Supreme Court practice

Restrictive Covenants in Victoria–theory and practice

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The following paper Restrictive Covenants in Victoria–Theory and Practice is based on a presentation to the University of Melbourne’s undergraduate Property Law class. It provides a reasonably comprehensive overview of the law in relation to the construction, modification and removal of restrictive covenants in Victoria. It is current as at 26 May 2023.

2023-05-26-restrictive-covenants-in-victoria-theory-and-practiceDownload

An hour long walk-through of the notes can be found here:

And a downloadable audio version can be found here:

Comments are welcome: townsend@vicbar.com.au

Schematic diagrams might not be sufficient for trial

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The long awaited decision in Jeshing Property Management Pty Ltd v Yang [2022] VSC 306 has been handed down by the Supreme Court.

This was probably the most heavily contested restrictive covenant case since Prowse v Johnston and resulted in the dismissal of an application to modify a single dwelling covenant to allow five dwellings at 16 St Georges Road, Toorak.

As is often the case, restrictive covenant applications are the plaintiff’s to lose, and here too, the Court found the plaintiff had not discharged its onus to prove an absence of substantial injury to beneficiaries.

The Court made adverse observations about the plaintiff having not prepared detailed plans in support of the application. Rather, Annexure A to the Originating Motion provided an annotated two dimensional building envelope:

Matthews AsJ explained:

338. For the reasons given above, I am not satisfied that there will be no substantial injury to any of the Defendants as a result of the Plaintiffs’ proposal. As a consequence, the s 84(1)(c) Application will be refused.

339. Before moving on, I wish to say something further about the way that the Plaintiffs put their case in respect of the Modification Applications, and it is convenient to do so here.  The Plaintiffs clearly made a decision to pursue the Modification Applications without providing detailed drawings or plans of their proposal; rather, the detail of the proposal was confined to the Proposed Envelope.  That was their choice, and they were entitled to run their case that way if they saw fit.  As noted earlier, having made that choice, they then have to bear the consequences of it in terms of not being able to clearly articulate the changes which may occur and whether they will be substantially injurious to the Defendants.

Schematic plans such as those shown above, may still be sufficient for unopposed applications or indeed for mediated settlements, but this decision suggests that plaintiffs take a risk by not preparing architectural drawings if the modification application proceeds to trial.

The importance of costs in restrictive covenant applications

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Section 24 of the Supreme Court Act 1986 (Vic) specifies that costs are in the discretion of the Court:

Costs to be in the discretion of Court

(1)     Unless otherwise expressly provided by this or any other Act or by the Rules, the costs of and incidental to all matters in the Court, including the administration of estates and trusts, is in the discretion of the Court and the Court has full power to determine by whom and to what extent the costs are to be paid. [1] …

This discretion in relation to costs is absolute and unfettered to ensure substantial justice is achieved between the parties:

3       … the court has an absolute and unfettered discretion in relation to costs, and may, in appropriate circumstances, examine the realities of the litigation and attempt to achieve on the matter of costs substantial justice as between the parties.[2]

Despite this discretion, there is a settled practice that costs follow the event, and a successful litigant should receive their costs absent disqualifying conduct:

Although costs are in the discretion of the Court, there is a settled practice (sometimes called a general rule) that in the absence of good reason to the contrary a successful litigant should receive his or her costs. It is not, however, a legal rule devised to control the exercise of the discretion.[3]

This discretion is modified in certain applications pursuant to section 84 of the Property Law Act 1958 (Vic) to the effect that:

… unless the objections taken are frivolous, an objector should not have to bear the burden of his own costs when all he has been doing is seeking to maintain the continuance of a privilege which by law is his.

This principle from Re: Withers[4]was applied by Morris J in Stanhill Pty Ltd v Jackson[5]who noted:

The principle set out in Re Withers is consistent with other decisions of the Court, such as that by Gillard J in Re Markin, Lush J in Re Shelford Church of England Girls’ Grammar School andMcGarvie J in Re Ulman. In my opinion, it is a sound principle.

