restrictive covenants

The Court sounds a note of caution to ambitious developers

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The Supreme Court has refused an application to modify a single dwelling covenant to allow a 21 apartment development over two lots (~1,400sqm) in 9 Highlands Road in Thomastown–notwithstanding the absence of objectors in Court to oppose the application.

The decision of Re Morihovitis [2016] VSC 684 is somewhat different to the decision of Re Jensen [2012] VSC 638 where the Court refused a relatively modest unopposed application because it was proposed amongst a relatively intact network of single dwellings. Rather, the application in Re Morihovitis was found to be simply too great a departure from what the covenant originally contemplated:

 The absence of a single dwelling covenant on no. 11 immediately exposes the peculiar and testing feature of this application.  Subject to planning laws and considerations, there is nothing on title to prevent the plaintiff as owner of no. 11 from building an apartment block, or at the least, there is no restrictive covenant getting in the way of a planning application to do so.  But the presence of the restrictive covenant on no. 9 Highlands Road obliges the responsible authority under the Planning and Environment Act to refuse to grant a planning permit unless the covenant over that land is removed or varied.  Thus, by this application Mr Morihovitis seeks under s 84(1) of the Property Law Act to modify the single dwelling covenant on no. 9 by deleting and adding words as shown in this way −

… not at any time hereafter excavate carry away or remove or permit to be excavated carried away or removed any earth clay stone gravel or sand from the said land hereby transferred except for the purpose of excavating for the foundations construction of any building and basement to be erected thereon and that not more than one dwelling house and outhouses shall be erected on the said lot hereby transferred …

The Court therefore found it would alter the character of the neighbourhood:

The judgment to be made about ‘substantial injury’ turns on the nature and degree of the injury to those benefits.  Here, in my judgment, the location of the proposed development is not so removed from the residential area of the neighbourhood that it can be regarded as being sufficiently far away from it to say that such changes will not be seen and felt.  It will be a conspicuous part of the neighbourhood.  It will be the only apartment block in the neighbourhood.  The scale of the project and its departure from the scale of any existing residential developments in the neighbourhood, means that if it does not of itself create the sort of notorious problems of higher density living as I have identified them, it will in my judgment be the beginnings of altering the character of the neighbourhood.

Although the Plaintiff endeavoured to make the most of the absence of objectors, the Court pushed back on any suggestion it would give the Plaintiff a free rein:

No objectors have attended Court.  However, it is established in the legal authorities on these applications that the absence of objectors does not necessarily satisfy the onus of proof, and it certainly does not amount to implied assent. But as is commonly submitted in these applications, the absence of objectors ought go some way to overcome a court’s caution.  In this case, it was submitted that the absence of objectors willing to advance their objection to a substantial development such as this was especially significant, meaning to say I think the Court should not be overly cautious or assailed by the scale of the development in the assessment of substantial injury.  The submission went a little further.  It was submitted that known cases where such applications were refused were, or tended to be, opposed applications on which the Court could act on grounds of resistance from a beneficiaries according to evidence adduced by them.  In this case, although it was said that the Court has to play devil’s advocate, it was submitted the Court should, in the absence of objectors or any other evidence, act on the plaintiff’s evidence.     

I do not accept the amplitude of that submission.

Ultimately, the Plaintiff was held to the contract he struck when he purchased his land, at least insofar as the present development was concerned:

To put it in plain terms, Mr Morihovitis has bought land knowing of a negative covenant on it which binds him as if he made it by private contract.  He cannot use the land in defiance of that contract.  By statute this Court might discharge that obligation or modify it if doing so will not cause substantial injury to those to whom the promise was made.  That cannot be done by saying or assuming that the planning authority will ensure that the apartment development is in accordance with planning laws and regulations.  The question for the Court is whether the landowner should be relieved of his promise and allowed to build an apartment block in the first place, before it is subjected to planning scrutiny.  For the reasons I have given, in my judgment the plaintiff has not shown that the proposed modification will not cause substantial injury to those to whom the covenant was given.

How to choose a lawyer to run your restrictive covenant case

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Choosing a lawyer to run your application to either modify or remove a restrictive covenant, or to defend such an application, can have considerable bearing on both the substantive outcome of the proceedings and, of course, costs.

In this sub-specialty of property law, only a relatively small number of law firms have had much recent experience, particularly in contested applications.

Getting your choice of lawyer wrong can mean up to twelve months lost by pursuing the wrong type of application or perhaps losing an opportunity to recover a proportion of your costs.

The best means of choosing the right solicitor (or barrister) is to look through recent published cases to see: who has been acting for who, where the relevant land was located; and in which jurisdiction the case was run.

The following search from the independent Australian Legal Information Institute lists all Victorian cases (Supreme Court proceedings, VCAT hearings and panel hearings) using the search phrase “restrictive covenant”:

http://www.austlii.edu.au/cgi-bin/sinosrch.cgi?method=phrase&query=restrictive+covenant&meta=%2Fau&mask_path=au%2Fcases%2Fvic

The following is a similar search narrowed to Supreme Court proceedings:

http://www.austlii.edu.au/cgi-bin/sinosrch.cgi?method=phrase&query=restrictive+covenant&meta=%2Fau&mask_path=au%2Fcases%2Fvic%2FVSC

And the following is a similar search narrowed to VCAT proceedings:

http://www.austlii.edu.au/cgi-bin/sinosrch.cgi?method=phrase&query=restrictive+covenant&meta=%2Fau&mask_path=au%2Fcases%2Fvic%2FVCAT

However, be careful about making predetermined judgements about which jurisdiction in which to commence your application. The decision to pursue an application under the Planning and Environment Act 1987 vis a vis the Property Law Act 1958 may prove to be of considerable importance and you should be confident your lawyer is familiar with the advantages and disadvantages of both avenues.

