What Happens to Restrictive Covenants After the Builder is Out of Business?
Full Question:
Answer:
Although restrictive covenants can be imposed in a number of situations, the most common is where there is a housing development. In a large development there could be a gap of several years between the sale of the first house and the sale of the last house. During this period the developers may use restrictive covenants to maintain house prices. Restrictive covenants are used to prevent the owners of the first few houses to do anything that could have a serious effect on the value of all the other houses.
For example, unappealing extensions, vehicles in the front garden, home businesses being run from the garage, noisy parties at all times, etc., could put off prospective buyers if they give the a negative impression of the development. Therefore, the developers will ensure that in the transfer document of every house on the development they will impose large numbers of restrictive covenants so as to control what the property owners can and cannot do.
After the date of the last sale, the developers will cease to be interested in what anyone on the development does. They have sold all the plots and made their profit and are long gone. However, the covenants still remain. Sometimes the restrictive covenants are worded so that that they only apply for a certain period of time - long enough for all plots to be sold. However, in most cases they are not time-limited at all.
The above only applies to those restrictive covenants that are only ever intended to be enforceable by the developers. Sometimes what is known as 'a building scheme' is set up and here one householder can enforce their neighbour's restrictive covenants (and vice versa) if they are being breached. Such building schemes are rare.
Often restrictive covenants that affect a property are questioned many years after the development is completed. In many cases the developers who can enforce them are nowhere to be found or have gone out of business. Old restrictive covenants are often unenforceable because, to be able to enforce them, you have to own land nearby that could be affected if the restrictive covenants were breached. This land clearly has to benefit from the restrictive covenants.
This benefit can be shown when the housing development is not yet been completed. The plots not yet sold would clearly benefit from the restrictive covenants imposed on all those properties that had been sold. If any were breached the developers would be able to enforce them.
If you own a property subject to restrictive covenants that seem unnecessary and appear to benefit a company that may have been the original developers, then there is less risk of being sued for a breach if the developers have either gone bust or you are pretty sure they don't own any land locally.
It is possible to apply to the land management department to have obsolete restrictive covenants extinguished. However, the time needed and the cost means it is typically only pursued by developers with very deep pockets.
If old restrictive covenants are causing a potential buyer of your property a problem then indemnity insurance is often available fairly cheaply.
The situation is different where someone sells part of their land for building and imposes restrictive covenants benefiting the land they retain. These will usually benefit the land and can be enforced by subsequent owners. As mentioned above, the position is also different where there is a building scheme.
