Public Sector

Easements and Covenants can be modified and extinguished

Following the Supreme Court's judgment in Synlait Milk Limited (Synlait) v New Zealand Industrial Park Limited (NZIPL) [2020] NZSC 157, the courts are likely to be more willing to use their powers under s 317 of the Property Law Act 2007 to modify or extinguish historical covenants.

In that case the Supreme Court has accepted a broader approach to s 317, and emphasised Parliament’s clear intention that easements and covenants can be modified or extinguished in the circumstances set out in that section. The court’s task is first to determine whether one or more of the grounds in s 317(1) is made out. If so, the second task is to determine whether the discretion to extinguish or modify the easement or covenant at issue should be exercised.

By way of background, the covenants in Synlait v NZIPL were created in 1998 and 2000. They restricted the use of the burdened land to farming, grazing and forestry operations to protect the ability for the owners of the benefited land to develop a quarry in the future on that land. They also included a “no objections” clause to the effect that the owner of the burdened land would not object to a quarry on the benefited land or to any application for a resource consent to establish a quarry.

Stonehill Trustee Ltd (Stonehill) had an agreement to sell the burdened land to Synlait and successfully applied to the High Court to modify the relevant covenants. NZIPL successfully appealed that decision to the Court of Appeal. By that time Synlait had become the owner of the land and was in the process of building a substantial milk factory on it. So, Synlait appealed to the Supreme Court and was substituted as the appellant in place of Stonehill. Between the conclusion of the hearing in the Supreme Court and the Supreme Court’s decision, the parties had entered into a confidential settlement of the dispute which allowed the milk factory to remain.  Nevertheless, the Supreme Court issued a decision to clarify the law as it would have allowed the appeal and modified the covenant had the case not settled.

Stage One: Grounds that were relied upon to extinguish or modify a covenant

No Substantial Injury

For an injury to be substantial it must be “real, considerable, significant as against insignificant, unreal or trifling.” An assessment of substantial injury requires the court to compare the position of the owner of the benefited land with the covenant in place to the position if the covenant is modified or extinguished. The Supreme Court was satisfied that modification of the covenants would not substantially injure NZIPL. This was in part because there were already two milk factories in the area, the owners of which would likely object to any application for a quarry consent in any event, and a further milk factory would not make much difference.

Changes in the Neighbourhood

The second ground relied upon was that modification of the covenant 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 Pokeno, and because significant commercial and residential development had occurred.

Impede reasonable use

When the 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 covenants were entered into, and accordingly found the covenants now impeded reasonable use of the land to a greater extent.

Stage Two: Discretion

The Supreme Court concluded that the grounds in s 317(1)(a)(ii), (b) and (d) were made out so it was required to consider whether it would have exercised its discretion to modify the covenants, in the absence of settlement.

Significance of decision

The Supreme Court’s rejection of the Court of Appeal’s emphasis on the sanctity of contracts is potentially significant.  There has been a substantial increase in the numbers of applications to modify covenants in the last six years.  With the increasing pressure on land use and availability, that trend is likely to continue.

If you require any advice on covenants which might require modification or extinguishment, or receive a request to modify a covenant, please contact:

 

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