New Case Highlights Risks for Landowners Selling Land to Developers

December 10, 2021

By Catherine Burke

When land is sold to a developer, it’s often agreed that the landowner will receive a share of the uplift in value when the land is developed- this is known as overage. One of the landowner’s main concerns will be to ensure that the obligation to pay them the overage- which could be triggered years down the line- is properly secured.  A recent case has highlighted the risk of using restrictive covenants as a means of securing that overage payment.

Landowners and developers will know all too well that restrictive covenants on land can disrupt or even prevent a development from going ahead.  However, the decision of the Upper Tribunal (Lands Chamber) in Father’s Field Developments Limited v Namulas Pension Trustees Limited [2021] UKUT 169 and [2021] UKUT 252 has shown that a developer can potentially discharge or modify a restrictive covenant that is only made for financial gain with no practical benefits, and so would disregard the overage.

The Facts:

In 2001, Father’s Field Developments Limited (“the Developer”) purchased a golf course as a going concern from Namulas Pension Trustees Limited (“the Seller”).  The transfer contained a restrictive covenant preventing the Developer from carrying out residential development on any part of the land for 30 years without the Seller’s consent -unless any such residential development was occupied only by the Developer’s family members or the golf club’s employees.

The Developer went on to construct 3 houses on the golf course, and made an application to the Tribunal under section 84 Law of Property Act 1925 (“the Act”) to have the covenants discharged/modified- so that the houses could be sold to unrelated third parties. The Seller objected on the basis that the restrictive covenant had been put in place to secure an overage payment in return for their consent.

The Decision:

The Tribunal has the power to discharge or modify a restrictive covenant if it impedes a reasonable use of the land, and if it has no practical benefit of substantial value to the benefitting party (the Seller in this case) under section 84 of the Act.

The Tribunal decided that the proposed residential development would be a reasonable use of the land and that the restrictive covenant put in place by the Seller hampered this use.

A significant factor in the Tribunal’s decision was that the Seller did not retain any land which could benefit from the restrictive covenant.  This suggested that the Seller imposed the covenant purely for financial gain and not to protect the amenity of any land, so there was no practical benefit to the restrictive covenant. The Tribunal held that financial gain alone is not a practical benefit.

It was also pointed out by the Tribunal that the introduction of the restrictive covenant did not affect the purchase price of the property when it was acquired by the Developer.

The Tribunal discharged the restrictive covenant, enabling the Developer to construct and sell the houses on the land for occupation by unrelated third parties. No compensation was awarded to the Seller as the Tribunal decided they had suffered no loss in value by the discharge of the covenant.

Practical implications

The Tribunal’s decision highlights the need for landowners to carefully consider the best way to secure future overage payments. In most cases, the safest mechanism will be an overage agreement rather than a restrictive covenant.

For more information and advice on overage agreements or a related topic, please contact Catherine Burke on 029 2082 9112 / cburke@darwingray.com for a free, no-obligation conversation.