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Supreme Court upholds Calderbank offer in restrictive covenant case

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The benefits of an early offer of compromise in restrictive covenant proceedings were again shown in Manderson v Smith Anor (Costs) S ECI 2020 03378 when Efthim AsJ upheld an offer to walk away as being a genuine compromise in proceedings concerning a fence that was said to have constituted a breach of a restrictive covenant:

His Honour held that the earliest of three offers of compromise would be effective:

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.

The decision summarises the criteria the court will consider when determining whether or not to order indemnity costs against an unsuccessful party:

(a) the stage of the proceeding at which the offer was received;
(b) the time allowed to the offeree to consider the offer;
(c) the extent of the compromise offered;
(d) the offeree’s prospects of success, assessed as at the date of the offer;
(e) the clarity with which the terms of the offer were expressed; and
(f) whether the offer foreshadowed an application for an indemnity costs in the event of the offeree’s rejecting it.

A more detailed discussion of Calderbank offers is discussed in the following notes at page 81:

2023-05-26-restrictive-covenants-in-victoria-theory-and-practice-1Download

Supreme Court approves covenant variation previously refused by VCAT

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In 2011, in Zwierlein v Baw Baw SC [2011] VCAT 74, the Victorian Civil and Administrative Tribunal refused an application for a three lot subdivision on land in Warragul after finding it was “unable to say that a beneficiary of the covenant will be unlikely to suffer loss of amenity or loss arising from change to the character to the neighbourhood or any other material detriment.”

However, some ten years later, in Zwierlein v Coelho [2021] VSC 451, the Supreme Court has allowed an application that was in certain respects similar to that refused by VCAT.

As Hetyey AsJ in the later decision explained:

“the decision of VCAT is of limited relevance to the present application because it pertained to a different statutory test set out in s 60(2) of the Planning and Environment Act 1987 (Vic). That provision essentially states that a permit for the variation or removal of a restriction in respect of land must not be granted unless the responsible authority is satisfied that a beneficiary of a covenant will be unlikely to suffer financial loss, loss of amenity, loss arising from change to the character of the neighbourhood, or any other material detriment as a consequence of the removal or variation of the relevant restriction. There are also differences between the nature of the proposal which was then before VCAT and the proposal the subject of the present application.

A careful reading of the two decisions provides further support for the view that section 84(1) of the Property Law Act 1958 is a kinder avenue for applicants, even for covenants created on or after 25 June 1991.

VCAT offers a potentially inexpensive means of testing a building materials covenant

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In Rose Burwood Pty Ltd v Whitehorse CC [2021] VCAT 755, the Victorian Civil and Administrative Tribunal adopted a potentially inexpensive means of construing a building materials covenant.

The parties appear to have made written submissions to the Tribunal and a determination was made on the papers.

The Tribunal found that the grant of a permit would not authorise anything that would result in a breach of the covenants that required that the dwellings be constructed substantially of brick or brick veneer:

I find that the use of the face brickwork inlays on the external parts of the building to be the same as brick veneer. They will give the appearance of brick and sit upon an internal structure but do not form part of the structure of the building.  Although anyone viewing the walls will not be able to distinguish this feature.  There are sections of the external walls that will not be covered in the brick inlay tiles however the plans indicate that the external walls will be substantially brick veneer in the form of brick inlay tiles. The requirements of the covenants are therefore satisfied.

The building material considered was an inlay brick system that embeds clay brick tiles into precast concrete panels: https://www.pghbricks.com.au/inbrick

While the process may have avoided the costs associated with an appearance at VCAT, the decision suggests the permit application was made in 2019; the application for review lodged in 2020; and the decision handed down in July 2021.

In contrast, in Re Orangi, the Supreme Court heard and determined a buildings material covenant application in a little over three months. C/f: Dwivedi v Whitehorse CC [2015] VCAT 176.

The Supreme Court will not enforce all breaches of a restrictive covenant

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It is important to remember that the Supreme Court will not enforce each and every breach of a restrictive covenant.

A plaintiff discovered this, to his detriment, in Manderson v Smith S ECI 2020 03378.

This case concerned a resident of Barwon Heads who applied for a mandatory injunction to compel his neighbours to remove at their cost, a fence constructed on their land, that the plaintiff asserted was in breach of a restrictive covenant.

Efthim AsJ found that while there had been a breach of the restrictive covenant, his Honour refused to uphold Manderson’s application:

56 Here the defendants’ fence was not erected entirely on the boundary line. A small part of it is erected outside Lot 3 and at best the fence encroaches the hatched area by approximately 6cm. The fence does breach the Covenant. However I agree with the defendants that any incursion by the front fence into the hatched area is de minimis. If I ordered that the fence be removed, then there is a possibility that vegetation would need to be removed or damaged. It could do more harm than leaving the fence where it is.

A curious aspect of the case was that the Plaintiff’s own fence was also in breach of the covenant:

28 In cross-examination Mr Manderson agreed that all properties in Warrenbeen Court have fences. He also agreed that he had a fence and a gate, and believes that the fence encroaches further than 6cm, and more like one to two metres, on to the hatched area on his lot (which is the area on which no buildings can be erected).

