Written by Salina Lim.

In the recent case, Peninsula Securities Ltd v Dunnes Stores (Bangor) Ltd [2020] UKSC 36, the Supreme Court has shed light on the law and questions posed in respect of contractual restraints which restrain the use of the land.

On 19 August 2020, in the case of Peninsula Securities Ltd v Dunnes Stores (Bangor) Ltd [2020] UKSC 36, the Supreme Court regarded that the ‘trading society’ test was the proper test for the restraint of trade by agreement. The ‘trading society’ test replaced the ‘pre-existing freedom’ test which was recognised in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269.

Salient facts of Peninsula Securities Ltd v Dunnes Stores (Bangor) Ltd as follows:

• In 1979, a property developer owned land in Londonderry. The property developer intended to build a shopping centre.

• In February 1981, the property developer granted a lease to Dunnes Stores (Bangor) Ltd (“Dunnes”).

• The lease indicated that the property developer was “…to promise not to cause or permit the establishment on any other part of the site of a unit measuring more than about 3,000 square feet for the sale of food or textiles” at paragraph [4] (“the covenant”) to Dunnes.

• Dunnes constructed its store.

• In October 1982, the shopping centre opened.

• Later, the property developer’s interest in the land and covenant was assigned to Peninsula Securities Ltd (“Peninsula”)

• Peninsula argued that the shopping centre became unsuccesful due to the covenant but Dunnes disagreed.

• Subsequently, Peninsula brought a claim against Dunnes that the covenant was unenforceable under the doctrine against restraint of trade (“the doctrine”).

• Initially, the case was dismissed by a judge who deemed that Peninsula had given up pre-existing freedom to use the land due to the assignment of the land and covenant.

• Peninsula then appealed the case with success.

• Subsequently, Dunnes appealed to the Supreme Court.

What was the Supreme Court decision?

In Peninsula Securities Ltd v Dunnes Stores (Bangor) Ltd , the Supreme Court considered the law on the restraint on trade. Also, the Supreme Court considered whether the doctrine was engaged at all. The Supreme Court agreed with Dunnes and determined the covenant was reasonable and, hence, enforceable.

The Supreme Court found that the ‘pre-existing freedom’ test used in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd had the following issues:

• it had been constantly condemned for more than half a century;

• there was “no principled place within the doctrine” at paragraph [50];

• the reasoning was difficult to defend; and

• it was rejected in common law jurisdictions, for example some parts of Canada and Australia, and produced legal issues in terms of consistency between common law countries.

It is noted that for the “trading society” test, the doctrine of the restraint of trade does not apply to restrictive covenants that are accepted because it has “passed into the accepted and normal currency of commercial or contractual or conveyancing relations” at paragraph [46], that has progressed due to demands of various factors such as competition, negotiation and public policy. These types of covenants can now be understood to be acceptable as a part of the trading society.

Implications to note

The Supreme Court in Peninsula Securities Ltd v Dunnes Stores (Bangor) Ltd departed from ‘pre-existing’ test to ‘trading society’ test because they deemed that there was no defence of it and for public policy reasons.

It is imperative that for this type of covenant, that commercial landlords and tenants should be aware and have a reasonable understanding of what is considered to be a trading norm.

Legal advisors, commercial landlords and tenants should take note that:

• they should review these types of covenants carefully;

• the anchor tenants (larger tenant in shopping malls) benefit from these types of covenants;

• landlords should reassess the risks they have taken to filling vacant land because they may breach these restrictions; and

• common law jurisdictions in this world have confirmed and accepted that is normal for a grant of a long lease in part of a shopping centre to contain a covenant in relation the landlord’s use such as in the case of Peninsula Securities Ltd v Dunnes Stores (Bangor) Ltd.

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Case reference: Peninsula Securities Ltd v Dunnes Stores (Bangor) Ltd [2020] UKSC 36

• Date of judgment: 19 August 2020
• Court: Supreme Court
• Judge: Lord Wilson, Lord Carnwath, Lord Lloyd-Jones, Lady Arden, Lord Kitchin

James Cook

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Written by Jessie Cheow.

