The High Court has rejected an attempt to circumvent express wording in a restrictive covenant that limited the ways in which the benefit might pass to a purchaser of part of the vendor’s land.

The judgment of Peter Smith J in Sugarman v Porter & ors [2006] follows the first branch of the decision of the Court of Appeal in Crest Nicholson Residential (South) Ltd v McAllister [2004], considered in PLJ133. This concerned restrictive covenants whose benefit was explicitly limited to such part of the vendor’s land as from time to time remained unsold. The second branch of that decision prevents s78 of the Law of Property Act 1925 passing benefit of restrictive covenants in deeds that had no indication that these covenants were intended to benefit any identifiable land.

This is in the context that the benefit of restrictive covenants can only pass in one of four ways for freehold land:

• by virtue of being annexed to the benefited land;

• by express assignment with such land;

• where there is a scheme of reciprocal obligations; and

• under specific statutory provisions.

Normally, annexation of benefit applies to all parts of the land retained by the vendor at the date of the conveyance imposing the covenant, but this is subject to any contrary wording in that deed.

The facts in the Sugarman case

In August 1953 Mrs Hart bought a cottage with extensive grounds at Brighton. On 18 December 1953 she sold off the middle portion of the property to Mr Williams. He covenanted that no building should be erected here except a detached private dwellinghouse (with or without an ancillary garage) that was to be in accordance with plans to be approved by Mrs Hart or her surveyor (not to be unreasonably withheld). He also covenanted to erect and maintain boundary fences.

These covenants were expressed to be:

…for the benefit and protection of the vendor’s said adjoining property or any part thereof remaining unsold and any part of such property hereafter expressly sold with the benefit of this present covenant.

No such express assignment of the benefit was ever made.

Mrs Hart (as vendor) covenanted with Mr Williams to impose similar covenants for the benefit of his property on a future sale of the western portion of her property. On a sale later that month she did so.

The eastern portion of her property was not sold by Mrs Hart until 1957 (without any covenants being imposed).

The claimant (Mrs Sugarman) was the freehold owner of one of the two houses erected on the land bought by Mr Williams. She wished to demolish it and to erect eight self-contained flats in its place. She sought a declaration from the court that the defendants were not entitled to the benefit of the covenants in the conveyance to Mr Williams.

The first, second and third defendants were collectively the owners of the eastern land sold by Mrs Hart in 1957. At the trial the only active opposition came from the fourth defendant, Teresa Wall, the tenant of part of that property. She had at one stage procured the quashing of a planning permission for the development on a technicality (see PLJ145). The owners of the western portion of Mrs Hart’s original property were not parties to the action, as they had confirmed that they would not pursue any claim to prevent the proposed development.

On the face of it the explicit wording of the covenant and the absence of any express assignment of its benefit were against the defendant, along with much case law that the court considered.

Marquess of Zetland v Driver

In Marquess of Zetland v Driver [1939] the restrictive covenant was expressly for the benefit of such parts of the relevant land:

(a) as shall for the time being remain unsold or (b) as shall be sold by the vendor or his successors in title with the express benefit of this covenant.

It was not necessary for the Court of Appeal in that case to decide what would be the effect of a sale of part of the land with an express assignment, but plainly in this and other cases it was understood that land sold off without such an assignment would cease to benefit from the relevant covenant.

Roake v Chadha

In Roake v Chadha [1983] there was no specific annexation of benefit as such, but the wording stated that the benefit should only pass on an express assignment. It was argued that this did not prevent annexation of the benefit by virtue of s78 of the Law of Property Act 1925. Although that section (unlike s79) did not state that it was subject to any contrary intention being expressed, judge Paul Baker QC held that there was no reason why parties should not agree wording which prevented benefit passing automatically with all or part of the land retained by the vendor.

Wording geared to what is unsold at a future date should be contrasted with wording geared to what land of the vendor remains unsold at the date of the covenant, and likewise with wording that (as with s78) gives the benefit to the owners and occupiers for the time being of land unsold at the date of the covenant.

