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Restrictive covenants: buyer beware

with lawyer Justin Lawrence of Henderson & Ball

 

Property and law intersect regularly, so it pays to know key legal issues that may impact your property investment decisions.

One such area is restrictive covenants on certificates of title. These are private treaties or written agreements between landowners that limit the way land can be used and developed.

To find out more, I enlisted the help of one of Melbourne’s best property lawyers, Justin Lawrence. He is a partner at Henderson & Ball, a law firm with a longstanding relationship with Wakelin Property Advisory.

So Justin, what are restrictive covenants? How do they work and how have they developed over time?

 

Justin Lawrence

A restrictive covenant is a document, which registers on the certificate of title, a restriction specifically stating how a property can be developed.

Often they have been in place for a long time, but they have the potential to create problems for property owners. It’s definitely an issue property owners should be aware of before they buy.

 

Jarrod McCabe

Some of the older ones are quite unusual aren’t they? But while they might seem out of place today, back in the day, they were probably deemed necessary.

 

Justin Lawrence

Yes, that’s right. A lot are hangovers from the early part of last century. As Melbourne was expanding between the wars, in particular in between the 1920s and 1930s, there were a lot of new suburbs opening up. While new tracts of land were made available for subdivision, developers were restricted in the way properties could be developed and used. That’s when a lot of the restrictive covenants were applied. Many still remain to this day, and will continue to remain unless they’re actually removed.

 

Jarrod McCabe

And is it difficult to remove them? 

 

Justin Lawrence

Yes, it can be. At its most complicated, the issue can end up in the Supreme Court.

 

Jarrod McCabe

So, what are some of the more common covenants that we see, spanning back to the older days, right up to some of the more more modern ones?

 

Justin Lawrence

Of the older ones, the most common are single dwelling covenants, which dictate that there can only be one dwelling or building apart from usual outbuildings, such as a toilet. 

There are others that prevent industrial buildings in residential areas. As well as those that regulate the type of materials used in the construction of buildings. This last one has seen a bit of a comeback in recent years. A lot of the newer areas in Melbourne’s urban fringe, have restrictive covenants that regulate the materials used to ensure the homes have a uniform look.

Another common one is the restriction of removal of sand, soil and earth from the land.

 

Jarrod McCabe

This is an interesting one isn’t it and one that has had an impact on quite a few property owners in recent times. Can you take us through some of the issues it’s thrown up?

 

Justin Lawrence

Yes, people have bought properties, thinking that, ‘Oh, gee, wouldn’t this be great with a third storey, or wouldn’t this be great with a wine cellar, or I’d love to put a pool in the backyard.’

These owners bring us the title and say, ‘I’ve applied for a building permit, but the council says I can’t have one.’

We look at the title, and sure enough, there will be a restrictive covenant that says they can’t excavate the land.

Years ago these types of restrictive covenants were put in place to prevent the property being turned into a quarry. One hundred years on, it’s preventing the owner putting in a swimming pool or a wine cellar. This is obviously not what it was intended for, but the legal ramifications remain the same.

 

Jarrod McCabe

There have been some test cases in terms of trying to have this type of covenant removed or amended. Can you take us through how this has played out?

 

Justin Lawrence

One of recent significance involved the city of Stonnington, where there was a restrictive covenant that prevented the removal of earth, clay, gravel or sand from the land. There was nothing mentioned about quarrying. The owners wanted to build a swimming pool, but were denied by the council based on this restrictive covenant. 

After an impasse, the owner took the case to the Supreme Court. Ultimately, the Court allowed them the pool. But the Court really analysed the restrictive covenant in detail. And warned it wasn’t opening the floodgates, stating that covenants would continue to be analysed based specifically on the particular language.

It’s an important warning for buyers, that covenants need to be closely analysed. 

 

Jarrod McCabe

It could also impact the re-sale and value of the property couldn’t it?

 

Justin Lawrence

Yes, buyers need to think through how a covenant might affect resale value in the future. How might a future buyer want to improve and add to the property? And would the covenant restrict this? Will it put off future buyers who want to extend, put in a pool or make other improvements? 

 

Jarrod McCabe

So what’s the takeaway advice for property investors?

 

Justin Lawrence

First and foremost, a buyer should go nowhere near an auction or a private sale without first having the contract checked out. 

Professional advice can help you spot a potential problem covenant and understand how it might impact your plans for the property and affect the value of the home in the future.

Try and envisage what you might have in mind in terms of development. And think about how any covenant might affect the resale value. 

At the end of the day buyers need to know what can and can’t be done on a prospective property.

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