Housebuilder tip of the month: Protecting future value – Is a restrictive covenant enough?

Published 28 septiembre 2022

When a landowner disposes of land, they may wish to restrict the uses to which the land is put in order to secure a share in any uplift in value triggered by future development.

Imposing a restrictive covenant on the land may seem like an easy, cost effective way to achieve this.  The seller can impose covenants in the transfer, restricting the use of the land, preventing or limiting development unless the Seller provides its consent or expressly releases the covenant, which can be negotiated in return for a fee.  

Whilst a restrictive covenant may appear a simple solution, the law around the enforceability of restrictive covenants is complex and a number of conditions need to be satisfied. A restrictive covenant must “touch and concern” or somehow benefit other land, and the benefit must have been intended to run with that benefitting land.  The covenant cannot just be of personal benefit to the seller and cannot be used to secure an obligation to pay money.  Importantly, a seller must retain land that benefits from the covenant.

Where the seller will not be retaining any interest in land, but wants to protect its interest in any potential future value of the land post development, it may be prudent to enter into an overage agreement with the buyer.  An overage agreement will set out one or more “trigger events” upon which an additional sum (“overage”) will become payable to the seller, for example, the grant of planning permission or the sale of dwellings.  Overage should be calculated by reference to a clear mechanism set out in the agreement.  Crucially the overage agreement should be protected by way of a restriction on the title to the buyer’s land, with an obligation for successors in title to provide a deed of covenant to the seller to comply with the overage obligations. As this is a contractual arrangement which does not bind nor benefit the land, this means the seller will still be able to enforce the overage obligations against the buyer’s successors in title following a disposal of the site. 

Whilst overage provisions are inevitably more complicated and potentially more difficult to negotiate than a restrictive covenant, a landowner who wishes to secure a share in any increase in value in its land following a sale, should consider investing its resources into negotiating an overage agreement at the outset.  This would avoid issues in relation to enforceability of restrictive covenants and put in place a clear mechanism for the calculation of any overage, which will be binding on successors and can be enforced by a seller when it no longer retains any interest in the land.