Land covenants: the ability to amend to reflect modern developments

This article explores the legal principles surrounding land covenants, focusing on a case where a developer sought to modify a land covenant that restricted the number of dwellings on their property. The High Court considered the application under sections 316 and 317 of the Property Law Act 2007, which allow courts to modify or extinguish land covenants if certain criteria are met. The Court ultimately agreed to modify the covenant, determining that no substantial injury would result to neighboring property owners and the change reflected modern development demands.

Land covenants

A land covenant is a legal promise that imposes a 'burden' or 'benefit' on land. A land covenant imposing a burden will require a restriction, such as a limit on the number of dwellings allowed to be built on a property. A land covenant that 'benefits' land will require action be taken rather than preventing it.

As land covenants are a legal promise, they are legally enforceable and involve costly penalties if breached.

The case: Aztek Projects Ltd v Matthews [2024] NZHC 1293.

In 2017 the developer purchased bare land zoned as Rural Countryside Living Zone near Warkworth, subsequently subdivided and then built multiple dwellings on their land. It was later brought to their attention the property contained a land covenant registered in 2004 restricting the plot to only one dwelling.

After unsuccessfully seeking the consent of other affected owners to remedy the situation, the developer took the matter to the High Court to regularise the first subdivision, permit the second subdivision and allow 3 dwellings on one head title instead of one. In situations such as these the Courts have the power under sections 316 and 317 of the Property Law Act 2007 to modify or even extinguish land covenants.

In this case, the developer was successful in their application the Court accepting that whilst the land was zoned Rural Countryside Living Zone the land in question was surrounded by residential housing and the advent of the new Puhoi to Warkworth motorway was expected to further increase demand for residential development.  The Court also considered the area was likely to be subject to a zone change in the future and that recent legislative changes indicated more intensive development was likely in future.  A recent decision of this same Court in Sidwell Developments Ltd Partnership v Top Dream Developments Ltd [2024] NZHC 899 held that an ongoing development of the wider area should not impede the reasonable use (i.e. development) of the burdened land and that the land covenant should be modified.

As a word of caution it is important to note this case does not signify a green light to dismiss the importance of land covenants, they must still be approached with care.  The cost of taking such an application to Court is high and you are not always guaranteed to succeed. If you are a developer looking to subdivide land, it is vital you seek legal advice to ensure the land you are buying is free of any land interests that may impede plans.

Background

In 2017 Aztek Projects Limited ("APL") purchased a plot of land with the intention of subdividing it and developing it. They subdivided it into two separate plots of land, "a" and "b" and built dwellings on each plot. They then made plans to further subdivide lot "b", creating a lot "c". The intention was that lot "c"  would have another dwelling on it.

For unrelated reasons, APL changed solicitors while the plans for the second subdivision were being prepared. Their new solicitors swiftly let them know that there was and always has been a land covenant over the head title. This land covenant restricted subdivision and more than one dwelling being on each property.  

APL immediately halted all plans relating to the second subdivision. 

APL contacted the owners of the other affected titles to request the covenant be modified by consent and were unsuccessful. Auckland council advised they did not oppose the modification. 

The covenant 

The covenant on the head title stated that 

"The Covenantor shall: 

1. Not erect on the Lot any building other than a single private dwelling house designed for occupation as a single family home whether or not in conjunction with a Minor Residential Unit as that term is defined by the District Plan of the Relevant Authority together with a garage and/or other domestic outbuildings customarily associated with a private dwelling house." 

Under this covenant, where there is a breach an owner of any of the other burdened titles has the right to make a written demand to the party in breach requiring payment of liquidated damages of $100 per day for every day that the breach continues. 

The application

Sections 316 and 317 of the Property Law Act 2007 give the Court power to modify or extinguish a covenant if satisfied that one or more of the grounds under s 317(1) are met. 

Section 316 outlines the right to make an application. Section 317(1) outlines the criteria that must be met for an application to be considered.

APL as the burdened owner brought forward a section 316 application on the following grounds: 

1. there had been a change in the character of the neighbourhood (s 317(1)(a)(ii))
2. the continuation of the covenant would impede the reasonable use of the land different from that which could reasonable have been foreseen by the original parties to the covenant at the time of its creation. (s 317(1)(b))
3. the proposed modification or extinguishment will not substantially injure any person entitled (s 317(1)(d))

Section 316 applications require a two-staged approach as outlined in Synlait Milk Ltd v New Zealand Industrial Park Ltd [2021] NZSC 179 at [67]. 

First, the Court needs to determine if one or more of the grounds in section 317 are made out. 

Second, if the first stage is accepted, then the Court needs to determine whether the discretion to extinguish or modify should be exercised. 

Result

The Court accepted that all 3 grounds were made out. 

On sections 317(1)(a) and (b), the Court agreed that "since the creation of the covenant there has been a change in the character of the neighbourhood" and "the continuation of the covenant in its existing form would impede the reasonable use of the burdened land". 

Section 317(1)(d)'s test of "no substantial injury" was also analysed in more detail. As stated above, the test is that the proposed modification or extinguishment "will not substantially injure any person entitled". Under the Property Law Act 2007, a "person entitled" is any owner or occupier of the land who was entitled to enforce the covenant.  For the injury to be "substantial" it must be "real, considerable, significant ... It must have present substance, rather than merely being theoretical or fanciful". 

The court found that if this covenant were extinguished (for APL only):

1. there would be no reduction in the values of the respondents' properties,
2. traffic along the access road would not be affected, and
3. there would be no risk of the neighbourhood losing its rural character. 

Therefore, there was no risk of substantial injury to any of the entitled persons. This finding was also attributed to the fact that the size of APL's Head Title was over two hectares and each of the other ten properties originally affected by the covenant were about one hectare. 

Accordingly, Andrew J found there was no good reason based on the evidence provided to exercise discretion to reject, and the application was granted.

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If you have any enquiries relating to this topic or article, please contact:

Maree Adams

Email: madams@mcveaghfleming.co.nz

DDI: 09 306 6720

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