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Perpetuities

This page contains a practice note on the new Perpetuities and Accumulations Act 2009; and an article on the "old" law in relation to instruments taking effect prior to 6 April 2010. There is also a case report on Cosmichome Limited v Southampton City Council [2013] EWHC 1378 (Ch) where the court held that the relevant start date for the perpetuity period was when the option came into existence and the interest in land arose.


Perpetuities and Accumulations Act 2009

A short practice note on the legislation

Perpetuities and Accumulations Act 2009

This Act received the Royal Assent on 12 November 2009. The effect of the Act is not retrospective in relation to property transactions, but any instrument taking effect on or after 6 April 2010 will be caught by it. The meaning of “taking effect” is not defined, and it is possible that difficulties may arise in connection with instruments such as options and rights of pre-emption.

Application generally

Section 1(1) of the 2009 Act states:
    "The rule against perpetuities applies (and applies only) as provided by this section."
The remainder of s1 of the Act then deals with trusts, wills and powers of appointment only. This means that the vast majority of property transactions (including options, rights of pre-emption and easements) will no longer be affected by the rule against perpetuities, so far as instruments taking effect on or after 6 April 2010 are concerned.

There are, however, certain statutory restrictions applicable to leases, which although they appear similar to perpetuity restrictions, will continue to apply as they are unaffected by the 2009 Act - see below.

The old perpetuity rules will still apply to property transactions where the instrument came into effect before 6 April 2010. Therefore it will still be necessary to check whether past transactions complied with those rules.

Where a contract pre-dates 6 April 2010 but annexes an agreed form of completion document, and the completion date will be on or after 6 April 2010, it may be appropriate to consider whether the form of the completion document should be changed to remove unnecessary perpetuity-related drafting. Where the document is not changed, its effect will depend on how it is drafted.

Where there is a defined perpetuity period (i.e. the exercise of an easement is restricted to “the perpetuity period” and this is separately defined as being, say, 80 years) then the wording will probably simply be ignored as redundant, and the easement will apply in respect of things whether or not installed during the perpetuity period. Where, however, the easement refers to service media installed within a period of 80 years from the date of the relevant document, but there is no reference to perpetuity period, the position is unclear, and it is possible that the restriction to 80 years will remain.

Precedent documents will also need to be reviewed and references to perpetuity deleted. Where a document (such as an option) is to be limited to 21 years in future, it may be prudent to state expressly that this is intended to be a contractual limitation (rather than a misguided attempt to comply with the rule against perpetuities).

Leases

There are two statutory restrictions on leases, which will continue to apply despite the 2009 Act:
  • A lease cannot be granted for a term that will start more than 21 years after the date of lease completion (s149(3), Law of Property Act 1925) and, if granted, will be void. This rule applies to any lease granted on or after 1 January 1926 that reserves a rent or premium. The rule also applies to any agreement to grant such a lease and any option to call for such a lease. However, case law has established that the rule does not invalidate contracts for the grant of a lease at a future date (no matter how far in the future) so long as the lease, when granted, has a term that commences within 21 years of completion.

  • A contract made on, or after, 1 January 1926 to renew a lease for a period exceeding 60 years from termination of the existing lease will be void (section 145 and paragraph 7(2), Schedule 15, Law of Property Act 1922). The statutory wording is ambiguous and there are no reported cases on this section, so it is impossible to be sure how widely this provision applies.
In addition, a perpetually renewable lease will be converted into a lease for 2000 years (paragraph 5, Schedule 15, Law of Property Act 1922).

It has been suggested that the repeal of these provisions might be dealt with by an Order under the Regulatory Reform procedure without the need for a further statute, and this would be dealt with by the Ministry of Justice.


Perpetuities

A reminder of the old law

The rules set out in the 1964 Act remain relevant for instruments coming into effect on or after 16 July 1964 but before 6 April 2010. These include:

Options

A call option must be exercised within 21 years from the date of grant (or, in the case of an option for the tenant to acquire his landlord’s reversion, within one year after the determination of the lease), otherwise it will breach the rule against perpetuities and so will become void. In the case of an option to renew a lease, however, the rule against perpetuities does not apply. Note also that the 21 year period, created by the 1964 Act, only applies to an option ‘to acquire for value’ any interest in land; an option to acquire land for nil consideration is subject to the pre-1964 Act with no statutory period and no possibility of ‘wait and see’.

It appears that a put option is not subject to the rules against perpetuities.