However, his Honour sounded a note of caution that objector defendants should not see the reimbursement of costs as an entitlement:

It is also relevant that the defendants conducted the proceeding responsibly. If a defendant, resisting an application to modify a covenant, acts irresponsibly then it would not be entitled to costs in relation to that irresponsible conduct; indeed, it might be in a position where it would have to pay the plaintiff’s costs.[6]

Indeed, in Re Jeffkins Indenture,[7] the court suggested that defendants in applications for declarations in relation to restrictive covenants ought not expect a full indemnity on costs:

I would add, on the question of costs, that a plaintiff seeking a declaration that restrictive covenants do not affect his property is expected to pay his own costs. He is also expected to pay the costs of any defendants who enter an appearance down to the point in the proceedings at which they have had a full opportunity of considering the matter and deciding whether or not to oppose the application. Any defendant who then decides to continue, and appears unsuccessfully before the judge, does so at his own risk as to his own costs at that stage. Such defendant would not, however, be ordered to pay the plaintiff’s costs.

The Victorian Law Reform Commission adopted a somewhat similar recommendation in its report on Easements and Covenants:

45.    In an application under section 84 of the Property Law Act 1958 (Vic), the court or VCAT should apply the following principles to the award of costs:

a.       Where the application is unsuccessful, the applicant should normally pay the costs of any respondent entitled to the benefit of the easement or restriction.

b.      Where the application is successful, the applicant should normally pay the costs of the respondent incurred prior to the point in time at which, in the opinion of the court or of VCAT, the respondent has had a full opportunity to assess the merits of the application. The respondent should normally bear his or her own costs incurred after that point, but not the costs of the successful applicant.

By reason of the above, a well-advised plaintiff should look for opportunities to make Calderbank offers[8] and/or Offers of Compromise to improve their position in the future when it comes to discussing the issue of costs.

Calderbanks were unsuccessful in Wong v McConville[9] where the Court found that it was not unreasonable for the defendants to have rejected multiple offers to compromise.

Similarly, in Lahanis v Livesay & Ors (Costs) [2021] VSC 65 Derham AsJ found that in an application to modify a single dwelling covenant to allow two dwellings, there was insufficient difference between the offer to compromise and capitulation:

51     In this case, the factors that make up a so called ‘genuine offer’ have been separately considered, including whether the offer involved a real element of compromise. These matters include the timing of the offer, content and terms of the offer, its clarity, the explanation given for it, what was known or not known to the offeree at that time and the offerees’ prospects of success. What is left for consideration in order to determine whether the offer was a ‘genuine compromise’, in the sense of a real compromise, is whether it had an element of compromise or whether in truth it required the defendants to capitulate. In my view, it essentially required the defendants to capitulate.

52     In conclusion, it is in my view incorrect to say, as the plaintiff submitted, that the real cause of the litigation from the time of the expiry of the Calderbank offer was the defendants’ refusal to accept the offer and not the defendants’ legitimate action in defence of the Covenant. The defendants were entitled to put their views before the court and justified in opposing the application, so that the costs incurred by them ‘were a necessarily incident to such an application’. In my view, it is only right and proper that the plaintiff should pay all the defendants’ costs incurred by reason of the application on the standard basis.

That said, Calderbanks have been successfully applied by defendants in Michelmore v Suhr[10], and Manderson v Smith.[11] In the latter case, Efthim AsJ held that an offer of compromise should have been accepted and directed the Plaintiff to pay indemnity costs:

21     In my view, indemnity costs should be awarded to the defendants from the date of the first offer of compromise. The plaintiff commenced the proceedings knowing that he had a fence on his own property encroached the boundary line by a much greater distance than the defendants’ fence and knowing that all other residents had fences. He should also have known that the defendants’ fence was at best only six centimetres over the boundary line.

22     The first offer of compromise should have been accepted and, in my view, it was unreasonable that it was not. The defendants have come to the Court with clean hands, they obtained a permit from the local council to erect the fence. It is clear from the evidence of Ms Smith that the defendants were concerned about the native flora. They were put to a great deal of expense in defending this claim which they should never have had to do.

