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
