NSW Supreme Court clarifies the application of the "conditional benefit" principle in Australia

The NSW Supreme Court has applied a UK test which clarifies an exception in the law of covenants in Australia. Owners and purchasers of land should carefully revisit the terms of any positive covenant burdens in the wake of the NSWSC's decision in Aust-One Investment Pty Ltd v New World Investments Pty Ltd [2022] NSWSC 137.

Covenants and conditional benefits: a refresher

A covenant can either be positive (ie. requires the expenditure of money) or negative (can be complied with by doing nothing).

At common law, the burden of a positive covenant affecting freehold land does not 'run' with the land. This is an immutable rule, to which there are almost no exceptions. The original covenanter's successors in title are not bound by the covenant (positive or negative) because it goes against the common law rule that a person cannot be made liable under a contract unless they are a party to it.

In some instances in NSW, a positive covenant burden will be enforceable under the Conveyancing Act 1919 (NSW) (such as, for example, a covenant for maintenance and repair of land that is the site that of an easement).

In the UK, a positive covenant burden may be enforceable where, by reason of the successor in title to the covenantor choosing to take the benefit of a right to which the performance of the covenant was intended to be reciprocal or upon which the enjoyment of the right is conditional, fairness requires that the positive covenant be enforceable. This issue, the "conditional benefit" principle, was at the heart of the Aust-One case.

Two neighbours get along for 17 years

The parties owned lots next to each other in a commercial arcade building. The previous owners executed a registered memorandum of transfer under which the successors in title, Aust-One and New World Investments Pty Ltd, enjoyed certain rights:

• Aust-One had the benefit of a right of footway and use of amenities over New World's lots to access its property;
• Aust-One also had the benefit of an easement for support over New World's lots;
• Aust-One had the benefit of a positive covenant for New World to maintain and repair its own lots (Repair Covenant); but
• Aust-One had the burden of a positive covenant to pay New World a proportion of rentals received by Aust-One in respect of Aust-One's lot (Payment Covenant),

The parties observed the covenants for 17 years after which Aust-One stopped paying its proportion of rentals. Was Aust-One required to pay in circumstances where the burden of the Payment Covenant did not "run" with the land?

Enter the "conditional benefit principle"…

The NSW Supreme Court considered whether the "conditional benefit principle" applied: that is, as long as Aust-One enjoyed the benefit of the Repair Covenant and easements, New World could enforce the Payment Covenant. In doing so, it used a UK test for the first time in Australia, which clarifies the operation of this exception, as set out in Davies v Jones [2009] EWCA Civ 1164. Here is how the Court found that the Payment Covenant was enforceable as a conditional benefit, using the three-limb test in Davies:

Implications for enforcing covenants

It remains to be seen whether the decision in Aust-One will be appealed, and the position of the NSWSC on the conditional benefit exception in Australia overturned or affirmed. The NSWSC emphasised that the principles in Davies v Jones are not specific or exhaustive, opening the door for further refinement or development of the conditional benefit exception in Australia.

It is also unclear how the NSW Supreme Court's position on the conditional benefit exception will be reconciled with the indefeasibility afforded by registration on a Torrens title register (for example, in circumstances where a registered covenant is made conditional on the occurrence of an event that could not be discovered by a search of the register).

In any case, Aust-One is a reminder for owners and purchasers of land to take all necessary measures to ensure that the burden of a positive covenant is enforceable on successors in title (such as, for example, inserting personal covenants in deeds and assignment of deeds).