As a matter of practicality, however, while most cost disputes are resolved by negotiation, Calderbanks and offers of compromise can still have an outsized impact on this process, simply because of their potential impact should they be upheld by the Court.

Moreover, objectors’ costs are typically low until after the second return of the application, meaning a plaintiff can commence a section 84 application with a fair degree of confidence about how much the process will cost.

It is not until the number and extent of defendants becomes known that the implications of a Re Withers’ costs ruling starts to emerge.

None of this is to say that a defendant can take an order for costs for granted:

  • an order for costs was made against the defendants in Rouditser & Rouditser v Schreuder & Schreuder S ECI 2018 01166 after the defendants were found by Derham AsJ to have been responsible for the trial being adjourned;
  • an order for costs was made against the defendants in Livingstone v Kelleher & Pomponio S ECI 2020 0460 after Matthews AsJ found the first defendant had put the court and the parties to unwarranted expense in necessitating an additional directions hearing; and
  • an order for costs was made against the defendants in Sijercic & Sijercic v Brotchie & Bennett in S ECI 2021 03620 after Matthews AsJ concluded the defendant had not made sufficient effort to cooperate in the settling of pre-trial directions.

These examples of costs orders against defendants should not dissuade beneficiaries from acting in good faith to protect their property rights and from subsequently seeking reimbursement for the reasonable costs in doing so, but defendants must remember that they too, are bound by the following overarching obligations in the Civil Procedure Act 2010:

20     Overarching obligation to cooperate in the conduct of civil proceeding

A person to whom the overarching obligations apply must cooperate with the parties to a civil proceeding and the court in connection with the conduct of that proceeding.

22     Overarching obligation to use reasonable endeavours to resolve dispute

A person to whom the overarching obligations apply must use reasonable endeavours to resolve a dispute by agreement between the persons in dispute, including, if appropriate, by appropriate dispute resolution, unless—

         (a)           it is not in the interests of justice to do so; or

23     Overarching obligation to narrow the issues in dispute

If a person to whom the overarching obligations apply cannot resolve a dispute wholly by agreement, the person must use reasonable endeavours to—

(a)     resolve by agreement any issues in dispute which can be resolved in that way; and

(b)     narrow the scope of the remaining issues in dispute—

unless—

(c)     it is not in the interests of justice to do so; or

(d)     the dispute is of such a nature that only judicial determination is appropriate.

24     Overarching obligation to ensure costs are reasonable and proportionate

A person to whom the overarching obligations apply must use reasonable endeavours to ensure that legal costs and other costs incurred in connection with the civil proceeding are reasonable and proportionate to—

(a)           the complexity or importance of the issues in dispute; and

(b)           the amount in dispute.

25     Overarching obligation to minimise delay

For the purpose of ensuring the prompt conduct of a civil proceeding, a person to whom the overarching obligations apply must use reasonable endeavours in connection with the civil proceeding to—

(a)     act promptly; and

(b)     minimise delay.

[1]              Supreme Court Act 1986 (Vic) s 24.

[2]              Manderson v Wright (Costs) [2018] VSC 177, [3] (John Dixon J).

[3]              BCA Asset Management Group Pty Ltd v Sand Solutions (Vic) Pty Ltd [2021] VSC 177, [11].

[4]              Re Withers [1970] VR 319.

[5]              Stanhill Pty Ltd v Jackson [2005] VSC 169.

[6]              Ibid, [6].

[7]              [1965] 1 WLR 375

[8]              See Calderbank v Calderbank [1975] 3 All ER 333.

[9]              [2014] VSC 282

[10]             [2013] VSC 284

[11]             Unreported, S ECI 2020 03378, 24 August 2021

[12]             [1970] VR 319

Court of Appeal eschews recourse to the Planning and Environment Act 1987 when construing a restriction on a plan

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It’s long been established that equitable restrictive covenants or restrictive covenants inter partes should be construed in a common sense and non-technical way, with the objective being to ascertain the intention of the parties by reference to the words in their context. See Clare v Bedelis [2016] VSC 381 at [31]

Arguably, this approach to interpretation should not be strictly applied to a restriction in a plan created by way of the Subdivision Act 1988 (Vic).

