Want to Control the Future?

A seller commonly wishes to restrict the buyer's use of land after the sale – sometimes forever and sometimes only for a limited period.

Normally this is done by way of a restrictive covenant by which the buyer covenants not to so use the land – and if done properly (and correctly registered) this will automatically bind the buyer's successors in title, as well as the original buyer.

One essential for a restrictive covenant is that it benefits land held by the seller. However even where the seller has no remaining land in the area capable of really benefitting from the restriction it may want to restrict use of the land after the sale for legacy and reputational reasons and a restrictive covenant will not bite in these circumstances.

Sometimes the seller chooses to impose the user covenant in the hope that it will be a deterrent to the buyer. It might choose to back this up by putting a restriction on the buyer's title at the Land Registry which prevents any future buyer from registering itself as the owner of the land in question (unless the seller certifies that it has received a deed of covenant directly from the future buyer, covenanting to comply with the user restriction). In theory the seller would be able to sue on the covenant at any time, either under the original covenant or under the deed of covenant (as the case might be). However, a bullish owner might decide to ignore the covenant on the basis that the seller would be unable to show any real loss from the breach and would therefore be extremely unlikely to sue for damages.

The ways in which this might be better achieved all have their own disadvantages, including cost consequences, and both seller and buyer would need to take detailed advice when considering them:

(a) Clawback

The seller might try to enforce the user covenant through overage or clawback. Here the seller takes positive covenants from the buyer to pay the seller a sum of money if the buyer uses the land in the stipulated way in the future and this sum could be set so high that the buyer would be unlikely to do it.

The downsides of this scheme for the seller are that clawback provisions are complicated and can be subject to lengthy negotiation and this can increase the up-front legal costs. Furthermore the scheme is secured by a restriction on the buyer's title and deeds of covenant from each successor. There is therefore both an element of policing involved, and future time and legal costs in dealing with each deed of covenant in turn.

A seller is therefore unlikely to consider this unless it was intending to impose a clawback provision anyway – for example if it had been thinking of prohibiting the change of use for the first 5 years after the sale and then taking a clawback for any change of use after that period. In this scenario the clawback would be applied from day 1 – with a penal proportion of the profits going to the seller if the change took place in the first 5 years, and dropping to the intended (shared) level thereafter.

(b) Lease

One of the simplest ways to ensure that such a user covenant is enforceable is not to sell the freehold but instead to grant a long lease (999 years, equivalent to a freehold) to the buyer. In any lease a user covenant will remain enforceable between the landlord and tenant at all times (not just the original parties).

However this is unlikely to suit either party save in unusual circumstances: the seller usually wants to remove itself from the land completely and not to retain an interest in it, potentially for an extremely long period, and the buyer is likely to want the full freedom which comes with a freehold title. The long lease is also likely to lead to negotiation on areas such as the landlord's right to forfeit the lease versus the buyer's wish to control and raise finance on the property.

(c) Rentcharge

Another way to enforce such a user covenant is to couple it to an estate rentcharge. The way it works is that the seller reserves a nominal rent (the sum must be nominal only), imposes the user covenant and a right to re-enter the land if the buyer breaches the covenant. If the buyer (or its successors) breach the covenant the seller may forfeit the estate (i.e. take back the land without payment).

Of course the seller may have no interest in taking back the land (especially if it is contaminated) but this may be a useful threat.  In addition the Court has a general equitable jurisdiction to grant relief – but this is normally only given if the buyer remedies the breach.

Downsides of this route are that estate rentcharges to protect a covenant are rarely seen and so this would require specific negotiation and the buyer (and its funders) might well be reluctant to agree.

As a result of the difficulties detailed above, together with the risk of deterring the buyer and the increased legal costs which would be incurred, the seller will often simply impose the user covenant and hope that, in practice, this deters the buyer. However, where it is essential that the seller retains this future control one of the methods spelt out above could be used to achieve this.

This blog was written by Chris King.