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Focus: Suspending restrictive covenants – developers beware!

10 October 2011

In brief: A recent decision of the High Court of Australia is a good reminder of the importance of complying with all the procedural requirements of the relevant planning instruments when councils attempt to override private restrictive covenants registered on land titles in New South Wales. Partner Nicholas Cowie (view CV) and Lawyer Judith Hammerschlag explain.

How does it affect you?

  • There is no statutory compensation regime when private rights are suspended in this way, so courts will interpret broadly those parts of the legislation designed to protect property owners with the benefit of regulatory instruments (such as restrictive covenants) to ensure that all procedural checks and balances have been followed before those private rights are overridden.
  • Buyers and developers of land in NSW relying on planning instruments which override private covenants need to investigate early in the planning process whether the procedural requirements under the Environmental Planning and Assessment Act 1979 (NSW) (the EPA) relating to the suspension of covenants have been met.

Restrictive covenants

A restrictive covenant is an agreement between two or more parties (usually registered on the title) that attempts to restrict the use of land.  For planning purposes, a restrictive covenant is included in the class of 'regulatory instruments' referred to in the EPA.

Despite contractual arrangements, and their registration on a title, regulatory instruments may be suspended by virtue of section 28(2) of the EPA, which says that for the purposes of 'enabling development to be carried out, an environmental planning instrument may provide that, to the extent necessary to serve that purpose, a regulatory instrument specified in that environmental planning instrument shall not apply to any such development.'

An environmental planning instrument seeking to have this effect must be approved by the Governor under s28(3) of the EPA, as it overrides potentially valuable private rights without statutory compensation.

In this case – Cumerlong Holdings Pty Ltd v Dalcross Properties Pty Ltd [2011] HCA 27 – the High Court of Australia reversed the decision of the New South Wales Court of Appeal (the NSWCA), by holding that amendments made to clause 68(2) of the Ku-ring-gai Planning Scheme Ordinance (the ordinance) by the Ku-ring-gai Local Environment Plan No 194 (LEP 194) were not effective, as the Governor's consent had not been obtained.  If valid, these amendments would have had the effect of allowing development of a hospital on land that was encumbered by a private restrictive covenant that prohibited hospital use. 

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Factual background

The restrictive covenant

Dalcross Holdings Pty Limited (Dalcross Holdings) operated a private hospital on land in Killara, on Sydney's north shore, and wanted to extend that activity to an adjoining lot (Lot 2). 

Since 10 November 2003, Lot 2 had been burdened by a restrictive covenant which benefited an adjoining parcel of land (Lot 3).  The restrictive covenant stated that no part of Lot 2 was to be used for the purpose of a hospital.

The planning instruments

Clause 68(2) of the ordinance operated to suspend restrictive covenants in the Ku-ring-gai municipality in order to facilitate development, unless the restrictive covenant affected lots in zones which were specifically excluded by clause 68(2).  Prior to May 2004, Lot 3 was in a residential zone that was excluded from the restrictive covenant suspension provisions.

In May 2004, Lot 2 was rezoned by LEP 194 to a zoning which was not excluded from the restrictive covenant suspension provisions in the ordinance.  (Possibly by oversight, however, the Governor's consent to that change was not obtained.)

On the basis that the restrictive covenant burdening Lot 2 was suspended by LEP 194 and the ordinance, Ku-ring-gai Municipal Council, in 2008, approved a development application by Dalcross Holdings for an extension of the hospital use onto Lot 2.

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The NSWCA decision

Adopting a very technical approach, the NSWCA determined that LEP 194 was not caught by ss 28(2) and (3) of the EPA because it was the previous ordinance that contained the restrictive covenant suspension, not LEP 194 itself, even though LEP 194 cross-referred to the ordinance. Accordingly, it was held that the development consent for a hospital on Lot 2 was valid despite the terms of the restrictive covenant, because the Governor's consent was not required for LEP 194.

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The High Court decision

The High Court took a much broader approach to the interpretation of s28(2), holding that LEP 194 was an environmental planning instrument which, 'by its engagement with the provisions of the Ordinance, including clause 68(2)'1  was caught by s28(2).

The High Court said the section 'should be construed generously and liberally because [it is] protective of interests of those whose property rights may be damaged by an environmental planning instrument.'

Accordingly, as the Governor's approval under s28(3) of the EPA had not been obtained, the suspension of the restrictive covenant was ineffective, the development consent was invalid and the owner of Lot 2 was restrained from using or permitting Lot 2 to be used as a hospital or any ancillary or associated purpose that was contrary to the restrictive covenant.

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Conclusion

The High Court's judgement emphasises that the lack of a statutory compensation regime when private rights are overridden by planning instruments means that those parts of the legislation designed to protect the interests of private property owners will be interpreted broadly to ensure that statutory checks and balances are properly applied.

Developers seeking to rely on planning instruments that suspend restrictive covenants should make the necessary due diligence enquiries very early on in the planning process to ensure that all procedural requirements relating to suspension of restrictive covenants have been strictly complied with. This is necessary in order to ensure that any development consent issued in reliance on the suspension of a restrictive covenant will not be subject to challenge on this ground.

Footnotes
  1. Cumerlong Holdings Pty Ltd v Dalcross Properties Pty Ltd [2011] HCA 27 at 23.

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