As the learned authors of the Victorian Law Reform Commission’s report on Easements and Restrictive Covenants (VLRC Report) explained, equitable restrictive covenants and restrictions on a plan are not the same:

6.40 It is commonly assumed that a restriction created by registration of a plan is a restrictive covenant and that all lot owners in the subdivision have the benefit of it. The idea is likely to have been fostered by the inclusion of ‘restrictive covenant’ in the definition of ‘restriction’ in the Subdivision Act. It also finds some support from administrative provisions recently inserted into the Transfer of Land Act, which refer to a ‘restrictive covenant created by plan’.

6.41 We disagree with this assumption. A restriction created in a plan is not one that equity would recognise or enforce, as the restriction is not created for the benefit of specified land. Equity has strict requirements about identifying the benefited land.

In Manderson v Smith [2021] VSCA 359, the Court of Appeal was asked to construe a restriction arising out of a now-expired plan of subdivision, however, their Honours did not see fit to draw the distinction made in the VLRC Report.

Rather, Beach and Kennedy JJA were content to have recourse to a dictionary definition of a term in the restriction, namely “building”, and eschewed reliance on the definition of “building” in the Planning and Environment Act 1987:

42 Restriction 2 prohibits the ‘develop[ment]’ of the land ‘other than in accordance with’ the NDP. Even presuming that the construction of a boundary fence constitutes a development of the land, the fence is only ‘other than in accordance with’ the NDP if it properly constitutes a ‘building’, or ‘part of a building’ the subject of the prohibition in the NDP.

43 The Macquarie Dictionary definition of a ’building’ is as follows:

1. a substantial structure with a roof and walls, as a shed, house, department store, etc.
2. the act, business, or art of constructing houses, etc.

There is nothing in this definition which suggests that a ‘building’ should extend to a boundary fence. In this respect, we would respectfully disagree with Emerton J that it was appropriate to have recourse to the definition contained in the Planning and Environment Act 1987.
The matter does not appear to have been the subject of contested submission. In any event, we do not consider that any such recourse is necessary or appropriate. Although the Permit is to be interpreted pursuant to the definitions in that Act, the Permit is spent. It would also be unnecessary to include the words, ‘or part of a building’ if that definition applied, because the statutory definition already includes ‘and part of a building’.

Such an approach, their Honours found, would be consistent with the principles summarised in Clare v Bedelis and avoided a technical or legal approach.

The tantalising point made in the VLRC report about jurisdiction was not taken and will need to be fought another day:

6.43 If, as we maintain, statutory restrictions are not restrictive covenants, they are enforceable under administrative law rather than as property rights. Administrative law is the branch of public law that regulates the exercise of public powers and duties. Statutory duties and restrictions can be enforced by obtaining an injunction or declaration by a court. The Attorney-General has the right to enforce the public interest in the observance of a statutory duty or a restriction, and can apply to a court for an injunction or declaration or authorise somebody else to do it.

The court rarely exercises its power to discharge a restrictive covenant entirely

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The Supreme Court is typically unwilling to exercise its power to discharge a restrictive covenant entirely, preferring instead to modify a covenant to allow an applicant’s stated intentions.

The objective for applicants should therefore be to modify the restrictive covenant as modestly as possible, while comfortably facilitating the intended use or development. Applicants should appreciate that the responsible authority under the Planning and Environment Act 1987 (the municipal council at first instance and then the Victorian Civil and Administrative Tribunal on review), may require additional changes to any plans during the planning process.

That said, an application to discharge a restrictive covenant may be allowed where the Court finds that outcome appropriate to avoid future confusion:

In Re: Ambrens SCI 2016 03948, for instance, Lansdowne AsJ explained: “In many cases, modification of a restrictive covenant to allow an intended development will be more appropriate than discharge of the covenant. In this case, however, the Court considers that discharge of the Covenant is more appropriate than modification. The Court considers that the proposed form of modification, to allow the construction of ‘one residential building’ , could be unclear and so introduce confusion, and is not necessary given the nature of existing development proximate to the subject land and its zoning as residential.”

