Archive for the ‘Restrictive covenants’ Category

Compensation for land resumption: valuation where a restriction on use has been abandoned

December 19, 2017

In Cheermark Investment Ltd v Director of Lands ([2017] HKEC 2536 (CA)) the Court of Appeal had to consider appeals from the Director of Lands concerning the basis on which compensation was payable in respect of two shops, the ownership of which had been resumed by the Government.

The shops were held on Government Leases that included restrictions on use which were contravened by the use of the property as shops. The Lands Tribunal found that the Government had abandoned the restrictive covenant.

The Director of Lands appealed against this finding. The Director also argued that section 12 of the Lands Resumption Ordinance (‘LRO’) meant that any abandonment was irrelevant to the valuation exercise to be carried out. The compensation payable would be much lower if the valuation had to take account of the restrictive covenant.

The Government leases on which the shops were held contained a covenant that the lessee would not allow the land to be used other than for ‘dwelling houses workshops factories or godowns or similar purposes’ (‘the user covenant’).

The Court of Appeal (Kwan JA giving the main judgment), reversing the Lands Tribunal on this point, held that the use of the property as shops was a breach of the user covenant.

The Lands Tribunal found that the Government had abandoned the user covenant on the basis of ‘the open and notorious breaches over a lengthy period without enforcement action’. The Court of Appeal said that whether the facts are capable of establishing the abandonment of a covenant ‘is primarily a matter for the fact finding tribunal’ ([69]). There was no basis, in this case, to interfere with the Lands Tribunal’s judgment.

Did section 12 of the LRO mean that the abandonment was irrelevant when it came to calculating the compensation payable? The section provides, among other things, that, ‘no compensation shall be given in respect of any use of the land which is not in accordance with the terms of the Government lease under which the land is held’.

The use of the properties as shops was not in accordance with the terms of the Government lease unless the court could take account of the fact that the Government had abandoned the user covenant.

The owners were entitled to fair compensation following the resumption; this is the principle of equivalence which would operate even in the absence of article 105 of the Basic Law ([106]). Further, ‘the principle against doubtful penalisation imports a presumption against the imposition of a statutory detriment to a person’s property or other economic interests without clear language’ ([107]).

Through the abandonment, the Government had disposed of the right to enforce the restrictive covenant. It could no longer charge a premium for a change of use to that of a shop. The owners’ interest in the shop was to be valued in such a way as to reflect this: ‘compensation is required to be paid for the interest resumed’ ([108]).

Michael Lower

 

 

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Purchasers from squatters take subject to equitable interests of which they have notice

January 20, 2015

Re Nisbet and Potts’ Contract ([1906] 1 Ch. 386, CA (Eng)) concerned N’s contract to sell land to P. N’s title was possessory. The formal title had been defeated and there had been several conveyances of the possessory title before its conveyance to N. The contract beween N and P required P to accept this title. At the time of his purchase, N had not investigated title for the full forty years then demanded by conveyancing practice. Had he done so, investigating the paper title that had been defeated, he would have discovered that the paper title was subject to a restrictive covenant controlling what could be built on the land. P was a builder and he acquired the land with a view to building shops and other buildings on it. Before the contract was completed, the neighbour with the benefit of the restrictive covenant informed him of it and that proceedings would be brought in the event of breach. P refused to complete on the basis of this undisclosed encumbrance. The question was whether the covenant was binding on N; if so, P was justified in refusing to complete.

The English Court of Appeal held that a restrictive covenant is an equitable proprietary interest binding on all but a good faith purchaser for value without notice of it (Collins M.R. at 403; Romer LJ at 405 and 406). It was not defeated merely because the paper title had been extinguished. Time would only begin to run against the covenantee when there had been a breach so that the covenantee had a right to bring proceedings (Collins M.R. at 401 and 402).

The squatter himself is always subject to the covenant whether or not he had notice of it (Cozens Hardy L.J. at 410). A purchaser of the squatter’s title is subject to the restrictive covenant unless he is a good faith purchaser for value without notice (Cozens Hardy L.J. at 410). N was not such a purchaser. He had not investigated the title for the full forty year period  and so had constructive notice of any interests that he would have discovered had he done so. N’s title was subject to the restrictive covenant and P was entitled to resile from the contract.

Michael Lower

Clear words needed for a general waiver

November 30, 2012

Real Honest Investment Ltd v Attorney-General ([1997] 2 HKC 436, PC) concerned a restrictive covenant in a 1923 Government Lease that prohibited the erection of any building exceeding 35 feet in height. In 1948, the site had been redeveloped and the Government had waived the height restriction. Now RHI proposed a further redevelopment and argued that the 1948 waiver had been a general waiver and that the height restriction no longer applied. This failed. The 1948 waiver had been a waiver in respect of the particular development then proposed. Clear words are needed to express an intention to grant a general waiver (Lord Clyde at 440) and they were not present in the 1948 waiver.

