Restrictive covenants and HMO use
When acquiring properties for use as Houses in Multiple Occupation (HMO), one has to pay attention to restrictive covenants for use as a private dwellinghouse or use as a single private dwellinghouse and various forms of such restrictive covenant. The meaning of such restrictive covenants and whether or not HMO use would breach them is tied to their precise wording and reference to caselaw.
Restrictive covenant indemnity insurance is the better part of valour
When faced with the risk of breaching a restrictive covenant through development or change in use (such as HMO use), the pragmatic approach for a buyer is to seek indemnity insurance against the risk of the beneficiary enforcing the restrictive covenant. Insurance does not solve the problem of the breach but provides cover against the risk of the consequences of such breach.
One could instead approach the beneficiary of the restrictive covenant for a deed of release or variation but the beneficiaries may refuse or demand a premium and they will have been alerted to the breach, thereby likely ruling out an offer of restrictive covenant indemnity insurance. Transaction timescales also work against exploring the option of negotiating releases especially where a portfolio of HMO properties is being acquired for investment.
There is also the option of applying to the Upper Tribunal (Lands Chamber) to modify or discharge a restrictive covenant which is what the property owners did in the case of Livett v Hennings [2022] UKUT 325 (LC).
Livett v Hennings
This Upper Tribunal case concerned restrictive covenants not to build more than 1 dwelling house on land and not to cause a nuisance to neighbours. Mr and Mrs Livett's property in Petts Wood and the surrounding houses were subject to such restrictive covenants. Mr and Mrs Livett received planning permission to demolish their house and to build 2 new houses and applied to the Upper Tribunal to discharge or modify the restrictive covenants to the extent that they prevented the redevelopment. Mr and Mrs Hennings and Mr and Mrs Murdin wished to oppose such application.
There was no dispute that Mr and Mrs Livett's property was burdened by the restrictive covenants which were imposed by a conveyance dated 22 October 1931. The restrictive covenants benefitted the residue of the Vendor's Estate which meant the unsold land still in the Vendor's hands. The properties owned by Mr and Mrs Hennings and Mr and Mrs Murdin respectively had been sold off prior to the restrictive covenants created by the conveyance dated 22 October 1931 so they did not form part of the residue of the Estate of the Vendor.
Building Scheme
The objectors therefore had to show that there was a building scheme. The effect of a building scheme is that all the landowners within a defined area have the burden of similar covenants and are able to enforce the covenants against each other irrespective of the date of sale of each plot by the original vendor. A building scheme has to meet various requirements:
1) It has to apply to a defined area;
2) The property owners purchased their properties from a common owner;
3) Each property is burdened by covenants intended to be mutually enforceable;
4) The limits of the defined area are known to each of the purchasers;
5) The common owner is bound by the scheme and must dispose of plots within the defined area on the terms of the scheme.
The effect of a building scheme is that it will bind future purchasers of land within the defined area.
Lack of defined area
The Upper Tribunal emphasized that the defined area must be identifiable so that purchasers of plots know that the original vendor has imposed what the Upper Tribunal called a "local law" on such area. The Upper Tribunal found that the objectors had failed to identify the defined area to which their claimed building scheme applied. The conveyance dated 22 October 1931 did not have an Estate Plan attached to it and other plans did not sufficiently identify the affected land.
The Upper Tribunal further found that the objectors had failed to prove that the restrictive covenants were for an estate-wide benefit rather than for the benefit of the Vendor's retained land. The fact that the houses in Petts Wood were subject to restrictive covenants to the same effect did not mean that there was a building scheme and the conveyance dated 22 October 1931 stated that the restrictive covenants were for the benefit of the Vendor and of the residue of its land.
Breakaway/Takeaway
When acquiring a property which is subject to a restrictive covenant which restricts its development or use, it is worth being aware that in order for a third party to enforce a breach of the restrictive covenant, it will have to show that it benefits from the restrictive covenant. If the restrictive covenant when imposed was to benefit an Estate and the party is claiming to benefit by virtue of a building scheme then the Estate must be a defined area. In my experience, it frequently is not possible to identify the Estate from the conveyance or transfer as delineation of the Estate on the conveyance or transfer plans is absent. In principle, this makes successful enforcement of the restrictive covenant less likely and is supportive of procuring restrictive covenant indemnity insurance.
Want to hear more from us? 
