Are positive obligations binding after a sale? Image

Are positive obligations binding after a sale?

Posted: 18/04/2013

The recent case of Ridgewood Properties v Valero [2013] EWHC 98 (Ch) highlights the importance of ensuring positive covenants in conditional contracts are enforceable following the sale or transfer of the land.

Whilst the benefit of positive covenants automatically passes with the interest in land, the burden does not. Failure to give this issue careful consideration could result in the benefit of outstanding positive obligations being lost on a transfer of the land. This could have implications for landowners, developers, buyers and tenants. For example:

  • original landowners/developers could find themselves subject to a claim under a positive covenant and be unable to pass on the liability to a new landowner;
  • buyers/tenants could find themselves unable to enforce positive covenants and, in turn, unable to satisfy conditions in a conditional contract;
  • the benefit of overage provisions could be lost.

Positive obligations

Under English contract law only the benefit of a contract can be assigned, the obligation to comply with positive obligations cannot. However, it is important to draw a distinction between:

  • positive obligations relating to the creation of property rights (eg granting a property interest, transferring property upon the exercise of an option or granting a lease when an agreement for lease becomes unconditional); and
  • other positive obligations in conditional agreements which are pre-conditions to the creation of a binding contract (eg the obligation to enter into a section 106 agreement or to assist in obtaining planning permission).

Positive obligations relating to property rights are 'landlord’s covenants' under the Landlord and Tenant (Covenants) Act 1995 (the 1995 Act) and will bind successors in title if the agreement has been noted against the landlord’s title at the Land Registry, as do estate contracts for the sale of land. Other positive obligations do not automatically transfer under the 1995 Act.

Planning obligations (as opposed to a covenant to enter into planning obligations) are an exception to the rule and run with the land by virtue of section 106(3) of the Town and Country Planning Act 1990, meaning they are enforceable against the original covenantor and any subsequent owners of the land.

Facts of the case

  • Texaco and Ridgewood entered into contracts and options (the agreements) for the development of a number of sites conditional on securing planning permission. On completion the freehold of each site was to be transferred to Ridgewood with a lease back to Texaco of the forecourt and shop. 
  •  Texaco was to assist Ridgewood in securing planning permission.
  • The agreements were noted against Texaco’s title at the Land Registry.
  • Before planning permission was granted, Texaco sold the sites to Somerfield, which covenanted with Texaco (but not Ridgewood) to comply with the obligations in the agreements.
  • Somerfield subsequently claimed it was not obliged to perform Texaco’s obligations. Somerfield’s failure to comply meant Ridgewood could not obtain planning permission and could not satisfy the conditions precedent in the agreements.
  • It was held that the positive obligations were conditions precedent to the grant of the leases and did not automatically bind Somerfield under the 1995 Act.
  • Texaco remained liable to Ridgewood under the original contract but Texaco’s claim against Somerfield was limited to damages because Somerfield’s covenant to observe and perform the obligations only amounted to an indemnity covenant.  

What can be done to enforce positive obligations in a conditional contract?

A tenant/buyer should seek to restrict the right of the landlord/developer to sell the property until it has complied with any personal obligations which will not bind successors even if registered at the Land Registry. If this is not possible, the contract could provide that until the positive obligations have been complied with, the landlord/developer cannot transfer its interest until the new owner covenants directly with the buyer/tenant in the terms of the relevant positive covenant.

Where a deed of covenant is required, best practice is that this should be protected by the registration of a restriction on the landlord’s/developer’s title to prevent dispositions unless the deed of covenant is given to the buyer/tenant.

Will it always be necessary to require a deed of covenant?

It is not always necessary to impose an obligation to obtain a deed of covenant. In deciding whether such an obligation is required, it is important to consider the nature of the positive covenant(s); the nature of the parties; and the nature of the transaction.

A deed of covenant might be appropriate for some positive obligations in a conditional agreement, but not necessarily all of them. For example, positive obligations relating to property rights will automatically bind successors in title if the agreement has been noted against the landlord’s title at the Land Registry. But a deed of covenant is appropriate where completion is conditional on obtaining planning permission. Unless the tenant can enforce the landowner’s obligation to enter into a section 106 agreement, it is unlikely to be able to obtain planning permission in order to satisfy the conditions precedent in the agreement.

It will not always be possible to get a direct covenant from a new landowner. Funders and institutional investors are unlikely to agree to take on liability for development obligations. In forward funding arrangements, the transaction is unlikely to happen unless the tenant relinquishes the requirement for a deed of covenant and relies on the personal covenant from the landlord/developer in the usual way.

A tenant may not want a new owner to take on development obligations, particularly if they have a lesser covenant strength or have never been involved in a development project. If a landlord has a good reputation or specialist expertise for development projects, the tenant may want the original landlord to remain liable.

Where an obligation to obtain a deed of covenant is imposed, it is important to remember there must be provisions in the contract for cancelling any restrictions at the Land Registry when the agreement becomes unconditional.

The future for positive covenants

A Law Commission report issued in 2011 (Making Land Work: Easements, Covenants and Profits à Prendre) recommended the creation of a new legal interest in land known as a 'land obligation' which could be positive or negative. The benefit and burden of land obligations would be capable of registration in the same way as easements meaning that positive covenants would bind successors in title if correctly registered. However, there is no indication of whether, and if so when, the Law Commission’s recommendations will be taken up. Until then, it is essential that conditional contracts and development agreements effectively deal with any outstanding or continuing positive covenants on the transfer or sale of the land.  

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