Both the decision in Mortimer v Bailey [2004] and some dicta in that case weaken the chances that a developer can present the court with a faît accompli by carrying on building while a case concerning a claimed breach of restrictive covenant awaits trial.

Claimants in this situation have a number of choices open to them. They can apply under CPR Part 25 for an interim injunction so that building work is halted until the dispute is determined at trial. This would be on the standard basis that the claimants (as applicants) undertake that if the court later, on ruling against them, finds that the order has caused loss to the developer and decides that the developer should be compensated for that loss, they will comply with any order that the court may make. In other words, the claimants take the risk that, as well as having to pay costs on losing the case, they face damages. These could involve bank interest whilst the developer holds on to the site longer, increased building costs for the delay and possibly reduced sale proceeds in a weakening market. Where there is a long delay in reaching a trial, the damages could be, for most people, very substantial.

If the claimants do not seek interim relief then, in the absence of unusual circumstances, it would be most unlikely that the court would require the demolition of completed or almost completed buildings, even though these were erected in breach of covenants.

In that scenario, even if the claimants won the case, they would just get damages in lieu of the injunction that they had wanted. Meanwhile, the developer would not have been delayed with work and would not be too upset at having to share some of the profit of the project – especially if the risk had been covered by indemnity insurance.

In practice, rather than spend costs on an interim injunction, it may be that the developer gives an undertaking not to carry on building work. This is on the basis of a cross-undertaking by the claimants to cover damages if they lose, secured by a deposit of money. The arrangement puts the same risk on the claimants as seeking an interim injunction.

I have seen one case where the risk was accepted by claimants who lost but (as had been thought) there were in fact no damages – although this took time to establish. Very often the claimants do not wish to take the risk.

The uncertainty principle

Restrictive covenant cases have three elements. First, is the covenant enforceable by a particular person? Secondly, on a correct interpretation of the document, would some other person be in breach of the covenant? Thirdly, will there be a remedy by a grant of an injunction or an award of damages, or some other result? Prediction of the outcome of these cases is notoriously difficult unless the matter is very clear-cut.

Judges and the Court of Appeal may make varying decisions as shown by the cases that I reviewed in issues 133 and 135. There may or may not be annexation of benefit or a building scheme, depending on quite what is said in the documents and what are the background facts – for example, properties a mile away may or may not have been in a purported scheme.

Interpretation is even more of a lottery, as shown by two recent cases. In Smith v Garrard [2004] the Court of Appeal considered a covenant not to park vehicles on, or in any way to obstruct the free passage of, any part of a shared driveway ‘over which other persons have rights of way’. As all of the driveway was subject to rights of way, it might be thought that the final words of the restriction were merely by way of emphasis. It might also be thought that parking and obstruction were two infringements. Evidently Mr Smith did not like vehicles being parked where they affected the setting of his listed building.

The Court interpreted the restriction so as not to prohibit parking on parts of the shared drive unless the rights of way were actually obstructed. Since there was enough space to pass the parked vehicles, the Court would not restrain parking on this particular part of the driveway, even though it was as much subject to the rights of way as any other part of the driveway. The result was sensible but it put a gloss on the words.

In GLN (Copenhagen) Southern Ltd v Tunbridge Wells BC [2004] the Court of Appeal disagreed with the trial judge’s ruling that a place for showing films in an auditorium setting could not refer to a cinema since ‘cinema’ had been separately mentioned. However, it held that the burdened land, comprising common parts of a complex giving access to a five-screen cinema, was not ‘associated or ancillary’ in relation to a principal use for showing films in an auditorium setting. This was because the burdened land also gave access to what was a larger area of retail and other premises. It is not clear why ‘associated’ should depend upon the cinema being the principal purpose of the complex, as the cinema was not merely an incidental feature.

Curiously, it was the landowner bound by the covenant that wanted to say that the proposed complex would be in breach of covenant. The covenantees bowed out of the appeal. The Borough Council, as planning authority, successfully responded against the appeal. It’s a funny old world.

Where we find that a judge refuses to give commercial effect to a restriction that many owners and conveyancers understood as intending to require ‘one house per plot’, and where the Court of Appeal may interpret ‘a’ to mean as many as you like, it is not surprising that claimants do not want to put their shirts and houses on the line by giving an undertaking in (substantial) damages. They prefer to go to trial, but they do not then want to find that, by not taking the risk of damages, they have lost the desired remedy of a permanent injunction against the developer.

