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Construing restrictive covenants over registered land

Published February 2017

The decision in Bryant Homes Southern Limited v Stein Management Limited [2016] EWHC 2435 (Ch) shows how the usual principles of interpretation are modified in the context of restrictive covenants over registered land.

In essence, it appears that the inclusion of a restrictive covenant in a registrable document has the effect of narrowing the admissible factual background, so that information which is only accessible to the original parties – and crucially not accessible to a future owner or occupier viewing the record of the covenant at the Land Registry – is given little or no weight in the interpretative process.

The facts of Bryant Homes

The case concerned agricultural land in Oxfordshire which had been owned by a Mr Boggis. In 1993, Mr Boggis sold two parcels (known as the Green Land) to the Claimants, a consortium of property developers, with the intention that they would seek planning permission for commercial or residential development. If they were successful, the Claimants would pay Mr Boggis a share of the uplift in value, and in due course would develop the Green Land in accordance with the planning permission.

On 15 December 1993, the parties executed a conveyance of the Green Land (“the 1993 Conveyance”), and by clause 3 the Claimants covenanted with Mr Boggis “and his successors in title the owners or occupiers for the time being of the adjoining land” (known as the Red Land and the Blue Land) that the Claimants would not use the Green Land “for any purpose other than agricultural”.

The same day, the parties entered into a further agreement (“the 1993 Agreement”). The Claimants agreed to seek planning permission for residential or commercial development of the Green Land, notwithstanding the restrictive covenant in the 1993 Conveyance. Mr Boggis agreed to release that covenant if and insofar as qualifying planning permission was obtained, once any overage payment (as calculated under the 1993 Agreement) had been paid.

Over the years, Mr Boggis sold parts of the Red and Blue Land to various purchasers. A small strip was sold to Stein Management Limited in June 2013, which thereby purported to have obtained the benefit of the restrictive covenant as against the Claimants.

In February 2015, the Claimants issued Part 8 proceedings for a declaration that no person (including in particular Stein Management Limited) now had the benefit of the restrictive covenant, and a consequential order directing its removal from the charges register of the Claimants’ title. Chief Master Marsh directed that the question of the nature and transmissibility of the restrictive covenant be tried as a preliminary issue, and it is that preliminary issue with which this case was concerned.

The parties’ submissions

The parties all agreed that the test for when the benefit of a restrictive covenant may run with the land was effectively the same at law and in equity: the covenant had to “touch and concern”, “benefit” or “accommodate” the land (see for example P & A Swift Investments v Combined English Stores Group [1989] AC 632 at 639ff).

The Claimants submitted that the 1993 Conveyance had to be read alongside the 1993 Agreement made simultaneously between the same parties: otherwise, form would triumph over substance. Read together, it was clear that the covenant in the 1993 Conveyance was no more than a means of securing the due payment of the overage in the 1993 Agreement. The entire arrangement was about the payment of money to Mr Boggis, and as such did not “touch and concern” the Red and Blue Land. To hold otherwise would be to disregard the commercial reality of the scheme.

The Defendants submitted that the covenant – as expressed in the 1993 Conveyance – was in entirely conventional terms and was precisely the kind of covenant which was capable of benefiting the land. The relevant words from the 1993 Conveyance appeared on the charges register of the Claimants’ title. The court should be slow to depart from the plain meaning of those words by reference to an unregistered and comparatively invisible provision in the separate 1993 Agreement.

The decision of Norris J

Norris J held that the conveyance had created a restrictive covenant which “touched and concerned” the Red and Blue Land and was therefore capable of benefiting Mr Boggis’s successors in title.

Norris J characterised the question of “touching and concerning” as one of construction, starting from the conventional rule that “the meaning of the contract or conveyance is that which would be conveyed to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of entering the document”.

However, applying the Court of Appeal’s judgment in Cherry Tree Investments Ltd v Landmain Ltd [2012] EWCA Civ 736, he held that the background knowledge would include the fact that the wording of the 1993 Conveyance would be recorded at the Land Registry against the title to the Green Land, and that future owners or occupiers of that land would see that wording, but would have no means of knowing what the 1993 Agreement said. They would have no access to any of the material on the basis of which the Claimants said the covenant was merely intended to secure the payment of money.

As a result, he said, “the reasonable reader would understand that the true nature of the covenant was more likely to be set out in the registered document of title and would not treat the 1993 Agreement as containing material of sufficient weight entirely to recast the nature of the obligation as so disclosed”.

Significance of the decision

Norris J’s decision is unusual because – contrary to the law’s general approach in matters of interpretation – it emphasises the literal wording of the covenant in favour of the commercial reality of the parties’ scheme, and accords significant weight to the particular form the parties chose for their agreement.

The practical effect is to increase the chance of enduring proprietary rights being created unintentionally. This has the potential to provide additional opportunities for neighbouring landowners to extract undeserved ransom-payments, contrary to the general policy of the law (the ability to extract a ransom is, for example, not a “practical benefit” for the purposes of resisting discharge under section 84(1)(aa) of the Law of Property Act 1925: see Stockport MBC v Alwiyah Developments (1983) 52 P&CR 278).

Moreover, Norris J’s approach means that the parties’ overage scheme is unworkable from both sides. Mr Boggis could not – at least without negotiating a series of express agreements – effectively retain control over the covenant, and so his ability to release it in return for the agreed overage was undermined. Likewise, the Consortium could not count on being able to implement the planning permission on payment of the agreed overage. This is significant because the use of restrictive covenants to secure overage payments is far from unusual; Bryant Homes shows that this practice does not work for either party to the arrangement.

The decision in Bryant Homes is important for both transactional lawyers and litigators. For transactional lawyers, it highlights the danger of structuring a deal so that the outward – and importantly, registered – appearance is different from the private reality. For litigators, it clarifies how the courts will approach questions of construction where a document is registered.

The Claimants have applied for permission to appeal.

Written by Joseph Steadman.  Joanne Wicks QC appeared for the Claimants

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