Creebray Ltd v Deninson and another [2020] UKUT 262 (LC) – Unsuccessful application to modify or discharge covenant.

Background

The applicant company, the registered proprietor of a vacant plot of land (Oldways) applied to discharge or modify a restrictive covenant pursuant to section 84 of the Law of Property Act 1925 (LPA 1925). It intended to build a house on Oldways and a planning permission had been granted by council but it is in a position that would breach the restrictive covenant as the covenant prevents building in front of a line 50 feet away from its rear boundary. There had been a house on Oldways, which had been demolished in 2008. The planning permission was for a six-bedroom family house over three levels (including accommodation in the roof space), and a triple garage with a gym above it. Its footprint would be larger than that of the demolished dwelling. The registered proprietors of the house next door to Oldways had the benefit of the restrictive covenant. The objectors genuinely believe that the building line protects their privacy and outlook, that the new building would overlook Severalls and the inhabitants of the new house will be able to see them, hence, it would have a very significant impact on its value as it affected their privacy and seclusion. Further, there is an interference with the right of light as the new house will overshadow Severalls. Therefore, they have objected to its discharge or modification because of the detrimental effect they claimed the breach of the covenant would have on their property.

The Relevant Law

Section 84 of the Law of Property Act 1925, subsections (1) (aa) and (c). Section 84 provides, so far as is relevant:

“84(1) The Upper Tribunal shall … have power from time to time, on the application of any person interested in any freehold land affected by any restriction arising under covenant or otherwise as to the user thereof or the building thereon, by order wholly or partially to dis-charge or modify any such restriction on being satisfied-

(aa) that (in a case falling within subsection (1A) below) the continued existence thereof would impede some reasonable user of the land for public or private purposes or, as the case may be, would unless modified so impede such user; or

(c) that the proposed discharge or modification will not injure the persons entitled to the benefit of the restriction.

and an order discharging or modifying a restriction under this subsection may direct the applicant to pay to any person entitled to the benefit of the restriction such sum by way of consideration as the Tribunal may think it just to award under one, but not both, of the following heads, that is to say either –

(i) a sum to make up for the loss or disadvantage suffered by that person in consequence of the discharge or modification; or

(ii) a sum to make up for any effect which the restriction had, at the time, when it was imposed, in reducing the consideration then received for the land affected by it.

(1A) Subsection (1)(aa) above authorises the discharge or modification of a restriction by reference to its impeding some reasonable user of the land in any case in which the Upper Tribunal is satisfied that the restriction, in impeding that user, either –

(a) does not secure to persons entitled to the benefit of it any practical benefits of substantial value or advantage to them; or

(b) is contrary to the public interest;

and that money will be an adequate compensation for the loss or disadvantage (if any) which any such person will suffer from the discharge or modification.

(1B) In determining whether a case is one falling within section (1A) above, and in determining whether (in any such case or otherwise) a restriction ought to be discharged or modified, the Upper Tribunal shall take into account the development plan and any declared or ascertainable pattern for the grant or refusal of planning permissions in the relevant areas, as well as the period at which and context in which the restriction was created or imposed and any other material circumstances.

(1C) It is hereby declared that the power conferred by this section to modify a restriction includes power to add such further provisions restricting the user of or the building on the land affected as appear to the Upper Tribunal to be reasonable in view of the relaxation of the existing provisions, and as may be accepted by the applicant; and the Upper Tribunal may accordingly refuse to modify the restriction without some such addition.”

Issues and Decisions

The applicants have reliance ground (aa) and (c), however the applicants have accepted that ground c is not applicable in this case. Therefore, the court will look only at ground (aa) and decide the following issues accordingly:

• Whether the proposed use of Oldways is reasonable;

Decision: The building of a house on Oldways is obviously reasonable and indeed desirable. This particular proposed house is large and could be regarded as overbearing but it has planning permission and we regard its construction as a reasonable use of the land.

