Don't underestimate the power of covenants over land

When purchasing or developing property, it always pays to treat covenants with respect.  Even when it may seem that a covenant is no longer required because of development and growth around the property which appears contrary to the purpose of the covenant, the courts will be slow to sweep it aside.  This was the outcome in New Zealand Industrial Park Ltd (NZIPL) v Stonehill Trustee Ltd (STL).[1]

 STL had purchased land and was on-selling it to Synlait, which began building a dairy plant.  The land though was subject to a 20-year old covenant in favour of NZIPL which prevented this.  NZIPL owned neighbouring property that could be used for a quarry.  The covenant was intended to protect NZIPL in the event it decided to operate a quarry.  It provided for two things: one, part of STL’s land could only be used for grazing, lifestyle farming or forestry; and two, STL could not object to any proposed quarry on NZIPL’s land.  The covenant was to last for 200 years. 

 However, STL took the view that, given the extent of recent surrounding development, new zoning, and that there had been no quarry on NZIPL’s land for the 20 years since the covenant was registered, the covenant was no longer required.  STL applied to the High Court to have it removed.  NZIPL protested.

 The High Court held that in the circumstances the covenant could be removed.  NZIPL appealed this decision to the Court of Appeal (CA).  The CA took a different view, overturning the High Court’s decision and holding the covenant should remain.

 The CA noted that covenants play an important role in providing property owners with greater or more focused protection than planning controls.  The courts should not remove this protection simply because it inconveniences other owners of property.  The CA had to consider, and answered, the following questions:

  • Had there been a change in the nature and extent of use of the properties to which the covenant applies?  No, NZIPL still had the opportunity to operate a quarry and STL’s use of the land – a dairy plant – since the covenant was registered was the very thing the covenant prevented.  While the zoning of both properties had changed over time, this didn’t prevent a quarry and the purpose of the covenant was to protect from potential zoning changes.

  •  Had there been a change in the character of the surrounding area?  While there had been significant residential growth and industrial development in the neighbourhood, this did not increase the burden on STL’s land imposed by the covenant.  The developed, surrounding land was also never subject to the covenant.

 The CA also considered there were no other relevant circumstances to remove the covenant, refusing to entertain STL’s argument that because the dairy plant could be built on part of STL’s land that wasn’t subject to the covenant this meant the covenant should be removed. Further, given the covenant was to last for 200 years the CA found that it would have been foreseeable that its terms would provide relatively increased restriction on land use if zoning changed or zoning restrictions were relaxed in the future. 

 Finally, while zoning changes may have made it more difficult for NZIPL to obtain consent to operate a quarry, it didn’t prevent it entirely, and the CA found that NZIPL ultimately wanted to quarry their land.  The dairy plant could impede that development.  So, to remove the covenant would substantially injure NZIPL’s property rights.

 Importantly, for anyone considering removing or ignoring a covenant, bear in mind it’s not unusual for covenants to specify that the party who has the burden of it has to pay all the enforcement costs of the party who has its benefit. That was the case here and the CA awarded indemnity costs in favour of NZIPL.  That meant STL would not only have to pay all its legal and other expert costs, but all NZIPL’s legal and other expert costs as well.  These costs would not be insignificant.

[1] New Zealand Industrial Park Limited v Stonehill Trustee Limited [2019] NZCA 147.