Restrictive covenants – providing certainty to purchasers

Glen Low – Partner

Buying into a subdivision can be a daunting prospect.  This is especially true in the early stages of a development.  It can take a leap of the imagination by a purchaser to transform a bare paddock into an established subdivision and a thriving community.  Restrictive covenants can provide certainty to purchasers in larger subdivisions.  Covenants restricting what can be built in the development can give purchasers confidence that their neighbours’ activities will not detract from their own property values.  While undoubtedly useful tools for creating a quality development, when used carelessly covenants can create problems for future generations which may be costly to correct.

As a starting point it is important to explain what a restrictive covenant is.  A covenant is a contract between land owners which is registered against the affected certificates of title and “runs with the land”.  The expression “runs with the land” is a legal term of art which means that future owners will continue to be bound by the terms of the covenant.  A new purchaser need not sign the covenant itself to be bound by it.  It is sufficient only that they buy the property affected by it.

Unless otherwise stipulated, covenants will remain upon a certificate of title and will continue to bind prospective owners in perpetuity.  People drafting covenants should bear in mind the prospect that they may be binding successive property owners for a very long time to come.  This is particularly the case where covenants are registered over a large number of titles as any attempt to vary or discharge a covenant requires the consent of the owners of all affected titles.  It can seem odd to think that the building styles and materials which are considered appropriate today may be imposed upon future generations with new and different ideas of how to build.  For this reason it is always appropriate to consider whether or not a covenant should be limited as to duration.  That is to say, inserting a clause which imposes a time limit on the enforceability of the covenants after which the covenants may be discharged upon application by any owner.

As restrictive covenants will shape the character of a development, careful thought is required to ensure that they are appropriate.  For example, restrictive covenants registered in a 50 Lot subdivision will not be appropriate for a 2 Lot subdivision where the vendor is retaining an interest in the balance of the land.  In smaller rural subdivisions we are typically asked by developers to register covenants which protect views and the rural character of their own property.  It is not uncommon to specify building platforms and provide for height restrictions in these instances.  Although it is also common to provide for an appropriate standard of build, generally the level of control which we see in larger subdivisions (ie style guidelines and the approval of a design panel) are not required.  As a general rule of thumb the larger the subdivision the more control a developer will wish to have over what is built in it.  This is particularly the case where there are multiple stages in the development.  Purchasers in the third stage of the development will no doubt be influenced in their decision to buy by the buildings already constructed in the first and second stages.  If the first and second stages are of a low standard then this will affect the developer’s prices for the remaining stages.  Such considerations will not apply to a smaller development and developers should be wary of a “cookie cutter” approach to the drafting of restrictive covenants.

Restrictive covenants need not be limited to controlling building activities on a property.  With the spread of residential development encroaching upon existing market gardens in the district complaints concerning rural activities are becoming more common.  Such complaints often revolve around noise, dust, the use of pesticide and the run off of silt from neighbouring cropping land.  When subdividing rural land it is important to consider the activities which will continue upon the balance of the land.  In such instances it is recommended that a developer register a “reverse sensitivity” covenant which prevents the new owner of a residential section from complaining about the existing agricultural uses of the neighbouring land of which they should have been aware of when they purchased.

If you are carrying out a subdivision and wish to obtain advice concerning the types of covenants which might be appropriate for your development then please do not hesitate to contact us.

The information contained in this paper is necessarily of a generalised nature and specific advice should be sought in relation to any particular situation. Further information and assistance in relation to this article can be gained by contacting senior personal property lawyer Glen Low.