Gafford v Graham

In Gafford v Graham [1998] the Court of Appeal awarded damages in lieu of an injunction. Nourse J gave the only full judgment, stating at the outset:

The principal question is whether the owner of a dominant tenement who, having, with full knowledge of his rights, omitted to seek interlocutory relief to restrain the unlawful erection of a building on the servient tenement, ought to be granted an injunction, mandatory or prohibitory, or damages in lieu…

Graham’s land was subject to restrictive covenants in favour of Gafford’s premises. Despite an objection by Gafford, planning permission was granted for construction of a riding school on Graham’s land. The construction and use were in breach of covenant. Before work began, Gafford’s solicitors wrote about this to Graham, with mention of an injunction. Correspondence was exchanged while, within six weeks, the construction was completed. This included a without prejudice offer by Gafford to accept certain damages. That offer was refused. Gafford commenced proceedings four months after the building had been completed. The case then took over seven years to reach trial and more than a further year to be heard on appeal.

At the trial it was argued that by failing to seek an interlocutory injunction at the outset, Gafford had taken the risk that the building would be completed. It might be thought that the four months’ delay after completion of the work would count for at least as much as the initial six weeks’ construction period.

As against this, the judge found that Graham had, in effect, blatantly flouted the covenants in disregard of Gafford’s rights. In these circumstances he felt that it would not be oppressive to grant an injunction, not for demolition of the building (which he thought might possibly be adapted for a permitted use), but against the use as a riding school – which had been going on for about seven-and-a-half years.

The Court of Appeal stated the principle that:

As a general rule, someone who, with the knowledge that he had clearly enforceable rights and the ability to enforce them, stands by whilst a permanent and substantial structure is unlawfully erected, ought not to be granted an injunction to have it pulled down.

The Court of Appeal also reversed the prohibitory injunction on use of the riding school. Despite Graham’s calculated disregard of Gafford’s rights, what tipped the balance was Gafford’s earlier willingness to accept money. The essential prerequisite ofoan award of damages was that it should be oppressive to grant an injunction. That prerequisite was satisfied.

Whether there are clearly enforceable rights being infringed is often a matter of opinion. Consider the following cases.

Vardy v Banner New Homes

On the very day that Gafford v Graham was reported in The Times, the decision was distinguished by the High Court in Vardy v Banner New Homes 4 Plc [1998].

One week after commencement of a development in breach of a covenant, local residents commenced proceedings for a permanent injunction against it. The High Court referred to ‘intimidatory’ letters from solicitors warning residents that they would face large damages if they sought an interlocutory injunction. The developer sought to strike out the claim for a permanent injunction on the ground that the local residents had not been willing to give the undertaking in damages, which they had been warned would be so very expensive. In the meantime the developer had erected nine houses.

fhe High Court dismissed this interlocutory application. The facts were quite different from those in Gafford v Graham. The residents could not be said to have stood by, in the sense of allowing the developer to think that they were only seeking compensation.

Mortimer v Bailey

The case of Mortimer v Bailey [2004] was a case where neighbours first became friends and then fell out.

The Baileys decided to extend their house. They supplied the Mortimers with a copy of the plan of their proposals. The Mortimers responded, in conciliatory tone, saying that the impact on their house would be horrendous but suggesting alternatives. Discussion failed to resolve the difference between these neighbours.

The Baileys took legal advice and decided to go ahead. Planning permission was granted for the proposed extension, against objections from the Mortimers. When building work commenced, the Mortimers took legal advice. Their solicitors wrote to the Baileys, pointing out that approval had not been obtained from the Mortimers under a restrictive covenant against erecting a building or structure or making additions or alterations without such approval. They also asked that work cease and threatened legal action if there was no response within seven days.

The Baileys’ solicitors replied that approval was not to be unreasonably withheld under the terms of the covenant and that, having regard to the grant of planning permission, refusal was unreasonable. Their advice to the Baileys was to proceed with the construction. Actually, the trial judge found that the discussions about the proposals had not purported to be a request for approval under the covenant.