Covenant only to build domestic houses

November 29, 2012

Expressluck Development Ltd v Secretary for Justice ([2007] HKEC 1352, CFI) concerned land on which houses had been built. The Conditions of Exchange under which the land was held provided that “The lessee will not be allowed to erect any buildings on the lots except domestic houses.” From the 1940s onwards, the ground floors of the houses had been used for commercial purposes without the Government taking any formal action in respect of the breaches of covenant. Where, however, other major changes of use had been proposed, consent had been sought by the owners. Expressluck now intended to build a block of residential units but with the ground floor being used for commercial purposes. It did not want to apply for a variation or release of the covenant. Instead it sought, inter alia, declarations to the effect that the proposed development did not amount to a breach of covenant, that the covenant had been abandoned or waived (because of the long history of tolerating commercial use) or that the Government’s demand for rent based on commercial use of the ground floor of the development gave rise to an estoppel. Expressluck failed in all respects.

First, there was a breach. The covenant did not affect only the type of building that could be built but also its subsequent use. Second, although the Government may have waived breaches of the covenant, it had not waived the covenant itself:

’81. What I glean from the authorities is that waiver of a covenant cannot be lightly inferred. It can be, but only where acquiescence by the grantor is sufficiently clear and unambiguous that it would be inherently unfair for him to be permitted to go back on his word, either actually spoken or derived from his conduct.
82. Further, it is important to distinguish between waiver of a breach of a covenant and the covenant itself.
83. Acquiescence will not amount to a waiver of the covenant unless in the particular circumstances, there was a clear intention to do so for all time.’ (Deputy Judge Gill)

Finally, there was no estoppel the Commissioner for Rating and Valuation had issued the demand but this did not bind the relevant department of Government (the Director of Lands).

Building schemes

November 28, 2012

In Elliston v Reacher ([1908] 2 Ch 665, CA (Eng)) a building society bought land. A deed was prepared in which the building society and the purchasers were said to covenant with each other not to use any plot of land on the estate as a hotel (unless the building society’s consent was obtained). This was stamped but was not executed by the building society or any of the purchasers. The sales materials for the first sale of the plots identified the estate and the plots to be sold and stated that each purchaser would covenant with every other to observe the restriction on building a hotel without consent. The first conveyance of each plot expressed an intention that the purchaser and his successors in title would be bound by the restrictions in the deed of covenant. It identified the plot and the estate. It was held that this created an effective building scheme so that the restriction against building a hotel could be enforced by a successor in title against a successor in title. Every lot was purchased subject to the understanding that it had the benefit and burden of the restrictions.

Tulk v Moxhay explained: purchasers with notice only take subject to restrictive covenants

November 21, 2012

In Haywood v The Brunswick Permanent Building Society ((1881 – 82) L.R. 8 Q.B.D. 403, CA (Eng)) E covenanted with C that E would keep in repair the houses on the land conveyed to him. The building society and H were the successors in title of E and C respectively. H brought proceedings against the building society for breach of the repairing covenant. These failed. The equity referred to in Tulk v Moxhay only arose where the covenants in question were restrictive covenants and the purchaser took with notice of them.

Tulk v Moxhay

November 15, 2012

In Tulk v Moxhay ((1848) 1 Hall & Twells 10547; ER 1345) Leicester Square had been sold to by T to E in fee simple. The conveyance included a covenant not to build on the land and only to use it as a pleasure garden. E sold the property to M who proposed to build on the land. T sought an injunction. The question was whether M had to observe the restriction and it was held that he did:

‘I consider that this piece of land is purchased subject to an equity created by a party competent to create it; that the present Defendant took it with distinct knowledge of such equity existing; and that such equity ought to be enforced against him, as it would have been against the party who originally took the land from Mr. Tulk.’ (at 116).

Discharge of restrictive covenant against sub-letting (England)

June 21, 2012

In Re Lee’s Application ([2012] UKUT 125 (LC)) concerned a lease owned by L of a flat in a block of flats. The lease contained an absolute restriction on sub-letting. The landlord was the management company that owned the freehold of the building. The lessors’ covenants in the long leases on which the owners held their flats required the landlord to enforce the lease covenants if any tenant required it to do so. Thus, the lease covenants created a scheme for the benefit of all tenants.

L wanted to be able to sub-let and so he sought the discharge of the covenant or its modification to a qualified covenant (only to sub-let with consent). He relied on section 84(1)(aa) of the Law of Property Act 1925 (that the continued existence of the covenant would impede some reasonable use of the land for public or private purposes). The question was whether the covenant secured some practical benefit of substantial value or advantage to the landlord (section 84(1)(a) of the Law of Property Act 1925).

