Inconvenient Covenants and How to Remove Them – A Cautionary Tale for Developers

Land covenants are commonly used in New Zealand to protect a party’s underlying interests in land. The Supreme Court has recently provided guidance for landowners and developers on how the Courts will treat potentially irrelevant covenants, and how they can be extinguished or modified by the Court.

Summary

Section 317 of the Property Law Act 2007 (“PLA”) contains the legal process for modifying or removing land covenants.  A person bound by a land covenant can apply to the Court to modify or extinguish it.  In short, even when it may seem that a land covenant is no longer relevant, the Courts will be reluctant to sweep it aside.  In the recent December 2020 Supreme Court decision of Synlait Milk Ltd v New Zealand Industrial Park Ltd, Synlait would be ultimately successful in its application under section 317 of the Property Law Act 2007 (“Act”). However, this was a costly and time consuming exercise, to the point that Synlait ultimately settled the matter out of Court to protect its new $250 million factory, despite having gone through a full Supreme Court hearing.  This case presents a cautionary tale on the difficulties of removing land covenants.

History

Synlait entered into a conditional contract in February 2018 to purchase 28 hectares of land from Stonehill Trustee Limited (“Stonehill”). The contract was conditional upon Stonehill removing land covenants which restricted use of the site to grazing, lifestyle farming and forestry. 

The land covenants were 20 years old and ran for 200 years. The land covenants had been put in place to protect New Zealand Industrial Park Limited’s (“NZIPL”) ability to develop a quarry in the future. Removing the land covenants would make it more difficult for NZIPL to apply for a quarry resource consent on Stonehill’s land.

Stonehill attempted to negotiate with NZIPL for the removal of the land covenants but was unsuccessful.

The land had been rezoned from rural to industrial land in 2012 and notably there were other industrial activities nearby, including another dairy plant. There were also a number of planning changes to the Pōkeno area which changed the Synlait land to “Industrial 2” land. Grazing, lifestyle farming and forestry were “non-complying activities” under “Industrial 2” zoning which compromised what the land covenants had intended to achieve. NZIPL’s land was still zoned to allow for discretionary quarrying.

Court Decision and Appeal Grounds

A High Court decision in November 2018 removed the land covenants, and Synlait consequently took title of the land and began building their milk factory. NZIPL succeeded in overturning the High Court decision in the Court of Appeal, with the Court of Appeal finding that despite the changes in zoning and neighbourhood, NZIPL should continue to enjoy the same benefits from the land covenants.

Synlait appealed the May 2019 Court of Appeal decision. The key ground being under section 317 (d) of the PLA, and the Court of Appeal’s assessment of whether there has been “substantial injury” to entitled parties.

In short, Synlait sought to extinguish the land covenants on their burdened land. Alternatively, it sought to modify the land covenants to allow development of the burdened land.

NZIPL submitted that Synlait’s factory would make it harder for NZIPL to obtain quarrying resource consent, thereby “substantively injuring” NZIPL.

Supreme Court Analysis

Section 317 of the PLA has a number of grounds that can be considered when modifying or extinguishing an easement of covenant. The categories considered by the Supreme Court were:

317(1)(d): Would there be substantial injury (from the milk factory)?

For an injury to be substantial it must be “real, considerable, significant as against insignificant, unreal or trifling.” The Supreme Court was satisfied that modification of the land covenants would not substantially injure NZIPL. This was in part because there were already two milk factories in the area, meaning a further milk factory would not make much difference. There was also uncertainty as to whether NZIPL would ever actually develop a quarry.

317(1)(a)(ii): Does the change in neighbourhood justify the removal/modification of the land covenants?

The second ground relied upon was that modification of the land covenants was justified due to changes in the neighbourhood. The Supreme Court was satisfied this ground was made out due to a significant increase in the population of Pōkeno, and there had been significant commercial and residential development.

317(1)(b): Do the land covenants impede reasonable use of the burdened land?

When the land covenants were entered into, it was reasonable for the burdened land to be restricted to grazing or forestry operations. The reasonable use of the burdened land had changed because of the changes in zoning and the neighbourhood generally. 

The Supreme Court was satisfied that the changes were not foreseeable when the land covenants were entered into. This in turn meant that the land covenants, appropriate at the time, now impeded the reasonable use of the land to a greater extent. The Supreme Court disagreed with the Court of Appeal, and held the land covenants were an impediment on the land.

Key Learnings

Land developers should treat land covenants with an appropriate amount of respect before looking to challenge them, even if the covenants appear no longer relevant.  There has been a substantial increase in the numbers of applications to modify covenants in recent years, and with the increasing pressure on land use and availability, that trend is likely to continue.  Although the Courts look like they are more willing to modify or remove covenants, the process is still slow, and as Synlait found out, extremely costly.

Andrew is a Solicitor in our Dispute Resolution Team and can be contacted on 07 958 7447.