The Mortimers’ solicitors replied on 20 June 2003 that they were instructing counsel with a view to issuing proceedings at the earliest opportunity. However, proceedings were only commenced at the end of July 2003. An application for an interim injunction was heard a week later by HH Judge Armstrong. By then there was only a further seven days’ work remaining to be done. He refused the application on the ground that damages would be an adequate remedy if, at the trial, the Mortimers were proved right. He also said that they had delayed too long but that, had the application been made in June, the position might have been different.

At the later trial HH Judge Bowers held that the Mortimers were justified in refusing approval under the covenant, because of the loss of openness, light and direct sunlight. Planning considerations were quite different from those which he had to weigh in the balance. The proposed extension would have had an adverse effect on the value of the Mortimers’ house.

Judge Bowers said that even substantial awards of damages would not represent adequate compensation as they did not take account of injured feelings. The only proper approach was to restore the situation. The Baileys had taken an enormous and costly gamble. They had lost and had to return the building to its former state.

On appeal

On appeal the Baileys’ counsel submitted that a final injunction should have been refused on the ground of the Mortimers’ delay in seeking an interim injunction until the extension was substantially complete. He relied on the principle stated in Gafford v Graham, set out above.

Peter Gibson LJ contrasted the facts in Gafford v Graham. In the present case there was no suggestion that the Mortimers would be willing to receive damages in lieu of an injunction. The trial judge had not considered that the injury to the Mortimers’ rights was small, nor that it was capable of being estimated fully in money terms, nor that it was one that could adequately be compensated by a small or any money payment, nor that it would be oppressive to the Baileys to grant an injunction – they having chosen to go ahead in the full knowledge of the covenant and of the Mortimers’ objection and intention to commence proceedings.

The point about delay in applying for an interim injunction had not featured before the trial judge. Gafford v Graham was readily distinguishable. In any event, the principles on which the discretion to grant an injunction should be exercised must remain adaptable to the facts of the particular case.

What occurred could not be characterised as the Mortimers standing by while the extension was built. It was true that they were slow to seek an interim injunction. Delay is a relevant consideration in the exercise of discretion whether to grant a final injunction. But very shortly after work commenced, and with completion of the extension still two months away, the Baileys were warned that if the construction continued then proceedings would be brought. The Baileys chose to rely on legal advice and to proceed with the construction. In so doing they gambled that it was unreasonable for the Mortimers to have refused approval. They lost that gamble.

Judge Armstrong’s decision not to grant an interim injunction did not govern the issue of a final injunction. The considerations applicable to the two were quite different. The Mortimers had promptly put the Baileys on notice of their intention to bring proceedings. The Court of Appeal refused to interfere with the trial judge’s exercise of discretion in ordering a final injunction.

Obiter dicta

Peter Gibson LJ commented:

For my part I own to some doubt as to whether it is appropriate to say that a person who does not proceed for an interlocutory injunction when he knows that a building is being erected in breach of covenants, but who has made clear his intention to object to the breach and to bring proceedings for that breach, should generally be debarred from obtaining a final injunction to pull down the building.

He added:

There may be many circumstances in which a claimant would not be able to take the risk of seeking an interim injunction. He would need to satisfy the American Cyanamid test, and would have to provide an undertaking in damages. It may be entirely reasonable for the claimant, having put the defendant on notice, to proceed to trial, rather than take the risk of expending money wastefully by seeking interim relief.

He accepted ‘that not to seek an interim injunction is a factor which can be taken into account in weighing in the balance whether a final injunction should be granted’. However, this factor evidently can be outweighed by other factors.

Blame on both sides

Jacobs LJ added that if there is doubt as to whether a restrictive covenant applies, or whether consent under a restrictive covenant is being unreasonably withheld, the prudent party will get the matter sorted out before starting to build, as could have been done in this case. It will require very strong circumstances for an injunction to be withheld if a chance has been taken and lost.

The developer has the same ability to commence proceedings to sort out the matter as the person asserting a restrictive covenant. As shown in issue 84, the court may even indicate whether or not injunctive relief can be ruled out as at the date of the declaration. If the developer races on with building work so that it is done by the time the case reaches trial, then both sides share the blame for the state of affairs.

Sometimes developers (or their insurers) suggest that opponents should either seek an interim injunction or put up with work going ahead. It seems from Mortimer v Bailey that this invidious choice can be avoided in common circumstances. It is only fair that risk falls on both sides in these cases. © Property Law Journal