Paul Smith, Associate in JB Leitch’s Real Estate department, provides timely comment and insight into enfranchisement and some of the potential issues surrounding positive covenants.

Why is it important to consider positive covenants and obligations on both voluntary and statutory freehold sales?

Notwithstanding the potential for existence of a valid ‘benefit v burden’ argument, the basic principle is that positive obligations benefitting an original covenantee (“Transferor”) do not bind successors in title to an original covenantor. (“Transferee”)

It is often the case accordingly, that the Transferor (or otherwise a party to the conveyance such as a management company) will require that on any future disposal, the acquiring party gives to it a direct covenant so as to render that party liable for continued performance of those positive obligations.

It is additionally common for the Transferor to protect itself further by seeking entry of a restriction against the title to the land to prevent registration from occurring in absence of compliance with those imposed requirements.

It is to be noted that a disposal of land does not release the Transferee (original covenantee) from liability for positive covenants given as part of the transfer, although it may be the case that the land being sold is the only asset of value that the Transferor possessed and hence security is lost in the event of a breach arising.

Drafting Precautions

Particular care should be taken in situations where the Transferor is to retain an interest in land that derives benefit from those positive obligations owed by the Transferee, and as a consequence requires continued performance beyond completion of a subsequent disposal. An example would be a contribution by owners of premises towards the maintenance of the common parts of an estate.

Whilst the preservation of rights on a future disposal of land must be considered at the drafting stage of any deed, a failure to adequately protect a Transferor frequently occurs with enfranchisement matters (that is for the purpose of this article, the acquisition of freehold land and not the extension of a leasehold interest) despite statute permitting for appropriate measures to be taken to safeguard its position.

Leasehold Reform Act 1967 (“1967 Act”)

Ongoing plans for reform will likely dictate that newly built houses will no longer be sold as leasehold properties, although there remain vast numbers of homeowners that had historically acquired interests of a leasehold nature, and that may seek to enfranchise.

Section 8 of the 1967 Act renders a freehold interest being acquired by a tenant of a house capable of being made subject to tenant incumbrances. This is that the Transferee as new freeholder of that land is capable of being bound by the Transferor to the equivalent extent concerning certain positive obligations, as they are presently under the provisions of their lease.

Leasehold Reform, Housing and Urban Development Act 1993 (“1993 Act”)

Similar provision exists where the right to enfranchisement is being exercised by a collective under the 1993 Act at Section 34, of more relevance however where the disposal does not result in the Transferor being relieved of all interest in land that derives benefit from those positive covenants.

In conclusion, the notion of enfranchisement is not to cause detriment to the Transferor or other plot owners within an estate. This is particularly important on more modern estates where an estate charge (for the maintenance of estate common parts) exists. Enfranchisement completed without considering the need to impose existing positive covenants in the transfer enabling the acquisition could see the creation of a void where the Transferee no longer owes the Transferor an obligation to contribute towards the maintenance of estate common parts as had previously been the case. This could create a shortfall in the estate charge budget for the freeholder/managing agent/other properties on the estate. Appropriate drafting as permitted by statute will avoid occurrence of this issue in practice.