Interpreting covenants: purchasers beware

Restrictive covenants are becoming increasingly popular in New Zealand, especially with the continued intensification of development and the increasing expansion of cities into rural areas through large subdivisions, and it is important that all landowners and purchasers understand them to ensure there is nothing that fetters their plans for the relevant property. A restrictive covenant refers to a covenant imposing limits on how land can be used. Such covenants are frequently used by property developers to maintain a certain quality or character of neighbourhood in a subdivision. Common examples include restricting the number of houses or storeys that can be built on the land, or imposing certain standards as to quality of materials used to construct buildings on the land. Historically, there may also be existing covenants that prevent intensification and/or certain uses.

A recent case[1] in the New Zealand Court of Appeal illustrates the difficulties that may arise over the interpretation of a restrictive covenant, serving as a useful reminder of the importance of a well-drafted covenant that clearly outlines the obligations of the landowners involved.

Key Facts

In 1995, a large section of rural land comprising six original lots (Original Section) was made subject to restrictive covenants prohibiting the erection of any building “other than a new …single dwelling house and such farm outbuilding or ancillary buildings as are usual and reasonable for the type of rural use of the land in the subdivision [to ensure] a pleasing and aesthetically compatible appearance.

A portion of the Original Section was purchased and subsequently subdivided into seven new lots. The purchaser of this section constructed an equestrian facilities building on one of the lots, and also made plans to build a dwelling house on that same lot. The purchaser intended to sell the other six lots for residential purposes.

The vendor of the land (who also remained a neighbour whose property benefitted from the restrictive covenants) argued that the covenants imposed a limit of a single dwelling house per original lot, and applied for an injunction to prevent the purchaser from selling the six new lots for residential purposes. The vendor also argued the equestrian facilities building was not an ‘outbuilding’ or ‘ancillary building’, and its scale and style did not blend in with the buildings in the subdivision.

Decision

1. Did the covenants impose limits on the number of dwelling houses that could be built on the land?

The Court of Appeal ruled that when looking at the covenants as a whole, “single” referred to the nature and style of the dwelling house, rather than imposing a numerical limit. The covenants were concerned with the quality of the buildings, rather than quantity. This was clear from the fact that the covenants required a dwelling house to be new, conform with the rural area, and adhere to certain standards of quality as to the buildings and land use. The court noted that if the covenants were intended to impose a numerical limit, one would expect the phrase “single new …dwelling house”, rather than “new …single dwelling house”. This illustrates how the order of words in a sentence can significantly affect the meaning of the sentence.

2. Was the equestrian facilities building an ‘outbuilding’ or ‘ancillary building’ usual and reasonable for the type of rural use of the land in the subdivision?

The High Court had previously found that the equestrian facilities building was not an ‘outbuilding’ or ‘ancillary building’ as it was not subordinate and separate from a main building. However, an injunction was not granted due to the purchaser’s plan to build a dwelling house next to the equestrian facilities building. This finding was not appealed.

The Court of Appeal found that the High Court erred in failing to compare the size and design of the equestrian facilities building, as against the other buildings within the subdivision. The court ruled that the covenants required a building to be firstly, not unusual for a rural property, and secondly, to be of a similar nature, design or style as the other buildings within the subdivision. Therefore, the question required an assessment as to consistency within the subdivision, not just with the rural landscape. This aspect of the appeal was allowed.

Caution Required Going Forward

At the start of this article, we mentioned that covenants are becoming increasingly popular. Litigation on covenants (and easements) is also becoming more common. To put this into perspective, in the 10 years between 2008 and 2018 the Courts dealt with approximately 64 cases covering covenants and easements (including appeals), whereas in the previous 10 years the number was approximately 22. A significant number of the recent cases have gone to the Court of Appeal and Supreme Court.

The law is continuing to develop – as well as the Taylor v Small case, the Green Growth case[2](which related to an ‘open space’ covenant) provided good guidance on what is admissible when determining the meaning behind language used, and recent reforms of the Property Law Act are likely to mean Courts have wider discretion in relation to applications to modify or extinguish existing easements and covenants – but ultimately it would be preferable for all parties involved not to have to rely on a Court decision to determine the extent and/or enforceability of covenants they are subject to.

A land covenant binds future owners and will remain on a title until all affected landowners and interest-holders agree to its removal, or the court orders its extinguishment. When purchasing a property, this makes it essential to check the title for any land covenants and obtain legal advice to ensure you fully understand what the covenants mean and how to comply with them. It also makes it essential to ensure that any new covenant is well-drafted, leaving no room for ambiguity.

If you require assistance with a current covenant, or are contemplating entering into a new covenant, our Property team would be delighted to help.

Footnotes

 1 Taylor v Small [2019] NZCA 152

2 Green Growth No. 2 Limited v Queen Elizabeth The Second National Trust [2018] NZSC 75

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