant entered into by his predecessors in title without flatly contradicting the common law rule that a person cannot be made liable under a contract unless he was a party to it”.

Only negative covenants • The question of whether a covenant is negative or positive is a question of the substance of the obligation imposed. Does it require the successor to the covenantor to do something (positive); or does it merely require them to refrain from doing something (negative). Butt suggests that a good rule of thumb is whether the covenant requires the expenditure of money – positive – or if it can be complied with by doing nothing (negative).

Only negative covenants • Build on land within a certain time (positive) • Any buildings should be detached; cost not less than x amount (negative – don’t have to build) • Keep a park ‘uncovered with buildings’ (negative) • Not allow premises to fall into disrepair (positive) • Only use land for a ‘bowling and recreation club’ (negative – can be complied with by doing nothing – don’t have to build the club) • Covenant to build to a certain standard (positive); covenant not to build unless to a certain standard (negative)

The Covenant Must Benefit the Covenantee’s Land • The covenant must benefit land owned by the covenantee at the time of entering into the covenant. The only reason that equity would elevate a contractual obligation into an equitable encumbrance that will run with the land is that the covenant is designed to preserve the value of the covenantee’s land. As the High Court noted in Forestview v Perpetual Trustees WA (1998) 193 CLR 154 per Gaudron, McHugh, Gummow, Kirby and Hayne JJ at 162: • “The doctrine in Tulk v Moxhayhas been said to evince the appreciation by the courts of equity that the market value of land may be affected by activities upon adjacent parcels as much as by the uses to which the land can be put, and that certain arrangements designed to protect such value and which go beyond the frame of contract may be enforced in equity if not at law.”

The Covenant Must Benefit the Covenantee’s Land • If the land of the covenantee is too big to be affected, it can’t benefit; • The land would have to be reasonably close to the burdened land • Will the breach reduce the value of the benefitted land? • Will the breach remove an amenity of the benefitted land?

Intention that the burden should run with the land • Equity will only enforce covenants against successors in title to the covenantor if the original contracting parties intended the covenant to run with the land. So, a covenant designed to be personal to the original covenantor only will not run. • Proving intention for the purposes of the equitable rule has been simplified by the passage of s 70A(1) of the CA: • A covenant relating to any land of a covenantor or capable of being bound by the covenantor by covenant shall, unless a contrary intention is expressed, be deemed to be made by the covenantor on behalf of himself or herself and the covenantor’s successors in title, and the persons deriving title under the covenantor or the covenantor’s successors in title, and, subject as aforesaid, shall have effect as if such successors and other persons were expressed.

Notice • Because negative covenants will only be enforced against successors in title (outside of finding a conveyancing trick to do it legally) in equity, the right to have equity enforce the covenant will depend on whether the land is taken by a bona fide purchaser for value without notice. Therefore for old system land a BFPVWN will not be bound by the covenant.

Notice • Notice includes actual constructive and imputed notice • Torrens system has slightly different rules.

The benefit of covenants passing at law • Two substantive requirements must apply before the law will allow a successor in title to the covenantee to enforce the covenant against the covenantor. The covenant must: • ‘Touch and concern’ (benefit) the land of the covenantee; and • The parties must intend that the benefit of the land should run with the land.

The benefit of covenants passing at law • It must be a covenant that benefits the land, rather than benefitting the covenantee personally. Therefore you are looking for something that allows the better enjoyment of the land; or that enhances the value of the land. In each case the question is a question of fact. You don’t have to point to an actual increased land value, but can use intangibles such as character and amenity of the land. Examples from Butt at page 503: • Can only build one dwelling house – preserves the amenity of adjoining land • Keep river banks in repair – protects adjoining land from flooding which can be good for a residence or for agricultural land • Keep road in repair – affects access to the land and hence its amenity • Don’t carry on a butcher shop – by protecting a business from competition this enhances the value of the land

