Supreme Court confirms the elements of a valid covenant

In a somewhat unusual case, the Supreme Court has ordered that a planning permit be varied to allow for the removal of a restrictive covenant in an appeal from VCAT pursuant to s148 of the Victorian Civil and Administrative Tribunal Act 1998.

In a decision welcome for its clarity, in Beman Pty Ltd v Boroondara City Council [2017] VSC 207 Emerton J overturned a finding by a legal member of the Tribunal that notwithstanding that the covenant expressed the intention that it would ‘run with the land’, it was essentially unenforceable because it did not specify which land should take the benefit.

In doing so, the Court provided a useful overview of one of the most common means of setting a covenant aside:

17                    The Tribunal’s decision turned upon the construction of the Covenant.  The issue for the Tribunal was whether the Covenant contained a personal promise from Mr Greenshields to Kate Lynch and Robert Byrne, enforceable only by Ms Lynch and Mr Byrne, or whether it contained a promise intended to benefit land owned by them.

18                    A restrictive covenant only runs with land to burden a successor in title if the following three elements are met:

(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.[1]

19                    The applicant submits that the third element is not met in this case, as it is not possible to identify land sought to be benefited.

20                    In Fitt v Luxury Developments Pty Ltd,[2] Gillard J considered the passing of a benefit under a covenant and the need for the benefit of the covenant to be annexed to some land.  His Honour said:

Whether or not the benefit of the covenant is annexed to some land is a question depending upon the common intention of the original parties to the covenant.  It is necessary to construe the words of the covenant in their natural and ordinary meaning to determine the intention of the parties and whether they intended that the covenant was to be annexed to some land and run with it.  In carrying out this exercise the court may take into account the surrounding circumstances objectively known to the parties at the time.[3]

21                    As to how precisely the land must be identified, his Honour said:

Often the land to be protected is fully and accurately defined in the terms of the restrictive covenant.  However sometimes the covenant is expressed in general terms and refers to an area by a particular name.  It is well established that extrinsic evidence is admissible to explain the context in which the words were used.

It is not essential that the land to which the covenant is annexed should be expressly identified in the words of the covenant …  It is sufficient if the words define the land so as to make it open and ‘easily ascertainable’.[4]

22                    In Clem Smith Nominees Pty Ltd v Farrelly,[5] Bray CJ in the Full Court of the Supreme Court of South Australia sounded a warning about the use of extrinsic evidence to identify land entitled to the benefit of a restrictive covenant.  The Chief Justice opined that:

under the Torrens system it is essential before the burden of a restrictive covenant can be held to run with the land that the land entitled to the benefit of the covenant shall be capable of identification in some way from the registered document containing the covenant or, at least, from other related documents which can be discovered by a search in the Land Titles Office.  A prospective purchaser of land subject to a burden should be able to find out by a search whether the covenant  is a covenant in gross, which will not be binding on him if he purchases, or a covenant the benefit of which is attached to some parcel or parcels of land, which may be binding on him.[6]

23                    In the Tribunal, the Grace Park Residents Association submitted that it was possible to identify the beneficiaries of the Covenant by reference to the residual land in the area owned by Kate Lynch and James Byrne that still formed part of their landholding at the time the Covenant was created in October 1909.  The Tribunal accepted this submission, holding that the fact that the land sold in 1909 was a smaller part of a much larger residual landholding provided ‘some degree of counter-balance to the fact that the Covenant does not expressly identify the benefiting land’ and that this made it ‘more straightforward’[7] to infer that the residual landholding as at the date of sale in 1909 would benefit from the Covenant.

24                    In my view, the Tribunal erred in law in holding that the benefiting land had been sufficiently identified by this means.

25                    It is necessary to carefully consider the words in the Covenant to ascertain whether the benefiting land is identified, either expressly or by necessary implication.  The difficulty with the Covenant is that it does neither, even if surrounding circumstances are taken into account.

26                The Covenant, pared back to its essentials, provided that Mr Greenshields covenanted with Kate Lynch and James Byrne and ‘their transferees’ that certain things would be done on the land that was being transferred to him (the building materials covenant).  It also provided that certain things would not be done on that land (the Mary Street covenant) but granted Mr Greenshields and his transferees permission to do certain other things.  It then expressly recorded the parties’ intention that the Covenant be set out as an encumbrance at the foot of the Certificate of Title for Mr Greenshields’ land and that it would run with that land.

27                In my view, the words in the Covenant make it clear that the parties intended to burden the land acquired by Mr Greenshields.  As a result, the Covenant satisfies the first two elements of a restrictive covenant identified above.  Furthermore, the parties intended at least the first part of the Covenant to benefit persons taking title from Kate Lynch and James Byrne — ‘their transferees’.  However, even with the express acknowledgement that the Covenant (or at least the building materials covenant) was intended to benefit the transferees of Kate Lynch and James Byrne, the third element of a restrictive covenant remains unmet because it is unclear who are the relevant ‘transferees’ of Kate Lynch and James Byrne and therefore what land is to benefit from the Covenant.  The transferees of Kate Lynch and James Byrne might be persons to whom land was transferred by Kate Lynch and James Byrne prior to the date of the Covenant or they might be transferees to whom land was transferred after the date of the Covenant.  Indeed, they might be both.

28                The Tribunal accepted the submission that the ‘transferees’ in question were the transferees of the residual land in the area owned by Kate Lynch and James Byrne that still formed part of their main landholding at the time the Covenant was created in October 1909.  That may have been a reasonable assumption, having regard to the likelihood that Kate Lynch and James Byrne would seek to protect the value of the land that they continued to hold and would have had less interest in the value of the land that they had already sold off.  However, there is no compelling reason to limit the intended beneficiaries of the Covenant in this particular way.  The words of the Covenant, construed in context, do not require any such a conclusion.

The take home message from this decision is that, once again, restrictive covenants are often of varying quality and effectiveness. Although it may have been the drafter’s intention that the covenant run with the land, the passage of time and the demands of the Torrens system mean that the Courts are no longer prepared to enforce its terms.