Similarly, in City of Stonnington v Wallish & Ors [2021] VSC 84, Ierodiaconou AsJ said: “Given the limited scope of the restrictions imposed by the covenants and for substantially the same reasons outlined above, I do not consider that my residual discretion should be exercised in the defendants’ favour. I accept that it is desirable for the covenants to be discharged in order for there to be clean titles on the subject land. Such a course will avoid any future confusion or disputes and will not cause the defendants substantial injury.”

These examples, however, are the exception rather than the rule.

Re: Ambrens SCI2016 03948Download
City of Stonnington v Wallish & Ors [2021] VSC 84Download

Stress testing your restrictive covenant

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When construing a restrictive covenant, a careful analysis of its various components is needed to understand its true effect, and indeed, whether it is effective at all.

For example, one covenant in Toorak dating back to the 1960s, purported to prevent part of the land from being developed to more than one storey. The sole beneficiary was the neighbouring land to the south. The dwelling had been constructed on the assumption the covenant was valid. However, close consideration of the chronology revealed that the purported covenantee had already sold the benefitted land by the time the covenant was signed and registered. The Supreme Court therefore agreed that the covenant was unenforceable, given that the covenantee had lost his ability to enter into the agreement at the time the covenant was purportedly made.[1]

In another case, a restrictive covenant in Altona had been the subject of extensive advertising in an application to modify what was believed to be a single dwelling restriction. However, closer examination revealed that the covenant suffered from the same flaw that was the subject of the following comment by Morris P in Thornton v Hobsons Bay City Council:[2]

11     In the present case the transferor has sought to identify the land to be benefited by reference to land remaining untransferred in a particular certificate of title. That method of identification purports to be a precise method. It follows, as Ms Tooher submitted, that there is less scope in such circumstances to use surrounding circumstances to identify the benefited land. The problem is that, at the time the transfer was made on 25 April 1953, certificate of title volume 6836, folio 089 was no longer in existence, it having been cancelled on 15 September 1952. Thus at that time there was no land remaining untransferred in that certificate of title. Hence notwithstanding the exactitude with which the draftsman of the covenant sought to achieve, in fact all he has achieved is a nonsense.

The Supreme Court agreed that the restrictive covenant was a nonsense and declared the restrictive covenant unenforceable.[3]

A degree of uncertainty now surrounds surprisingly common covenants that purport to require plans to be approved by a now deceased person or deregistered corporation. In Crest Nicholson Residential (South) Ltd v McAllister[4] the approval of the vendor, in that case a company, was required for any construction on the subject land. The vendor company had subsequently been dissolved, and given the lapse of time could no longer be re-registered. Neuberger J noted that reading the restriction as now absolute, conformed with its strict literal interpretation. However, he found that the restriction was discharged now that the vendor could not consent. Crest Nicholson was said to be “strongly persuasive” in 196 Hawthorn Road Pty Ltd v Duszniak.[5]

It should not be assumed that you will necessarily need to apply to the Supreme Court to have a covenant removed for reasons of defect or express limitation. For example, a covenant on the Mornington Peninsula was expressed to be for the benefit of the original vendor, its successors and transferees. The Covenant did not identify the land to be benefitted by the restriction contained in the Covenant. A letter to the Registrar of Titles was sufficient to have the covenant removed through the exercise of the Registrar’s powers under section 106 of the Transfer of Land Act 1958.

townsend@vicbar.com.au
(04) 1122 0277

[1] Re Thaqi: S ECI 2020 01338.

[2] [2004] VCAT 383.

[3] Re Tran S CI 2018 02425.

[4] [2003] 1 ALL ER 46, [52] (Neuberger J).

[5] [2020] VSC 235.

How to avoid creating a precedent in a section 84 modification application

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A common challenge in settling an application to modify a restrictive covenant pursuant to section 84 of the Property Law Act 1958 is dealing with beneficiaries’ concerns that “if we agree to this application, future developers will rely on it as a precedent”.