Manderson v Smith also serves as an important reminder to consider first and foremost, the underlying purpose of a restrictive covenant, rather than taking a technical or literal approach to the meaning of particular words. Here, the court agreed that while a fence might be a building as a matter of law; properly construed, the covenant was never intended to prevent boundary fences.

The benefitted land must be easily ascertainable

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For a restrictive covenant to be legally valid, the following elements are required:

(a) the covenant must be negative;
(b) the burden of the covenant must be intended to run with the land; and
(c) the covenant must be given for the benefit of land, not simply for the benefit of the covenantee, and the covenant must touch and concern that land.

This last requirement was discussed by the Supreme Court in Re: Ferraro [2021] VSC 166.

In this case, Matthews AsJ was prepared to declare the covenant unenforceable without requiring the Plaintiff to advertise the application for declaration, because the covenant failed to satisfactorily identify the benefitted land:

47 The plaintiff submits, and I accept, that the wording of the Lot 106 Covenant appears to suggest that the parties intended to benefit those persons taking title from Kate Lynch, James Byrne and Harold Paul Dennehy, namely their ‘transferees’. The Lot 106 Covenant provides that the covenantor, Thomas Francis Brennan, ‘hereby covenants with the said Kate Lynch, James Byrne and Harold Paul Dennehy and their transferees’ (emphasis added).
48 The plaintiff submits that even with an express acknowledgement that a covenant was intended to benefit the transferees of the original covenantees, the third element of a valid restrictive covenant remains unmet where it is unclear who the relevant transferees of the original covenantees are and, therefore, which land is to benefit from the covenant.

The Court in Re: Ferraro endorsed the view that caution should be exercised in relying on extrinsic materials to construe a restrictive covenant, consistent with the High Court’s reasoning in Westfield Management Limited v Perpetual Trustee Co Limited (2007) 233 CLR 528.

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

Court clarifies notice required to create a binding building scheme

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In Randell v Uhl [2019] VSC 668, Derham AsJ has clarified the notice required before the Court will find a party to be bound by the terms of a building scheme.

Where a building scheme is established, all purchasers and their assigns are bound by, and entitled to the benefit of a restrictive covenant.

Previously, it was not entirely clear how far a purchaser would need to search the Register of Titles to be on notice as to the existence of a building scheme.

In Randell, his Honour found a building scheme had been established, but found the plaintiff not bound by its terms because the existence of a scheme was not evident on the face of the title, or any documents referred to therein:

82      … If it were sufficient notice that the Head Title in this case bears the notification of a building scheme, it would require a person interested in purchasing the Land to search the Register further than the title search indicated and to go back to the Head Title and the original, or first edition, of the Subdivision. That would render conveyancing a hazardous and cumbersome operation beyond what is reasonable to expect.

83      In summary, I am satisfied that a building scheme was established but the notification of it was not sufficient to give notice of it to the plaintiffs because a search of the title of the Land by the plaintiffs did not, and would not, reveal the existence of the scheme either directly, or indirectly by reference to any instrument referred to in the search of the title.

References to purported Building Schemes commonly appear on title documents in Victoria, but under close judicial scrutiny they are rarely proven. A question now exists whether Randell has made this process of atrophication effectively complete.

Think carefully before applying for a planning permit to modify a restrictive covenant

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Solicitors and planners need to be aware that when making an application to the Supreme Court to modify a restrictive covenant via s84 of the Property Law Act 1958, any earlier application to modify a restrictive covenant via the Planning and Environment Act 1987 process needs to be fully disclosed to the judge hearing the later s84 application.

Part of the reason for this is that the Court’s current practice is to ensure that each and every beneficiary who objected to an earlier application (irrespective of its statutory basis) receives notice of the subsequent s84 application.

This can have a significant impact on the degree of opposition to the s84 application by reason of the broader notice requirements triggered by the Planning and Environment Act 1987 process. Under the planning permit process, each person who has the benefit of the covenant must receive written notice of an application to modify or remove a restrictive covenant.

In contrast, in a s84 application, notice is at the direction of the judge, but this is typically far narrower than direct notice to all beneficiaries.

In recent times, we have found that the Court directing written notice to more distant beneficiaries can have a significant impact on the conduct of the s84 application, by triggering the opposition of parties that might otherwise not have been involved in the s84 process, were it not for this broader notice obligation.

It is often thought that there is little downside in making a speculative application to modify a covenant via the Planning and Environment Act 1987 process, before commencing an application in the Supreme Court, because the only downside is the cost of advertising and a modest application fee. If our experience is anything to go by, there is an additional consequence to consider.

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.

Easements FAQs (Frequently Asked Questions)

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What is an easement?

An easement comes in a number of forms but may generally be described as the right to use another person’s land without occupying it.

