One of the changes in the LTA will be to allow the registration of covenants “in gross” against the title to a property. A covenant in gross is a promise by the owner of a property for the benefit of another person (or category of persons) who does not need to be the owner of another property.
Generally, the existing law only allows the creation of covenants regulating activity on land for the benefit of neighbouring land (“land covenants”). A common example of land covenants are the covenants registered against residential sections which impose certain minimum standards in relation to the type of dwellings which can be built in the subdivision. The land covenants are for the benefit of the properties in the subdivision rather than for the benefit of particular owners. While a person owns the property they will be subject to and receive the benefit of the land covenants. Once a person sells their property they will no longer be subject to or be able to enforce the land covenants.
In contrast, a covenant in gross can be for the benefit of another person who does not own neighbouring land. An example is a restraint of trade provision in relation to a property of a third party (for example, McDonalds may have a covenant registered in its favour restricting the use of land for a fast food business). Another example is a covenant for the benefit of an incorporated society requiring the land owner to become a member of the incorporated society (for example, a residents association) and to pay annual levies to manage and maintain the upkeep of communal facilities in a residential subdivision (for example, a tennis court).
The inability to register a covenant in gross has meant that other mechanisms have had to be used to meet the objectives noted above. These mechanisms include the registration of encumbrances against titles which causes difficulties for banks and other parties having an interest in the land. For encumbrances which are already in place, the new Act provides the opportunity for these to be replaced by covenants in gross if the circumstances allow this.
From 1 November 2018, the ability to register covenants in gross will be a change welcomed by lawyers, banks and their clients.
This article is current as at the date of publication and is only intended to provide general comments about the law. Harkness Henry accepts no responsibility for reliance by any person or organisation on the content of the article. Please contact the author of the article if you require specific advice about how the law applies to you.