A restrictive covenant is generally a condition to control what can or cannot be carried out at a property, such as restricting what work can be done and what the property is used for.
In this article, Gemma Astbury-Dennis, Legal Indemnities Account Executive at Thomas Carroll, explains how indemnity insurance can help property developers quell a restrictive covenant and open up a development site to more possibilities.
The Rise of Restrictive Covenants
Restrictive covenants are one of, if not the most common title defect and we receive enquiries almost daily, ranging from the straightforward to the contentious.
In most cases, it can be expensive, time-consuming and even ineffective to attempt to release or modify a covenant. This becomes increasingly problematic if there is intention to develop a property where the enforcement of a covenant could result in:
- Wasted option and/or promotion costs.
- Abortive costs, i.e., costs incurred during demolition/ground clearance, planning costs, surveyors fees etc.
- Legal and professional fees.
- Costs in releasing/modifying covenants, including any settlements or compensation.
- Delay costs, i.e., works in progress, overheads etc.
- Interest due under a mortgage or charge, and/or potential loss of a favourable rate.
So, how can indemnity insurance provide financial protection from the above factors and unlock development potential? Let’s look at a recent news story regarding developments plan at Dudley Hippodrome.
Case Study: Restrictive Covenants and the Dudley Hippodrome
The Dudley Hippodrome, originally built as a theatre in 1938 and used as a bingo hall and nightclub from 1964, has remained vacant since 2009. Owned by Dudley Council, there have been various plans to demolish the site for development over the years.
Of the concerns raised about the development, it has been pointed out that there is a restrictive covenant on the title, imposed by the original owners. It stipulates that the land be used solely as a playhouse, theatre, or for retail and housing.
There has been much publicity and opposition against demolishing the building. Campaign groups, such as the Dudley Hippodrome Friends and Community Group, and the Dudley Hippodrome Development Trust in particular have been set up in order to raise awareness and funds to prevent development and preserve the existing building.
In addition to seeking what could be done to legally defend the covenant, they also sought to have the building grade II listed and requested support from the government.
In this particular instance, the council used their powers under Section 203 of the Housing and Planning Act to overturn the covenants imposed and the compulsory purchasing of adjoining buildings in order for them to clear the site and build a nursing college as part of the Dudley Regeneration Scheme.
This process would have been costly and whilst the council were in a unique position and able to override restrictive covenants under the Act, it is usually a last resort that requires careful consideration and strict adherence to planning processes so as not to risk a judicial review.
Something to keep in mind is that even though a benefitting party is unable to prevent or injunct any developments once the covenants have been overridden, they may still be able to seek compensation under the covenants.
Claims for restrictive covenants are on the rise. This is due to a wider public awareness of restrictive covenants as a result of increasing coverage on the news and social media. With it being one of the more common risk requests, an expected higher claims ratio will unfurl.
Whilst a third party seeking to prevent development by way of restrictive covenants may not always have the ability to enforce, it can still result in potential financial frustration for property developers due to the costs involved and the potential delays it can cause.
Cover Unexpected Costs With an Indemnity Policy
We can arrange indemnity policies to cover the costs associated with a restrictive covenants claim to unlock development potential and give you peace of mind, including negotiating and advising on bespoke cover and losses to meet the demands and needs of the parties involved.