It may be a private right between specified landowners, or an easement in gross, granted to a public authority by operation of statute. Easements may be implied if not expressly created; and easements may be prescribed by using land for at least 20 years without secrecy, permission or force.

What types of easements are there?

  1. A private easement is a property right to make a limited use of land by someone other than an owner. It cannot give exclusive possession, and must be for the benefit of other land (the dominant land).
  2. An easement in gross is an easement for the benefit of the holder of the easement (usually a service provider) which is not attached to dominant land. It is not recognised at common law and is a creature of statute. An example might be a drainage easement along the rear of a number residential properties in favour of a water authority.
  3. An implied easement is an easement that is not expressly created by grant or reservation in an instrument or by statute but is implied by common law or statute so that the land can continue to be used in a particular way.
  4. A prescriptive easement is an easement acquired by using land for at least 20 years without secrecy, permission or force.

What are the key elements of a private easement?

  1. There must be a dominant and servient tenement;
  2. the easement must accommodate the dominant tenement;
  3. the owners of the dominant and servient tenements must be different from each other; and
  4. the right or claim must be capable of being the subject matter of a grant.

In Victoria, private easements can be expressly created by grant or reservation:

  • Creating an easement by ‘grant’ means that the servient owner grants the dominant owner an easement over his or her land for the benefit of the dominant land.
  • An easement is created by ‘reservation’ when a vendor conveys land to a purchaser but reserves an easement over that land, for the benefit of other land that the vendor owns.

How do I know if land is burdened by an easement?

Typically, if land is burdened by an easement, it will be noted under the heading “Encumbrances, Caveats and Notices” on a register search or on a plan of subdivision.

However, under section 42(2)(d) of the Transfer of Land Act 1958, all easements, ‘howsoever acquired’, exist over land even if they do not appear on the register. This is significant, because while covenants can fall away if they not clear on the face of the title, easements may survive the sale process even if they are not revealed on an inspection of the Register.

How do I know if land is benefited by an easement?

Assessing who takes the benefit of an easement requires careful analysis.

The benefit of private easements cannot flow to the public at large. The exception is an easement in gross, which will confer a licence upon the person for whom the right was created.  Easements in gross are commonly created in favour of statutory bodies, such as the local government  or water authorities.

That said, the case of Anderson & Anor v City of Stonnington & Anor [2016] VSC 374 provides a detailed explanation of how easements can become roads, and if and when that occurs, the operation of the Road Management Act 2004, may mean the easement is permanently displaced.

How can I remove or modify an easement?

Presently, there is no judicial means of removing or modifying easements in Victoria.

There are two options: claim of abandonment and s 23 of the Subdivision Act 1988 in combination with the Planning and Environment Act 1987.

Claims for abandonment are notoriously difficult to prosecute. In Brookville Pty Ltd v O’Loghlen [2007] VSC 67, Kaye J found that in order to establish abandonment, the plaintiff must prove that the owner of the dominant tenement intended to relinquish their rights to the easement forever.

Section 23 of the Subdivision Act 1988 in combination with the Planning and Environment Act 1987, allow for easements to be removed or varied, without the consent of or compensation being paid to beneficiaries. For this to occur, a planning permit must first be granted under clause 52.02 of the relevant planning scheme, the purpose of which is “to enable the removal and variation of an easement or restrictions to enable a use or development that complies with the planning scheme after the interests of affected people are considered.” An example of this in operation can be found in Warner Crest Pty Ltd v Stonnington CC [2019] VCAT 36.

How is an express subdivisional easement created?

There are overlapping provisions for the creation of express subdivisional easements contained in two different statutes:

  1. section 12(1) of the Subdivision Act 1988; and
  2. section 98(a) of the Transfer of Land Act 1958.

Section 12(1) of the Subdivision Act 1988 requires all proposed and existing easements to be specified in subdivision plans. These easements are then created upon registration of the plan. Easements created under this section are in addition to those created under section 98(a) of the Transfer of Land Act 1958.

Section 36 of the Subdivision Act 1988 also provides for an owner of land to acquire an easement compulsorily over other land in the subdivision or consolidation, or in the vicinity, if granted leave to do so by the Victorian Civil and Administrative Tribunal. The best step by step analysis of this provision can be seen in JT Snipe Investments Pty Ltd v Hume CC (Red Dot) [2007] VCAT 1831, however, Gale v Frankston CC [2019] VCAT 62 suggested a slight change in emphasis.

How is a prescriptive easement created?

Another way easements can arise without being expressly created is under a common law rule called prescription. A prescriptive easement can be acquired by what is called ‘long user’ or 20 years of continuous use.

Victoria retains many common law rules of implication and prescription that predate the subdivisional planning system, as well as the new statutory provisions for implied subdivisional easements.

In Laming v Jennings [2018] VSCA 335, the Court of Appeal made some interesting comments about the apparent inconsistency of prescriptive easements with the Torrens system. It concluded by noting that the historical rationale of legal fictions such as the doctrine of lost modern grant has significantly diminished with the advent of modern systems for the registration of title, comprehensive planning laws and more mature land law jurisprudence.