The benefit of covenants passing at law • Large land – In the case Re Ballards Conveyance [1937] Ch 437, Mrs Ballard subdivided some of her land in 1906, including lengthy covenants about requirements for building should one of the new owners build. She retained about 1700 acres of land and subdivided some lots on the edge. The case came to court some years later when the present owner of the 1700 acres – a stud farm, sought to enforce the negative covenants against the present owner of one of the much smaller lots. The court found that while the covenant was entered into and intended to benefit the land originally owned by Mrs Ballard (the 1700 acres), the covenants concerned did not ‘touch and concern’ her land because any breach of the covenants could not possible affect the vast majority of her land holding. In this case the land was just too large to be ‘touched and concerned; in that manner and the courts would not sever the benefit to just attach to a small bit of the land. Note though – that you can express the covenant in that way: to benefit ‘such part or parts’ of the land as is relevant, and this will allow the covenant to be effectively annexed just to those parts.

The benefit of covenants passing at law • Marquess of Zetland v Driver [1939] 1 Ch 1 (8) the English Court of Appeal upheld an appeal from a decision of a judge in the Chancery Division and found that that a covenant "for the benefit and protection of such part or parts of the settled land as should etc". The reason for the finding in this case was that the covenant was expressed to be for parts of the remaining land and not, as in Ballard’s case, for the whole land.

The benefit of covenants passing at law • Subdivisions - Ellison v O’Neill (1968) 88 WN (NSW) 213. • In the case, a man called Benjamin owned a piece of land. He sold one section of the land to relatives (the Ellisons) and included a restrictive covenant which stated that they could not place a building on the land that was more than one story high. The aim of the covenant was to protect Mr Benjamins view of the Harbour. Mr Benjamin died. He left his property to a relative Ms Benjamin, who subdivided Mr Benjamins land into 3 lots. Lot 1, she gave to the Ellisons honouring Mr B’s request. Lots 2 and 3 she sold. The owners of lot 2 did not care about the covenant because their lot was on higher ground and a two storey building would not obstruct their view. The owners of Lot 3 – the O’Neill’s, did care because their view would be obstructed. The Ellisons wanted to subdivide their own land and they sought a declaration in court that if they sold off one of the lots that it would be sold free of the covenant.

The benefit of covenants passing at law • Justice Walsh reviewed the law on annexation and found a preference at law for treating the benefit as attaching to the whole of the land such that there is a preference for starting from the premise that it is intended to attach to the whole of the land unless it is shown that the benefit was supposed to attach to portions of the land: “Prima facie, the benefit of a covenant … enures to the land as an entirety” (at 221-222) (one other judge appeared to agree; 1 in dissent) • In this case there was not a sufficient indication in the documents granting the covenant that the covenant was intended to attach to portions of the land rather than the whole of the land, as so the benefit of the covenant was lost when the land was subdivided.

Intention to pass the benefit • The benefit of a covenant will not run at law unless the original covenantee and covenantor intended that the benefit should run with the land (and not just constitute a benefit for the covenantee personally). To ascertain intention you have to look at the document creating the covenant and the circumstances of its creation. You are looking for a form of words which suggest that the benefit of the covenant has attached to the land • enures for the benefit of the land • enures for all heirs or assignees of the land.

Intention to pass the benefit • Section 70 of the Conveyancing Act which provides with respect to the benefit of covenants: • A covenant relating to any land of the covenantee shall be deemed to be made with the covenantee and the covenantee’ssuccessors in title and the persons deriving title under the covenantee or them, and shall have effect as if such successors and other persons were expressed. For the purposes of this subsection in connection with covenants restrictive of the user of land "successors in title" shall be deemed to include the owners and occupiers for the time being of the land of the covenantee intended to be benefited.

Intention to pass the benefit • Does s 70 supply an intention? • In UK - yes - Federated Homes v Mill Lodge Properties Ltd [1980] 1 WLR 594; s 70 did supply the necessary intention because it allows not just heirs and assigns to enforce it but owners/occupiers of the benefitted land – suggesting that the relevant heirs and assigns are ones who take the land, not just any heirs and assigns of the contract (unless the covenant is clearly expressed to the contrary). • In Australia? Not sure - Forestview Nominees v Perpetual Trustees (WA) (1998) 193 CLR 154 – High court declined to consider whether the English approach to s 70 should be followed as it did not need to be determined on the facts of the case.

Freehold covenants