• Whether the covenant impedes that use;

Decision: The objectors’ Statement of Case stated that the covenant did not impede a reasonable use of the land because it was open to the applicant to build a house behind the building line; in other words, there were reasonable uses that were not prevented by the covenant. However, the objectors stated that LPA 1925 s 84(1)(aa) required that the proposed use would be a ‘reasonable use’ and ‘the restrictive covenant impedes that use’.

It was not in dispute that the building of the proposed house would be a breach of the covenant. Accordingly, the covenant impeded that reasonable use of the land (see [52] of the decision).

• Whether the impeding of the proposed use secures practical benefits to the objectors; and 4) Whether, if so, those benefits are of substantial value or advantage;

Decision: The restrictive covenant, in preventing the building of the proposed new house in front of the building line, secured a practical benefit to the objectors, regarded as being of substantial advantage to them. The rural leafy outlook of those properties, in which buildings did not intrude, was a big attraction and the whole character of Severalls would be changed if the view in front of the house included the building next door in front of the building line, of whatever size, and especially one so tall and bulky as was being proposed. That was not a ‘de minimis’ intrusion in front of the line. It was a very large house, most of which was in front of the line. It would certainly be visible at times of the year when the hedge was thin, and that view would completely change the outlook from the front garden of Severalls and the character of Severalls as a property (see [66] of the decision.

5) If they are not, whether money would be an adequate compensation.

Because of that conclusion the court do not need to consider the further question of whether by impeding the proposed use the restriction secures to the objectors practical benefits of substantial value but the court have commented on the expert evidence provided by Mr Smith. The assessment of the diminution in the value of Severalls at between £250,000 and £450,000 seemed to be arbitrary; the only explanation he offered was his asserted skill and judgment as a valuer. He also relied as his main comparable upon the sale in 2018 of Oakendell, a property adjoining Oldways but without the benefit of the covenant and therefore likely to have been reduced in price because of the prospect of the 2016 planning permission being implemented next door. Mr Smith did not think the adverse effect upon Oakendell would be as great as that on Severalls, but the main part of the proposed house would have been closer to Oakendell than to Severalls and there would, in the judgment, have been some adverse effect on value. Mr Smith does not appear to have considered the benefit of the restriction to Severalls when analysing the sale of Oakendell for use as a comparable.

Conclusion 

Application dismissed. The court decided that the restrictive covenant had secured a practical benefit to the objectors, regarded as being of substantial advantage to them, for the purposes of LPA 1925, s 84(1A). The rural leafy outlook of the properties, in which buildings did not intrude, was a big attraction and the whole character of the objector’s property would be changed if the view in front of the house included the building next door in front of the building line, of whatever size, and especially one so tall and bulky as was being proposed by the applicant company.

Opinions

The restrictive covenant produces a design for the three adjacent properties that ensure a leafy outlook to the south without sight of buildings. It does not restrict the size of the houses on the plots, and it does not need to because it places a tight restriction on position. If the applicants are willing to compromise and amend their plan/ drawing, perhaps this matter can be resolved amicably.

The only real protection the objectors have from the visual intrusion of a bulky three-story building visible from the objector’s garden is the hedge, in its current state. Based on the fact that the court is concerned that it will not provide adequate screening in winter. In my opinion, the respective parties may consider imposing a positive obligation on the owner or future owner of Oldways and Severalls to ensure that they will maintain the hedge. This could be registered as an additionally restrictive covenant on the registered title and require the future owner to observe and perform the positive covenant. For the safeguard, the current owner may also request an indemnity covenant from the future owner to secure their interest.

Have questions? We are here for you!

In the meantime, we are operating as usual, and you can reach us on 020 7928 0276 or email in to [email protected] for any questions you may have on this topic.

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If you have an iPhone, follow this link to download.

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James Cook

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