The Business Stress testing a Restrictive Covenant

When construing a restrictive covenant, a careful analysis of its various components is needed to understand its true effect, and indeed, whether it is effective at all.

For example, one covenant in Toorak dating back to the 1960s, purported to prevent part of the land from being developed to more than one storey. The sole beneficiary was the neighbouring land to the south. The dwelling had been constructed on the assumption the covenant was valid. However, close consideration of the chronology revealed that the purported covenantee had already sold the benefitted land by the time the covenant was signed and registered. The Supreme Court therefore agreed that the covenant was unenforceable, given that the covenantee had lost his ability to enter into the agreement at the time the covenant was purportedly made.1

In another case, a restrictive covenant in Altona had been the subject of extensive advertising in an application to modify what was believed to be a single dwelling restriction. However, closer examination revealed that the covenant suffered from the same flaw that was the subject of the following comment by Morris P in Thornton v Hobsons Bay City Council:2

11 In the present case the transferor has sought to identify the land to be benefited by reference to land remaining untransferred in a particular certificate of title. That method of identification purports to be a precise method. It follows, as Ms Tooher submitted, that there is less scope in such circumstances to use surrounding circumstances to identify the benefited land. The problem is that, at the time the transfer was made on 25 April 1953, certificate of title volume 6836, folio 089 was no longer in existence, it having been cancelled on 15 September 1952. Thus at that time there was no land remaining untransferred in that certificate of title. Hence notwithstanding the exactitude with which the draftsman of the covenant sought to achieve, in fact all he has achieved is a nonsense.

The Supreme Court agreed that the restrictive covenant was a nonsense and declared the restrictive covenant unenforceable.3

A degree of uncertainty now also surrounds relatively common covenants that purport to require plans to be approved by a now deceased person or deregistered corporation. In Crest Nicholson Residential (South) Ltd v McAllister 4 the approval of the vendor, in that case a company, was required for any construction on the subject land. The vendor company had subsequently been dissolved, and given the lapse of time could no longer be reregistered. Neuberger J noted that reading the restriction as now absolute, conformed with its strict literal interpretation. However, his Honour found that the restriction was discharged now that the vendor could not consent. Crest Nicholson was said to be “strongly persuasive” in 196 Hawthorn Road Pty Ltd v Duszniak 5

It should not be assumed that you will necessarily need to apply to the Supreme Court to have a covenant removed for reasons of defects or express limitation. For example, a covenant on the Mornington Peninsula was said to be for the benefit of the original vendor, its successors and transferees. The Covenant did not identify the land to be benefitted by the restriction contained in the Covenant and a letter to the Registrar of Titles was sufficient to have the covenant removed through the exercise of the Registrar’s powers under section 106 of the Transfer of Land Act 1958

1 Re Thaqi: S ECI 2020 01338.

2 [2004] VCAT 383.

3 Re Tran S CI 2018 02425.

4 [2003] 1 ALL ER 46, [52] (Neuberger J).

Matthew Townsend is a member of the Victorian Bar and maintains Restrictive Covenants and Easements in Victoria: a website providing cases, precedents and materials about modifying or removing restrictive covenants and easements