Rights of pre-emption

A right of pre-emption granted on or after 16 July 1964 but before 6 April 2010 has a maximum perpetuity period of 21 years. In Taylor v Couch [2012] EWHC 1213 (Ch) this was held to be from the date of grant. However, in Cosmichome Limited v Southampton City Council [2013] EWHC 1378 (Ch) the court disagreed and held that the relevant start date for the perpetuity period was when the option came into existence and the interest in land arose. For a fuller note on this case see below.

Sale contracts

Generally, the view has been that the perpetuity rules are not applicable to sale contracts. The buyer has an immediate equitable interest in the property from the date of exchange, which vests when the sale is completed. Completion is usually set for a specified date that is not too far away. If no date is specified, it will be implied as being within a reasonable time. There is therefore no breach of the perpetuity rules.

There is uncertainty over whether the perpetuity rules would apply to a sale contract that specified a very delayed completion date (over 21 years, which would be the default position for the length of the perpetuity period). There is no case on this point.

Overage provisions

An obligation to pay overage may be included in a contract, a transfer, a lease or a standalone deed. In all of these it amounts only to a contractual promise to pay money, and so should not fall under the common law perpetuity rule.

Nonetheless, some practitioners take the view that the perpetuity rule does apply to overage payments and will therefore restrict the period to 80 years or less. There is no authority for this approach.

Easements

Where an easement (whether granted in a transfer, a standalone deed of grant, or a lease) confers an immediate right to exercise the easement, there is no perpetuity issue, either at common law or under the 1964 Act.

Where, however, an easement is granted where the right can only be exercised at a designated point in the future (such as a right to use roads or service media that have not yet been constructed), then the rule against perpetuities does apply. Accordingly, the rights cannot take effect unless the relevant item is constructed within the perpetuity period, which cannot be longer than 80 years from the date of the relevant document.

Section 162(1)(d) of the Law of Property Act 1925 states that the perpetuity rules do not apply to a right of entry onto land, or to other easements to exercise mining rights, to sell and remove timber, to carry out repairs, alterations or additions to adjoining land or buildings, or to construct, alter, repair and maintain service media. The section has been given a very restrictive meaning in case law, in particular Dunn v Blackdown Properties Ltd [1961] Ch 433, in that it only allows ancillary easements to be exercised outside the perpetuity period. These easements must have been conferred as ancillary to a substantive right or interest, which itself satisfies the perpetuity rules.

Restrictive covenants

Although restrictive covenants create equitable interests in land that are (subject to appropriate registration) binding on third parties, the conventional belief is that they lie outside the perpetuity rules, because a future breach of the covenant does not bring about any vesting of any interest in the land.

Majority opinion suggests that this analysis still holds true where the restriction does not arise immediately on grant, but only at a later date (for example, a restriction against using the property for commercial purposes from a date that is more than 21 years after the date of the transfer in which the restrictive covenant is imposed). However, there is contrary judicial opinion in Adams v Rushmon Ltd.

Transactions which were always exempt from the old perpetuity rules

The following categories of transaction are exempt from the perpetuity rules, both at common law and under the 1964 Act:
  • Rentcharges and their enforcement;
  • Forfeiture rights;
  • Mortgages;
  • Survivorship rules (in relation to joint tenancies);
  • Rentcharges and their enforcement.

Overage

Pre-emption and perpetuities

Cosmichome Limited v Southampton City Council
[2013] EWHC 1378 (Ch)

Summary

A restrictive covenant imposed to protect a former landowner’s right to receive overage was not enforceable against a successor in title of the covenantor. A restrictive covenant is only enforceable against a successor in title of the covenantor if it was intended to benefit the land of the covenantee when it was imposed and it continues to benefit that land at the time that its enforcement is sought. Section 9(2) of the Perpetuities and Accumulations Act 1964 does not apply to a right of pre-emption unless and until the right becomes exercisable.

Facts

Some years ago a purchaser, B, bought land from a seller, S. B constructed a building on the land. The transfer to B contained a covenant that the site would be only occupied by B and any subsidiary or certain franchisees. This covenant could be removed if discharged by S and if B gave a further covenant that, following grant of planning permission for any use other than radio or television studio with ancillary offices, it would pay to S a “Development Charge”, being 50% of any resulting enhanced value accruing on the site.

There was also a pre-emption right so that if B no longer required the site for the permitted use, it would notify S. S would then have 3 months in which to call for the transfer of the freehold at open market value. If this right was not exercised, B could dispose of the site to a third party who would be subjected to similar obligations and the payment of the Development Charge.

