Understanding Covenants: A Case Study and Legal Insight
What is a covenant?
A covenant is a legally binding agreement registered on a property’s title, dictating how land can be used or what can be built on it. Covenants are usually designed to protect property values and maintain the character of a neighbourhood. There are positive covenants, which require the property owner to take specific actions (like maintaining a fence), and restrictive covenants, which limit what the property owner can do (such as restricting building height and subdivision).
Covenants can be for the benefit of the owner of a specific piece of land (an appurtenant covenant) or for the benefit of a specific person/entity (a covenant in gross). The entity that has the benefit of a covenant is called the covenantee. The consent of the covenantee is usually required to vary or surrender the covenant, unless it can be successfully argued in Court that the covenant should be removed or modified.
What if the covenantee is dead or a company that no longer exists?
If the covenant is a covenant in gross, the covenant is not cancelled just because the entity with the benefit of the covenant (the “covenantee”) is a deceased person or a company removed from the Companies Register. Instead, the covenantee’s rights and interest in the covenant must be transferred to the legal successor of the covenantee, who can then provide their consent for the required variation or surrender.
If the covenantee is a deceased person, the legal successor is the beneficiaries of their estate. If no one can be located to assign the benefit of the covenant, an application can be made to the Court to extinguish the covenant.
If the covenantee is a company removed from the Companies Register, the company may have assigned the benefit of the covenant to another party as part of its winding up process. The company can also be briefly restored to the Companies Register to assign the benefit of the covenant to another party. This assignment should be recorded on the land register. If no one can be located to deal with the company’s property or it cannot be restored to the Companies Register, an application can be made to the Treasury for the benefit of the covenant to be dealt with as Crown property or an application can be made to the Court to extinguish the covenant.
What if the Covenantee won’t agree to vary or surrender the covenant?
You could consider making an application to through the Courts for an order to vary or surrender the covenant. A recent High Court decision in AZTEK Projects Ltd v Matthews provides insight the legal grounds for such changes.
Key Takeaways from AZTEK Projects Ltd v Matthews
Case Overview:
In AZTEK Projects Ltd v Matthews [2024] NZHC 1293, AZTEK Projects Ltd (AP), a land development company, sought to modify a restrictive covenant on their property in Warkworth. The covenant, an appurtenant covenant registered in 2004, limited developments to one house per title. AP, unaware of this covenant, subdivided the land and built two houses. Upon discovering the restriction, AP halted further development and sought to modify the covenant.
Legal Grounds for Modification:
AP relied on three grounds under section 317 of the Property Law Act 2007 (PLA) to seek modification:
- Change in Character of the Neighbourhood (section 317(1)(a)(ii)): The High Court found significant changes in the neighbourhood’s character since the covenant's creation.
- Impediment to Reasonable Use (section 317(1)(b)): The continuation of the covenant impeded the reasonable use of the land, as the definition of "reasonable use" evolves with zoning changes and neighbourhood developments.
- No Substantial Injury to Any Person Entitled (section 317(1)(d)): The Court determined that modifying the covenant would not cause substantial injury to any entitled person, supported by expert valuation evidence.
Court’s Discretion and Compensation:
With all three grounds established, the Court exercised its discretion to modify the covenant, considering the significant consequences for AP if the covenant remained unmodified. As there was no economic injury to the respondents, no compensation was awarded.
Need help with your covenant?
We are property law specialists and can help you resolve your title challenges. Contact Sarah Churstain or Maggie Knowles for more information.
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