Enforcement of covenants in a contract for sale

Bellevue Station Pty Ltd v Consolidated Pastoral Company Pty Ltd & Anor (2024) QCA 47

A recent case in the Queensland Court of Appeal, Bellevue Station Pty Ltd v Consolidated Pastoral Company Pty Ltd & Anor (2024) QCA 47 explores the construction of a covenant in a Contract for Sale.

A covenant is a promise or obligation contained in a deed. A restrictive covenant restricts the land from being used a particular way by the covenantor. A positive covenant requires the owner of the land to carry out a certain act and does not ‘run with the land’. For a Covenant to run with the land it must not be personal, and it must benefit or concern the land rather than the individual/person.

The Case

Bellevue Station Pty Ltd (Bellevue) and NBT Pty Limited as trustee for the Astor Superannuation Trust (NBT) entered into a contract for sale of a property known as Bellevue Station. As part of the sale, NBT disclosed an agreement signed in 2009 (Historical Agreement) between NBT and Consolidated Pastoral Company Pty Ltd (Consolidated). Clause 6 of the Historical Agreement specifically requires any incoming purchaser to be notified of the Historical Agreement and for the parties to enter a new and ‘similar arrangement [agreement] with the continuing party [Bellevue]’.

Consolidated refused to sign the agreement with Bellevue. Subsequently NBT and Bellevue entered into a Deed of Assignment whereby NBT sought to assign its rights under the Historical Agreement to Bellevue.

Parties proceeded to litigate and the ultimate questions before the court were:

whether there was an implied obligation by Consolidated to enter into the proposed new agreement; and
whether Consolidated entered into a covenant which runs with the land.

Findings

The Court found that clause 6 of the Historical Agreement did not provide Consolidated an implied obligation to enter into the new agreement. The purpose of the Historical Agreement was personal as it aimed to save the neighbour costs in maintaining the fence. This purpose extinguishes once one party sells its property.

Additionally, the Court determined the phrase ‘enter into a similar arrangement’ was ‘too uncertain to be enforceable’[1] as there is no indication on what the terms of the new arrangement would be. There may be circumstances where the continuing party would not find it commercially desirable to enter a similar arrangement, such as a diminution in the value of the property.

Regarding the existence of a Covenant, the Court found that the Historical Agreement was constructed in a way which did not touch or concern the land, or else ‘express assignment would not be necessary … and would pass automatically on conveyance’.[2] Clause 6 of the Historical Agreement contemplates that a promise under the agreement will not pass automatically with the land but will be binding on an incoming purchaser if they were to enter into a new arrangement.

Key Takeaways

It is recommended that if a party wishes to include a clause in a contract to enforce an existing agreement imposing benefits as well as obligations, parties should use more certain term’s expressing an intention to enter ‘the same agreement’ by setting out the key terms, obligations and benefits that extend to the new party.

Additionally, this case has helped clarify how a covenant can be considered to relate to or ‘run with the land.’ Parties wishing to rely on a covenant in an agreement must ensure that if it concerns the land, it would be treated as part of the land and will pass on sale. According to this case, a covenant or term implying that the contract will cease to exist at sale until a subsequent contract is made cannot be said to relate to the land itself and will not be enforceable.

If you require assistance with drafting or reviewing a Contract for Sale or other commercial arrangement, please contact one of our people:

Ron Zucker 0410 590 111

Eollyn Cortes 0478 727 395

Sagang Chung 0431 435 333

Julia Zou 0426 670 202

[1] Ibid 18.

[2] Ibid 49.