Subsequently B notified S that it intended to enter into a sale and lease back of the property. As B intended to remain in occupation, it pointed out to S that the right of pre-emption would not become exercisable. S failed to respond, and B went ahead with the transaction with C.

C sought a declaration that neither the restrictive covenant nor the right of pre-emption was enforceable against it as a successor in title to B, nor against its successors in title.

Issues

The main issues for the High Court were:
  • In relation to the covenant, was this unenforceable against C because its true purpose was to obtain payment in the event of a change of use, rather than to benefit the covenantee’s adjacent land?
    In relation to the pre-emption right;
  • Whether S had lost its rights to acquire the freehold by failure to serve notice within 3 months of receipt of B’s notice;
  • Whether S had lost the right by virtue of s9(2) of the Perpetuity and Accumulations Act 1964;
  • Whether C bound by the pre-emption right in any event?
Decision

The High court (Sir William Blackburne) found for C.

Restrictive covenant: This did not benefit S’s adjoining or adjacent land when it was imposed and nor did it do so now. The reason for its imposition was to maintain B at the site and to seek payment if it sought to leave. Therefore, it was more in the nature of a money payment obligation rather than a restrictive covenant. It was not intended to protect or preserve the amenity or value of S’s adjacent land. Accordingly the covenant did not bind the C as successor in title to B.

The pre-emption right: In respect of the above issues the position was as follows.
  • S’s failure to respond to B’s notice did not cause it to lose the right to enforce the right of pre-emption, as the conditions for exercise of the right were not triggered by B’s sale to C and the leaseback.

  • S had not lost the right of pre-emption by virtue of s9(2) of the Perpetuities and Accumulations 1964 Act. Section 9(2) says:
      "In the case of a disposition consisting of the conferring of an option to acquire for valuable consideration any interest in land, the perpetuity period under the rule against perpetuities shall be twenty-one years, and section 1 of this Act shall not apply:
        provided that this subsection shall not apply to a right of pre-emption conferred on a public or local authority in respect of land used or to be used for religious purposes where the right becomes exercisable only if the land ceases to be used for such purposes."
    The crucial question was the interpretation of the phrase “an option to acquire for valuable consideration any interest in land” as used in s9(2). Both parties accepted the rule in Pritchard v Briggs [1980] Ch. 338 that an option to acquire an interest in land for valuable consideration was different from a right of pre-emption. That case held that s9(2) only applied once the seller made an offer to sell and the pre-emption right matured into an option.

    The court disagreed with the decision in Taylor v Couch [2012] EWHC 1213 and held that the relevant start date for the perpetuity period was when the option came into existence and the interest in land arose, rather than the date of the disposition conferring the right of pre-emption. In this case, the perpetuity period had not yet started to run and therefore C had not lost the right to enforce the pre-emption right by virtue of s9(2) of the 1964 Act.

  • C was not bound by the pre-emption right. A purchaser was not bound by obligations entered into by its seller in relation to land if the obligations were not protected in some way so as to be enforceable against subsequent owners. In this case, the pre-emption right was not protected by registration. The need to protect a third party right or interest over or in respect of land by appropriate entry on the register of title to the land was fundamental to the system of land registration. This is so even if at the time of the disposition the purchaser was aware of the right or interest.
A had raised at a late stage that the C should be treated as subject to a constructive trust to give effect to the pre–emption right in the event that it should become exercisable. This was on the basis that the C knew about the right and had probably secured a lower price for the site as a result. The court ruled that it was too late to raise such an argument in these proceedings. Sir William Blackburne said:
    “The need to protect a third party right or interest over or in respect of land by appropriate entry on the register of title to the land or by some other means which binds the purchaser to give effect to it, failing which the purchaser of the land may safely ignore the right or interest, is fundamental to the system of land registration. This is so even if at the time of the land's disposition to him the purchaser is aware of the right or interest. It is only in rare and clear circumstances that the law is willing to ignore this principle by imposing a constructive trust upon the person who has taken a transfer of the land to give effect to the third party right or interest.”
Comment

This case illustrates that a restrictive covenant should not be used to protect an overage payment, as a covenant that is incapable of benefiting the nature, quality or amenity of the covenantee’s land will not bind the covenantor’s successors in title.

The Court came to a different decision to that reached in Taylor v Couch on the application of s9(2) of the 1964 Act in relation to pre-emption rights. As Taylor v Couch was also a High Court decision, the uncertainty on this point continues.

Note that the rules against perpetuity do not apply in any event to a right of pre-emption that takes effect on or after 6 April 2010, as the Perpetuities and Accumulations Act 2009 applies in such a case.


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