Aust-One Investment Pty Ltd V New World Investments Pty Ltd  NSWCA 22
Covenants that are registered on title and that ‘run with the land’ are restrictive in nature, a principle which is confirmed at common law and by statute.
The general rule at common law is that the burden of a positive covenant is not enforceable against successors in title of the covenantor and can only be enforced against the covenantor personally who entered into the covenant as if it were a personal contract. Only the contracting parties can be liable.
Statutory exceptions exist in circumstances such as: a public positive covenant which benefit a prescribed authority and positive covenants for maintenance and repair of land that is the stie of an easement. Positive covenants as described in those sections do run with the land.
A further exception to the general rule may be possible, known as the conditional benefit principle.
The conditional benefit principle
Under the conditional benefit principle, the owner of land burdened by an easement (servient land) may seek to enforce a positive covenant against the owner of land which benefits from an easement (dominant tenement).
The conditional benefit principle has at least three requirements and if all are satisfied, the payment covenant may be binding on the land, although as this case demonstrates, it remains a matter of construction:
- there is a right held by dominant tenement, such as a right of way, to which a condition, such as a payment covenant, is attached;
- it was intended that the covenant run with the land; and
- the condition placed on the dominant land is conditional or reciprocal in the sense that it can be characterised as benefiting the servient land by ameliorating the effects or sharing the costs of being subject to the correlative burden in favour of the dominant tenement.
These requirements were discussed by the NSW Court of Appeal in the Aust-One v New World case.
This case is important as it shows the NSW Court of Appeal diverge from earlier UK cases. Where a party chooses to take a benefit from a conveyance, they must accept any burden in the same conveyance.
The case concerned two adjoining retail buildings located in a shopping area in Sydney. Aust-One is the owner of land at No 181, the dominant tenement (the land with the benefit of the easements), comprising four shops and a restaurant on the ground floor and two residential units on the first floor. New World is the owner of land at Nos 183-185, the servient tenement (the land burdened by the easements), on which a number of retail shops in an arcade are located.
In February 1962, the predecessors in title of the parties, together with local council entered into a deed. The Deed provided for the creation of a right of way through Nos 183-185 in favour of No 181. In 1963, the previous owners of both properties executed a transfer (Transfer) which was registered in 1964 in accordance with the terms of the Deed.
The Transfer included two easements in favour of the benefitted land: a right of way over part of the burdened land and the right to use the amenities located on it, and an easement for support. Those easements were expressed to be in consideration of a number of covenants which bound the owner of the benefitted land and their successors in title. One such covenant required the benefitted land owner to pay to the burdened land owner one-quarter of the gross rentals received from the four shops on the benefitted land. The burdened land owner was also bound by a covenant requiring it to repair and maintain the amenities located in the arcade on the burdened land.
Aust-One, the benefitted land owner, sought a declaration that the payment covenant was not a burden that ran with the benefitted land, and therefore that it was not liable to pay any money to the burdened land owner from time to time pursuant to that covenant. New World, the burdened land owner filed a cross-claim seeking declaratory relief to the opposite effect, and damages against Aust-One.
The NSW Supreme Court held as follows:
- the positive covenant did run,
- the performance of the payment covenant was a condition upon Aust-One’s right to enjoy the right of way, the right to use amenities and to enforce the repair covenant, and
- Aust-One was therefore bound by the payment covenant, and its claim against New World was dismissed.
The Court relied on a 3 limb test set out in a UK case as having been accepted in Australia and having been satisfied in this case, effectively:
- the benefit and burden must be conferred in or by the same transaction,
- the enjoyment of the benefit must be conditional on or reciprocal to the imposition of the burden; and
- the person on whom the burden is imposed must have or have had the opportunity of rejecting or disclaiming the benefit, not merely the right to receive the benefit.
Court upheld the Appeal
Aust-One appealed, contending that the primary judge erred by admitting and relying on the Council Deed for the purpose of construing the Transfer, by finding that performance of the payment covenant was a condition upon the various rights it enjoyed pursuant to the Transfer, and by finding that the payment covenant was binding on it as long as it continued to enjoy those rights.
The NSW Court of Appeal upheld the Appeal emphasising that it did not definitively accept that the earlier UK position had been accepted in Australia and to the extent it had any application, then it must be construed more narrowly and considered in the light of Amalgamated Investments.
Effectively the NSW Court of Appeal found that in considering whether the ‘conditional benefit principle’ applied, will depend upon the construction of the instrument – that is, is the obligation imposed on the benefitted land a condition of the rights conferred by the easement on the owner of the benefitted land or is it an independent obligation.
In Aust-One v New World, the Court held that neither the terms of grant of the easements nor the terms of the payment covenant expressly condition the exercise of the rights conferred by the easements on compliance with the payment covenant. Additionally, the Court was not satisfied that the payment covenant referred to the purpose for which the payment it requires is made. New World made no attempt to characterise the obligation of Aust-One to pay one quarter of the gross rentals of the four shops as ameliorative. Unsurprisingly, there is no evidence indicating that such a significant and ongoing fee was a reasonable proxy of the cost of maintaining the right of way.
- The role for the conditional benefit principle, if it is to apply, is limited to “obligations that are no more than restorative in nature”.
- To impose a fee, it should be characterised as ameliorating the effects or sharing the costs of the burden on the servient tenement.
- It must be clear that the payment covenant is intended to run with the land on its construction.
- For a negative covenant to be enforced it must benefit the dominant tenement rather than just confer a personal benefit on the owner of the dominant tenement.
If you would like to discuss this article with us, please contact Mike Ellis, Property Partner, or Esther Ihn, Senior Associate on (02) 9261 5900.
 s88 Conveyancing Act 1919 (NSW)
 ss88D, 88E Conveyancing Act
 S88BA Conveyancing Act
 S88F Conveyancing Act
 Per Kirk JA Aust-One Investment Pty Ltd v New World Investments Pty Ltd  NSWCA 22 at 264
 Aust-One Investment Pty Ltd v New World Investments Pty Ltd  NSWCA 22
 Davies v Jones  1 P & CR 22
 GM Amalgamated Investments (Dulwich Hill) Pty Ltd v Mills  NSWCA 202