Posted on June 5, 2023 by Frances Tse and Megan Hawley 4

Do positive covenants run with the land?

A recent case in the NSW Court of Appeal has considered whether a positive covenant for the payment of money that is registered on title runs with the land and is binding on successors in title.

General rule in relation to positive covenants

Covenants that are registered on title to land can be restrictive in nature (that is they restrict the use of the land in some way) or positive (that is they require the owner of the land to take action to do something).

At common law, the general rule is that the burden of a positive covenant is only enforceable against the  covenantor that is party to that positive covenant, and not enforceable against his or her successors in title. The reasoning behind this relies on the common law principle of privity of contract where a person cannot be made liable to a contract unless they were a party to it.

It is important to note that in NSW, the Conveyancing Act 1919 (Conveyancing Act) has amended this position in respect of some types of positive covenants, namely a positive covenant for maintenance and repair imposed under s88BA and public positive covenants imposed by prescribed authorities under s88D and s88E. Pursuant to those sections and s88F of the Conveyancing Act, those types of positive covenants run with the land.

The particular positive covenant that was considered by the Court of Appeal in this case was not one of those types of positive covenants.

Facts of the case

The case involved two neighbouring properties, No. 181 owned by Aust-One Investments Pty Ltd (Aust-One) and No. 183-185 owned by New World Investments Pty Ltd (New World). Both properties contained retail buildings.

A Transfer document was registered by the previous owners of No. 181 and 183-185 on title to both of those lots. The terms of that Transfer included the granting of:

• an easement burdening No. 183-185 (Servient Tenement) and benefitting No. 181 (Dominant Tenement) for a right of way and the right to use stair landings and amenities on the Servient Tenement (Easement),
• a positive covenant requiring the owner of the Dominant Tenement and their successors in title to pay to the owner of the Servient Tenement 1/4 of the gross rentals received by the owners of the Dominant Tenement of the shops erected on the Dominant Tenement (Payment Covenant).

The Easement was necessary in order for access to several of the retail shops on the Dominant Tenement.

After purchasing No. 181, Aust-One complied with the Payment Covenant for 17 years but ceased paying after 6 December 2020. Aust-One then commenced proceedings seeking a declaration that the Payment Covenant was not a burden that ran with the land.

Supreme Court decision and the ‘conditional benefit principle’

The Supreme Court of NSW found in favour of New World (that the Payment Covenant was enforceable against Aust-One) on the basis that the ‘conditional benefit principle’ applied as an exception to the general rule that positive covenants do not bind successors in title.

This is a principle accepted in the UK that can be broadly understood to be that where a party chooses to take a benefit from a conveyance, they must accept any burden in the same conveyance.

In Davies v Jones [2010] 1 P & CR 22 a UK court has more particularly identified a 3-limb test to determine when the ‘conditional benefit principle’ applies to make a positive covenant run with the land:

1. the benefit and burden must be conferred in or by the same transaction,
2. the enjoyment of the benefit must be conditional on or reciprocal to the imposition of the burden,
3. the person on whom the burden is imposed must have or have had the opportunity of rejecting or disclaiming the benefit, not merely the right to receive the benefit.

The 3-limb test from Davis v Jones had not previously been applied in Australia. However, Robb J in the Supreme Court considered that it had been accepted as part of the law in the Australia and applied it, finding that all 3 tests were satisfied on the facts of the case.

In particular in relation to the second limb of the test, Robb J considered that the enjoyment by Aust-One of the easement was conditional on compliance with the Payment Covenant. He came to this conclusion on the basis that the arrangement in the Transfer created a right for Aust-One to participate in a single functioning arcade which enhanced the commercial value of No. 181 and the Payment Covenant was ‘quid pro quo’ for the continuing enjoyment of that right.

Court of Appeal

The Court of Appeal has not definitively decided whether or not the ‘conditional benefit principle’ as set out in the 3-limb test in Davies v Jones applies in Australia. However, it held that if it was to be accepted, then the principle should be understood more narrowly as set out by Sackville AJA in GM Amalgamated Investments (Dulwich Hill) Pty Ltd v Mills [2014] NSWCA 202 as follows (our emphasis):

“The relevant principle is that where an easement is created subject to a condition, the burden imposed by that condition is enforceable against the owner for the time being of the dominant tenement, if the condition is relevant to the exercise of the dominant owner’s rights under the easement: Rhone v Stephens at 322; Fanigun Pty Ltd v Woolworths Ltd [2006] 2 Qd R 366; [2006] QSC 28; [2006] 2 Qd R 366 at [98] (Mullins J)… Whether an obligation imposed on the owner of the dominant tenement is a condition of the rights conferred by the easement on the owner of the dominant tenement or is an independent obligation is a question of construction.”

In other words, the Court of Appeal found that whether or not the ‘conditional benefit principle’ applies will depend on the construction of the terms of the instrument.

The Court of Appeal considered the terms of the Transfer and found that:

“Neither the terms of grant of the easements nor the terms of the payment covenant expressly condition the exercise of the rights conferred by the easements on compliance with the payment covenant…The transferee’s right to exercise the right of footway and to use the amenities is not expressly qualified by reference to compliance with the payment covenant.

…Having regard to the nature of the conditional benefit principle as an exception to the general rule that positive covenants do not bind successors in title, clearer language would be required to reach that conclusion.”

Accordingly, the Court of Appeal allowed the appeal and declared that the Payment Covenant did not run with the land.

Conclusion 

The above case will be of interest to any person seeking to negotiate an easement containing a positive covenant with their neighbour that is not a positive covenant under s88BA, s88D or s88E of the Conveyancing Act. Care must be taken to ensure that the terms clearly identify the conditionality or reciprocity between the benefit of the easement and burden of the positive covenant.

The Court of Appeal case is Aust-One Investment Pty Ltd v New World Investments Pty Ltd [2023] NSWCA 22 and can be found here.

If you would like to discuss any aspect of this article, please contact Frances Tse on (02) 8235 9711.