The importance of costs in restrictive covenant applications

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

Tribunal refuses to remove covenant even where no beneficiary has objected

It is relatively unusual for large development applications to simultaneously seek both planning approval and the modification or removal of a restrictive covenant. This is particularly so for covenants created prior to 25 June 1991 where section 60(5) of the Planning and Environment Act 1987 (PEA) applies. This provision states a responsible authority must not grant a permit that allows the removal or variation of a restrictive covenant unless it is satisfied that:

(a) the owner of any land benefitted by the restriction … will be unlikely to suffer any detriment of any kind (including any perceived detriment) as a consequence of the removal or variation of the restriction.

The orthodox approach is to deal with the modification or removal of a restrictive covenant first, typically by way of an application pursuant to section 84 of the Property Law Act 1958, with a planning application being dealt with subsequently as part of a separate process.

Pulitano Properties Pty Ltd v Yarra Ranges SC [2022] VCAT 32, serves as a reminder as to why an assessment against section 60(5) of the PEA is to be avoided, seemingly at all costs.

In this case, the Tribunal was asked to remove a series of covenants that provided an absolute discretion to a natural person, deemed to be deceased, to accept or refuse plans for development:

[the covenantor] shall not erect on the said lot … any building whether shop or dwelling house except in accordance with a plan thereof which shall first have been submitted to and approved by the said Elizabeth Annie Lipscomb…

Notwithstanding the absence of opposition from beneficiaries or indeed any opposition to the removal of the covenants by the municipal council that was otherwise contesting the development application, the Tribunal still found that the combined operation of section 60(5) and clause 52.02 of the relevant planning scheme meant that it should reject the application to remove the restrictive covenants:

365 The opening words of s. 60(5) of the Act contain a mandatory direction to a responsible authority (and the Tribunal) that a permit to remove or vary a restrictive covenant must not be granted unless the responsible authority (or the Tribunal) is satisfied of the matters that follow.

366 The Tribunal has previously recognised that there is a stringency in the requirements of s. 60(5) of the Act that sets “the bar that is extraordinarily high. The existence of any detriment of any kind (including any perceived detriment) is sufficient to defeat an application to vary a covenant.”

367 I do not accept that the fact that none of the beneficiaries to the restrictive covenants have objected to the proposed development, of itself, supports a finding that the beneficiaries would not suffer any detriment of any kind because of the development. There may be many reasons why a person (including a beneficiary to a restrictive covenant) may not make an objection to a planning permit, however it is for the Tribunal to be ultimately satisfied that beneficiaries will not suffer detriment of any kind.

368 In light of our findings on the merits of the proposal particularly in respect to the impact of the proposal on the surrounding traffic network and the unacceptable visual bulk of the proposed building, I am not satisfied that the beneficiaries of the restrictive covenant will not suffer detriment of any kind.

369 The other reasons given by the applicant for the exercise of discretion cannot overcome the statutory obligation imposed by s. 60(5) of the Act on the Tribunal to be satisfied that the beneficiaries of the restrictive covenant will not suffer any detriment of any kind.

370 In addition, the findings on the matters of concern to the resident respondents, Mr Williams, the League and the ETR Board, as ‘affected persons’ for the purposes of clause 52.02 of the planning scheme supports my finding that the restrictive covenants should not be removed.

In contrast, in an application pursuant to section 84 of the Property Law Act 1958 the Court would be unlikely to give much, if any, weight to injury occasioned on non-beneficiaries, and the absence of objectors might be expected to weigh heavily in favour of the Court’s discretion to remove or modify the restrictive covenants.

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

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.

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

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

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.

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

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.

Court clarifies notice required to create a binding building scheme

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.

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

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.

The brutal consequences of breaching a restrictive covenant

In Manderson v Wright (No 2) [2018] VSC 162, the Supreme Court revealed the devastating potential consequences of breaching a restrictive covenant.

In this case Justice John Dixon ordered the demolition of about $1 million of building renovations at a property at Barwon Heads, saying the building works occurred outside the permitted building envelope governed by a restrictive covenant, “I am not persuaded in all of the circumstances that the hardship to the defendant from a demolition order is out of all proportion to the relief assured to the plaintiff.”

A subsequent decision on costs of the proceedings, saw the unsuccessful defendant, Ms Wright, liable for 50% of the costs of the proceeding, claimed by the plaintiff to be $460,000.