Practitioners should be aware that most, if not all, judges are prepared to accommodate such concerns by spelling out in detail, why a modification in one case, should not be seen as a precedent for similar applications in the future.

A good example is the recent decision of Mukhtar AsJ in Tabrizi v Pedler & Ors S ECI 2019 05629 (3 July 2020) who took care to explain why the future applications might be considered differently:

In my judgment I think there are enough features of this application to say that on the confines of the peculiar or particular facts of this case, there is no good reason to refuse the consent order as sought. One cannot presage what other landowners in this neighbourhood or commercial developers may attempt to do in the future with this or any other application for a modification of a single dwelling covenant. However, because of the peculiar facts here, and in fairness to the defendants, what ought be stated here is that this decision is confined to its unique facts and not attributable to any neighbourhood-wide change to the neighbourhood that alters its predominant character as a single dwelling area.

Needless to say, there will need to be distinguishing characteristics in the application to attract such commentary by the Court, but most applications typically enjoy some form of distinguishing feature in order to be seriously considered for modification in the first place.

Supreme Court accepts a rooming house is a legitimate ‘comparator’ when modifying a single dwelling covenant

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In April 2019, in Re: EAPE (Holdings) Pty Ltd [2019] VSC 242, the Supreme Court found that when advancing a case for the modification of a single dwelling covenant, it is legitimate to say that the proposal for modification should be compared against a rooming house–an as-of-right land use arguably providing accommodation to the lowest end of the rental market.

This is potentially significant, because until this time, the comparator typically used in argument before the Court is a large single dwelling that would not need planning permission. In other words, applicants often argue:

– I can build this large house without modifying the covenant;

– given that my proposal for two or more dwellings is lower in impact than a large house, I should be allowed to modify the covenant for there is, relatively speaking, no substantial injury to beneficiaries by the covenant being so modified.

Now, applicants before the Court can legitimately invite the court to compare the proposed modification with the impact that beneficiaries might experience if the land was instead developed and used as a rooming house, with the increased activity, noise and parking impacts that routinely accompany such uses.

In EAPE the Court placed considerable emphasis on the plaintiff’s apparently genuine intentions to pursue the rooming house option in the event the modification was not granted, but one can imagine judges in future cases simply being convinced that a rooming house was a reasonably likely outcome of its refusal to modify a covenant: see Prowse v Johnston [2012] VSC 4 at 120.

Supreme Court modifies Urban Land Authority covenant

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It has been estimated that there may be as many as 35,000 covenants created by in Victoria by the Urban Land Authority, or statutory corporations that have carried on similar functions, including:

  • Urban Land Corporation;
  • Urban or Regional Land Corporation;
  • Victorian Urban Development Authority; or
  • Development Victoria.

These restrictive covenants can contain a combination of orthodox and unorthodox covenants, for instance:

i) there will not be erected on the land hereby transferred any building other than one house and usual outbuildings; and
ii) such house will not have less than seventy five percent (75%) of all external walls (save for provisions of windows, doors, fascias and gables) of brick or brick veneer; and
iii) such house will be for his own occupation; and
iv) he shall occupy the said house as his home for a period of at least five years.

Significantly, these covenants are unlike ordinary covenants that transfer the benefit to enforce a covenant to other landowners in the neighbourhood. Rather, the covenants are created by statute, and the only party with the ability to enforce the covenant may be the statutory corporation that created the covenant (or its successor).

However, officers of those authorities have expressed the view that they will not consent or assist in the removal of existing covenants. That is, they say, a matter for the responsible authority pursuant to the Planning and Environment Act 1987–typically Councils, or VCAT on review.

Yet at least one Council says it has no ability to remove the covenant, via the Planning and Environment Act 1987. Thus, there seems to be a lack of consensus on how these covenants may be modified or removed.

However, we now know that the Supreme Court of Victoria does have the power, and is prepared to modify statutory covenants in appropriate circumstances. See Re: Hamdan S CI 2018 02512.