A restrictive covenant or overage agreement might not always achieve what you think

It is now very common for landowners to sell their land subject to restrictive covenants or overage agreements – often both – with the aim of securing a share in the profits of any future development. But, increasing your profit is not always that simple.

Even where there is no immediate prospect of land coming up for development, sellers are employing devices to secure a share in the uplift as far as 20 or 30 years in the future.

Restrictive covenants might appear to be an easy way to achieve this aim.  They are well-established in law, simple (and therefore cheap) to draft and, though they can be very onerous in the ways that they restrict land use, it is usually easier to deal with land subject to restrictive covenants than land subject to overage agreements.  From the seller’s perspective, then, it all seems straightforward: impose a restrictive covenant preventing use of the land other than for agricultural purposes, and if the buyer ever obtains planning permission, the seller will agree to release the covenant for a price.

Restrictive covenants, however, are an imperfect device for this purpose. Restrictive covenants must be negative and capable of benefitting the seller’s retained land, both at the time they are imposed and at the time they are enforced. They are therefore only of value to the seller for so long as he owns land that can benefit from the covenant. They cannot be used to impose a positive obligation to pay money, and there is no mechanism by which to calculate the amount payable to the beneficiary in a given set of circumstances.

The courts will treat some restrictive covenants with scepticism. For example, the BBC’s premises in Southampton were subject to a restrictive covenant preventing the use of the premises other than as a broadcasting centre by the BBC. The covenant also contained a provision for it to be lifted and for payment equivalent to overage to be made to the council. The court found that the council did not have premises that could benefit from such a restrictive covenant and that it was, in truth, an obligation to pay money.  It was therefore unenforceable against subsequent owners of the land.

In another case, the court refused to uphold a restrictive covenant where the beneficiary had not taken action against the developer and had instead entered into failed negotiations to release it for a fee. The beneficiary was found to have accepted the breach by not taking enforcement action immediately and his negotiations for payment were found to be a reason not to uphold the covenant.

There will also be uncertainty about the price that the beneficiary can demand for the release of the covenant. A properly-drafted overage agreement will contain detailed calculations to ensure that during the defined overage period, the beneficiary receives an agreed percentage of the uplift in the value of the land after allowing for deductions of certain costs. Restrictive covenants, however, cannot include provisions of this kind and the price to be paid for a release can vary considerably from case to case. Where disputes have gone to court, awards have ranged from less than 5% to up to 40% of the profits of a development.

Finally, although restrictive covenants are not usually subject to a time limit, it cannot be assumed that they are permanent. They can be removed on application to the Lands Tribunal on a number of grounds, including that they have become obsolete or that they are impeding a reasonable use of the land. Given the difficulty of predicting the landscape in 20 or 30 years, sellers may be better off with an overage agreement of a certain period than a restrictive covenant, which may or may not last longer, and which could result in a court dispute. 

Landowners must think carefully about future development whenever they sell land, and consider how best to secure a share in any profits from it. Quite often, it is better to invest time at the point of sale in negotiating a detailed overage agreement, which will give the certainty of clear obligations to both parties and reduce the risk of a costly dispute further down the line.

If you are a landowner or would like to discuss this matter further please call 01206 217300 or complete our online enquiry form here.