Posted: 24/01/2014
The burden of a positive covenant (such as to repair a fence or contribute to the cost of maintaining shared facilities) will not bind successors in title to freehold land. The original covenantor remains bound under the doctrine of privity of contract. This is an unsatisfactory state of affairs. However, there are certain “workarounds” which, when properly employed, enable the burden of a positive covenant to run: for example, chains of indemnity, rights annexed to freehold rentcharges, the use of leasehold title, and the benefit and burden principle, the latter being the focus of this article.
The law
The benefit and burden principle derives from Halsall v Brizell [1957] Ch 169 in which it was held that a party may not take the benefit of a right granted without accepting the corresponding burden which goes with that right. This case involved a dispute as to whether the beneficiary of a right to use a road could be forced to pay a contribution towards the maintenance costs where the beneficiary of the right of way in question was the successor in title of the original covenantor. Although the High Court was bound to find that the positive covenant was unenforceable, it also held that the successor in title would not be entitled to exercise the right without also undertaking the corresponding obligation.
The benefit and burden principle has been narrowed by subsequent decisions and the position was succinctly summarised in Davies v Jones [2009] EWCA Civ 1164 as follows:
It is against this background that we come to the Court of Appeal decision in Goodman and others v Elwood [2013] EWCA Civ 110, which illustrates the use of the benefit and burden principle to enable the burden of a positive covenant to run.
The facts
The dispute concerned property at the Colwick Industrial Estate near Nottingham (“the Estate”). The Estate comprised a large industrial estate containing several light industrial units, of which the appellants owned several freeholds. The appellants accessed their units over an unadopted road (“Roadway 4”) on the Estate. The appellants (as defendants in the first instance) had been sued by Mr Elwood (E) (the freehold owner of part of the Estate, including Roadway 4) for arrears of maintenance contributions. Following case management directions the claim (and appeal) proceeded against Mr Goodman (G) as a lead action, the decision in which would be binding on the other defendants.
Prior to 1986 the Estate was owned by Dobson Park Properties Ltd (D). The Estate was substantial in size and, as explained above, included several light industrial units which adjoined Roadway 4. The units were held on long commercial leases which contained a right of way over Roadway 4 (in consideration of a corresponding charge). By June 1985 the lessee appellants had agreed terms with D to purchase the freehold of their individual units. At that time D was also negotiating with E for the sale of a substantial part of the Estate (to include Roadway 4).
E’s purchase of part of the Estate was completed on 29 September 1986 (“the September Transfer”). D reserved for itself and its successors in title a right of way over Roadway 4. E covenanted with D and its successors in title that he and his successors would maintain Roadway 4. D further covenanted with E that it, and its successors in title would pay to E a reasonable proportion of the expenses incurred by E in the maintenance of the portion of Roadway 4 abutting the units. The burden of D’s covenant to contribute to the cost of maintenance was not registered against the title of D’s retained land.
On 10 December 1986 G completed the freehold purchase of his unit by taking a transfer from D (“the December Transfer”). The unit was transferred to G together with “the right for the Purchaser [G] and his successors in title … to use for all reasonable purposes the road on the [Estate] …” G further covenanted “that he and his successors in title will pay to the Vendor [D] … a fair and reasonable proportion of the expenses incurred by the Vendor [D] and its successors in the maintenance of Roadway 4 …” D subsequently assigned the benefit of G’s covenant to E (the assignment was not challenged).
The dispute as to G’s contractual liability to contribute to the cost of maintaining Roadway 4 thus stemmed from the fact that D was not the freehold owner of Roadway 4 at the time of the December Transfer, and centred around whether the words “expenses incurred by the Vendor and its successors in the maintenance of Roadway 4” included E despite the fact that he had acquired the freehold of Roadway 4 prior to the December Transfer. G sought to argue that “successor” should be interpreted narrowly and did not include E.
At first instance it was held that G was liable to contribute to the cost of maintaining Roadway 4 as a matter of contract under the December Transfer and also pursuant to the September Transfer (under the benefit and burden principle) because he had elected to use the right of way over Roadway 4. G was also found to be liable to contribute to the cost of maintaining the short extension to the Roadway.
Appeal decision
The Court of Appeal allowed the appeal in part, deciding that the judge at first instance had been correct to find that G was liable to contribute to the cost of maintenance of Roadway 4 both under both the September and December Transfers, but had been wrong to find G liable to contribute to the maintenance of the extension to Roadway 4.
The Court of Appeal disliked G’s arguments as to the definition of “successor” in the December Transfer. The December Transfer was to be interpreted against the relevant factual matrix applying the test of what meaning the words would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties at the time (Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896). The purpose of the covenant as drafted was clear and G was well aware of the transfer to E (indeed it was a matter of public record having been registered at the Land Registry). G’s interpretation would defy commercial common sense. E was a successor and G was contractually liable accordingly.
The Court of Appeal agreed with the first instance judge that the burden of the positive covenant (to contribute to the maintenance) did run in equity under the benefit and burden principle. This was despite the fact that the December Transfer did not contain provisions which made the benefit conveyed (right of way) conditional upon payment in respect of maintenance. In this respect the circumstances failed the second test in Davies v Jones (reciprocity/conditionality). Nonetheless, these elements were found to be present in the September Transfer which was the basis of the obligation by D to contribute to the cost of maintaining Roadway 4 and the corresponding reservation of rights of way.
It was noted that the September Transfer did not contain provisions to deal with the subdivision of the retained land (which of course subsequently arose upon the transfer of the units). This did not defeat the application of the benefit and burden principle and now provides authority for the argument that a successor who only acquires part of the burdened land will be required to assume the proportionate burden, there being no reason why that reduced obligation should not be enforced.
The Court of Appeal also considered the argument that the burden in equity of a positive covenant must be registered in order to bind successors in title of the servient land. G argued that pursuant to section 20(1) of the Land Registration Act 1925, he did not acquire the freehold subject to the burden of the covenant as the burden had not been registered as an incumbrance as it should have been (given that it did not constitute an overriding interest under section 70(1) of the Act). The Court of Appeal held that to be registrable the incumbrance in question must be capable of creating a legal interest in the land. The burden in equity of a positive covenant is not capable of creating a legal interest and need not therefore be registered to bind successors.
Finally, G was not bound to contribute to the maintenance of the 1 metre extension to Roadway 4 as he had no right of way over it, only a terminable licence to use that new part of the roadway. As there was no correlation between the right granted and the obligation imposed, the reciprocity/conditionality test was not met.
The case for reform?
Although the courts have found a way to enable the burden of positive covenants to bind successors, and although other means exist to enable parties to structure transactions to achieve this, the position remains unclear and potentially troublesome. In 2011 the Law Commission published recommendations (following consultation) to reform this area of law to enable the burden of positive covenants to bind successors in title. The recommendations were generally well received, highlighting an appetite for reform across the industry. To address concerns about the effect of reform the proposals were tempered by safeguards including:
Two years on, it appears that these reforms are steadily gathering dust on the Government’s legislative bookshelf. In the meantime practitioners continue to rely on less than ideal “workarounds” to achieve their clients’ aims.
This article was published in New Law Journal in January 2014.
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