It was accepted that flats were likely to be better kept and would be easier to manage if there were a distinct community of owner-occupiers. This remained true even though 5 of the 31 leases in the block  had been  modified so that the restriction on sub-letting was qualified. In any event, the lease imposed a duty on the landlords to enforce the lease covenants. Thus, the covenants were part of a scheme on which the other owners had relied when buying their flats. The landlord’s duty was to uphold the scheme. This duty remained despite the modification of the restriction in five of the leases.

Weekly review: 8 – 12 August

August 13, 2011

Land covenants: abandonment

Land covenants often impose restrictions on what can be built on land and the uses to which it can be put. Should a covenant created in the nineteenth century still govern the use of land today? This gives great weight to the intentions of the long-dead parties to the deed. The character of the area and the pressures on the use of the land may have changed greatly. Thus in Attorney-General of Hong Kong v Fairfax Ltd, the Crown sought to enforce a restriction in an 1862 Crown Lease of land near the centre of Hong Kong (Hing Hon Road and Bonham Road). Since the 1950s high-rise, high-density development had been the norm in the area. Nevertheless, in the 1990s, the Crown still sought to enforce a covenant that allowed only the building of ‘villa residences’, The Crown’s acquiescence over many years in other obvious breaches of the same covenant persuaded the Privy Council that it had abandoned the covenant and was no longer entitled to enforce it.

Gray and Gray point out that although the Upper Tribunal (Lands Chamber) (formerly the Lands Tribunal) in England has the power to discharge or modify restrictive covenants (Law of Property Act 1925, s. 84) it is often reluctant to do so. The covenants can often play a useful part in protecting ‘environmental amenity’ (Elements of Land Law, pp. 255 – 256). Property Prof Blog has a number of posts about the use of conservation easements in the US.

Land Covenants: who can benefit?

Privity of contract means that only the parties to a contract can enforce it. Section 26 of the Conveyancing and Property Ordinance provides a way of extending the range of parties to land covenants:

‘A person may take an immediate or other interest granted to him in respect of land or the benefit of any condition, right of entry, covenant or agreement granted to him over or in respect of land, although he may not be named as a party to the instrument.’

One practical use of this is as a way of passing the benefit of land covenants onto the owners of identified parcels of land (as one element of a building scheme). White v Bijou Mansions shows that the person relying on section 26 must show that he falls within ‘the scope and benefit’ of the covenant and not merely that enforcement would be useful to him. Section 26 does not abolish the law on privity and applies only to land (Beswick v Beswick).

Promissory estoppel

It is usually said that promissory estoppel is a sword and not a shield. The Australian High Court allowed it to be used as a cause of action in Walton’s Stores (Interstate) Ltd v Maher. More recently, the Hong Kong Court of Final Appeal seems to have done the same in Luo Xing Juan v Estate of Hui Shui See.

Proprietary estoppel

Sometimes the relevant promise or representation in a proprietary estoppel claim stands out a mile; there have been frequent public assurances. On other occasions, however, the evidence is not overwhelming but is sufficient. Suggitt v Suggitt is an example of the latter.

Vacant possession

A seller of land often agrees to sell with vacant possession. At the end of a lease, a tenant has to give back possession. The meaning of ‘vacant possession’ was considered again in NYK Logitics (UK) Ltd v Ibrend Estates BV.

Effect of acquisition of land without notice of a restrictive covenant

March 24, 2011

In equity the burden of a restrictive covenant runs with the land and binds successors unless they are bona fide purchasers for value without notice of the restrictive covenant (‘equity’s darling’). Once the estate has come into the hands of equity’s darling, the burden ceases to run even if the land later comes into the hands of someone with notice of the covenant.

In Wilkes v Spooner ([1911] 2 KB 473, CA (Eng)), S1 was tenant of two butchers shops in the same street but with different landlords. In number 137 he carried on business as a pork butcher. In 170, he carried on business as a general butcher. He sold the lease of  170 and the goodwill of the business carried on there to Wilkes. In the sale agreement S1 covenanted not to carry on at 137 lines of business that would compete with the business at 170. S1 surrendered the lease of 137 and the landlord granted a new lease to S2 (S1’s son). S2 carried on the business of a general butcher in breach of his father’s restrictive covenant. The landlord of 137 had no notice of the restrictive covenant. The Court of Appeal held that the restrictive covenant ceased to run with the land once it had come into the hands of the landlord who had no notice of it. The fact that a lease was then granted to S2, who did have notice, did not bring the restrictive covenant back to life.