Dealing with deregistered companies referred to in restrictive covenants

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Restrictive covenants in Victoria often give development discretion to companies that have long been deregistered. A good example is the series of covenants affecting the area around Altona that may provide:

… nor will I or my heirs executors administrators or transferees use any material other than brick and/or stone for the main walls of any such shop or dwelling house without the consent in writing of the said Altona Beach Estates Limited

Altona Beach Estates Limited, the original developer of the land, has long ceased to exist.

A question is then raised: how will the Australian Securities & Investments Commission (ASIC) exercise its discretion if it is called upon to act in the capacity of the deregistered company pursuant to section 601AE(2) of the Corporations Act 2001?

Helpfully, ASIC has produced a practice note of sorts to explain its policy in relation to such requests.

This policy states that ASIC may consider applications for consent under an encumbrance (e.g. plans of subdivision where there is no specific prohibition to subdivision in the encumbrance; construction of a fence within the restrictions/conditions of the encumbrance) and may consider applications to discharge expired encumbrances. However, ASIC will not otherwise vary the restrictions/conditions of an encumbrance or discharge a current encumbrance.

It is not then, as some might have you believe, a fait accomplis that the discretion will be exercised in the applicant’s favour.

The policy can be found here: http://asic.gov.au/for-business/closing-your-company/effects-of-deregistration/property-of-deregistered-companies/there-is-an-encumbrance-also-known-as-a-covenant-or-restrictive-covenant-over-my-property-in-favour-of-a-deregistered-company/

It is permissible to look outside the Register of Titles to properly understand the effect of a restrictive covenant

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In a decision handed down in May 2013, the Supreme Court of Victoria confirmed that it is permissible to refer to materials outside the Register of Titles to properly understand the effect of a restrictive covenant.

In Suhr v Michelmore [2013] VSC 284 the Plaintiffs contended that the following covenant was void for uncertainty:

[W]ill not at any time hereafter erect any building of a greater height than twelve feet above the present level of the land hereby transferred and any such [building] shall not be erected within five feet of the southern boundary of the lastmentioned land. [Emphasis added]

All parties agreed that the words “the present level of the land” was a reference to the level of the land in 1937. However, the plaintiffs contended that this level could not be determined on the face of the covenant and could not permissibly be determined by reference to extrinsic evidence.

Pagone J rejected this argument, noting that the covenant clearly directed a reader to something outside the register:

11           The cases decided since Westfield Management Ltd v Perpetual Trustee Company Ltd[1] do not compel the conclusion propounded by the plaintiffs, namely, that the covenant must be void for uncertainty because the determination of the “present level” of the land as at 1937 would require reference to something outside of the Register. Plainly it would be void for uncertainty if its terms were “so vague that it [was] really impossible of apprehension or construction” such as might occur by the omission of any criteria by which the words in the restrictive covenant are to be ascertained. In Miller v Evans[2] Hall J took what might be called a narrow view of the impact of Westfield as limiting the construction of the restrictive covenant to what appears on the “face of the document” and not “to go beyond the text”. A statement to much the same effect may be seen in Ryan v Sutherland.[3] Neither case concerned a restrictive covenant where its terms, as revealed on the face of the Register, directed a searcher unambiguously to something outside the Register.

The Court also noted an important difference between easements and restrictive covenants namely that the former require registration for validity whereas the latter are required to be notified but the recording does not establish or effect validity:

14           A restriction in a covenant to be valid must of course, be capable of operation. However, that does not mean that all of the terms of a covenant must appear on the Register. It is important to bear in mind that the function of registration on title of a restrictive covenant is to give notice rather than to create validity.

In the circumstances, the covenant was capable of being properly construed and that it was therefore permissible for the covenant to refer a reader to extrinsic materials, in particular the condition of the land itself:

17           The covenant in this case, without regard to extrinsic evidence, itself unambiguously directs attention to the land for its operation. The covenant, as was in my view correctly conceded, was valid when first made in 1937, and is not shown by the plaintiffs to have become invalid because of any material change to the land since then. A visual inspection of the land revealed by the numerous present and historical photographs tendered in evidence showed that there had been no construction on the land since 1937 beyond such work as was required to surface or resurface the land for use as a tennis court. Such variation to the level of the land as may have occurred by its surfacing or resurfacing is in my view de minimis. In my view the covenant is not void for uncertainty and does not offend the principles in Westfield.

Matthew Townsend
Owen Dixon Chambers
http://www.vicbar.com.au/profile?3183
townsend@vicbar.com.au (04) 1122 0277
Liability limited by a scheme approved under Professional Standards Legislation

[1] (2007) 233 CLR 528

[2] [2010] WASC 127

[3] [2011] NSWSC 1397, [10] (Black J)