The obsolescence power in section 84(1)(a) can be used to clean a certificate of title

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The Supreme Court has approved the use of section 84(1)(a) of the Property Law Act 1958 as a means of cleansing a title of a reference to a restrictive covenant with no further work to do.

Practitioners have in the past found that Titles Office officials have refused to remove a reference to a restrictive covenant from a certificate of title, unless directly ordered to do so by the Court.

In turn, the Court has expressed reservations about being able to direct the removal of the covenant from a title solely pursuant to its declaratory power under section 84(2) of the Property Law Act 1958.

The end result is that an originating motion seeking a declaration that a restrictive covenant is ineffective, should also seek a consequential finding of obsolescence.

In Re Pomroy [2021] VSC 739, the court held:

“83. It follows that the third element required in order for the Covenant to run with the Subject Land and burden the plaintiff, being a successor in title, is not present.  This is because the Covenant has not been given for the benefit of land and does not touch or concern that land.

84. As the benefit of the Covenant is unenforceable by any persons other than the Covenantees, it can no longer be said to affect the Subject Land.”

The Court then agreed to its powers under section 84(1)(a) as a consequence of this finding:

The plaintiff submits that with respect to s 84(1)(a), if the Court is of the view that the Covenant is ineffective and therefore no longer has any work to do, it would be appropriate to issue an order for its removal from title to the Subject Land.

I agree with this submission and will therefore make such an order.

A copy of the submissions presented to the Court can be found here.

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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

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.