The Crest case

In Crest Nicholson Residential (South) Ltd v McAllister [2004] some of the conveyances had the following words of annexation:

For the benefit of the property at Claygate belonging to the vendors or the part thereof for the time being remaining unsold.

There was nothing here about express assignment, but the Court of Appeal held that the latter part of this wording meant that annexation only applied for land so long as it remained unsold, and that this precluded benefit passing under s78 of the Law of Property Act 1925.

That position had been assumed to be so by the Court of Appeal in a decision in 1986, and had been held to be so by Knox J in the High Court in an unreported case in 1994.

The arguments in the Sugarman case

The Court of Appeal in Crest had followed the line taken in Roake v Chadha and Zetland v Driver (the wording in which was in similar terms to that of the conveyance to Mr Williams in the Sugarman case).

Against this formidable array of authorities, counsel for Teresa Wall put forward ingenious arguments that failed to convince Peter Smith J. The primary argument was that by virtue of s63 of the Law of Property Act 1925 the benefit of the covenant had been included in the conveyance of the benefited land in 1957.

A recent case between a landlord and a tenant was relevant to that argument and is now considered.

Harbour Estates Ltd v HSBC Bank Plc

In Harbour Estates [2004] two underleases contained ‘break’ clauses giving the tenant options to terminate the lettings on specified dates. These provisions were stated to be personal to a named party and that they ‘shall not be capable of assignment to or exercise by any other person’. However, this was qualified by wording stating that the benefit ‘may be assigned’ to certain permitted assignees of the letting, in particular to a company in the same group as the named party.

The underleases were assigned to a subsidiary company but without any specific assignments of the benefit of the break clauses. The subsidiary exercised the break clauses. The High Court held that the subsidiary had been entitled to do so. The break clauses ‘touched and concerned’ the premises and therefore the rights had passed under s63 of the Law of Property Act 1925 as rights in, to or on the property.

Lindsay J considered the objection that this would cut across the previous rejection by the courts of a similar argument that the benefit of a covenant could pass automatically under s62 of the Law of Property Act 1925. He considered that the test was whether the right ‘touched and concerned’ the land.

It is fair to say that, normally, if it is intended that the benefit of a restrictive covenant is to pass automatically with all or part of the retained land, then the parties would either have annexed it to the land or set up a ‘building scheme’.

The decision in Sugarman

Peter Smith J rejected the argument that the benefit of the covenant passed under s63. The relevant time to consider whether a right touched and concerned the property was when the property passed. The covenants were expressed to benefit the land only until it was sold (in the absence of a decision to have an express assignment), therefore the benefit ceased at that point and was not there to pass under s63.

Moreover, ss62 and 63 are explicitly subject to any contrary intention expressed in the relevant conveyance. There was no express assignment and so s63 could not overrule the existing limitation in the covenant by Mr Williams.

Peter Smith J also rejected the second argument, which had various strands. One strand referred to the covenant by Mrs Hart to impose similar covenants when selling the western portion. However, it was held that there was no ‘mini scheme’. Another strand asserted that the positive covenant to erect and maintain fences had created an easement of repair and that the existence of dominant and servient tenements in this connection supported the notion of an intention to annex the benefit of covenants to the land, regardless of the explicit wording requiring an express assignment.

This too was rejected by Peter Smith J. He pointed out also that the approval of plans was to be by the vendor or the vendor’s surveyor – not by the successors of the vendor.

Conclusion for practitioners

The Sugarman case is significant as an example of the approach of the court following the Crest decision in the Court of Appeal. There is little chance that the ambit of a restrictive covenant will extend beyond what is indicated by the wording of the deed (plus any relevant attached plan). That is likely to be so for both branches of the Crest decision. If the deed imposing a covenant is silent on the subject of benefit, then it may be possible to argue that the nature of the restrictive covenants falls within s63 of the Law of Property Act 1925. However, this argument seems to be no more likely to prevail than previous ones seeking to rely upon s62.

Parties should make clear what they intend regarding benefit of the covenant – in which case the court will be very reluctant to go against limitations stated in the document.