A right of pre-emption, enabling the vendors of land that is sold to buy it back, may limit the restrictive covenants imposed on the sale. This was the surprising result of the decision of Lightman J in University of East London Higher Education Corporation v London Borough of Barking & Dagenham and others [2004].

The case also raised issues on which successors are bound by or benefit from restrictive covenants and on the conditions for extinguishment by virtue of unity of ownership. A supplementary second decision confirms the guidelines on costs relating to applications for a declaration enabling land to be sold free from restrictive covenants.

Background

The London County Council (LCC) had power to acquire land outside its area to provide housing for the working classes living within its area. In 1919-21 it purchased some 3,000 acres, then in Essex, constituting the Becontree Estate. Most of this was allocated for about 20,000 houses, built in 1921-35, for some 120,000 working class inhabitants from inner London. In 1923 a Royal Commission recommended against extending the LCC area eastwards to include this estate. It recognised that future changes might include local authorities acquiring the LCC’s housing functions regarding the estate.

By four conveyances in 1931-46, LCC sold some 24 acres on the western edge of the estate to Essex County Council (Essex) as education authority. This land comprises the Barking Campus.

The covenants

In the conveyances, the purchasers (Essex) ‘for themselves their successors and assigns’ covenanted ‘with the vendors their successors and assigns’ at all times thereafter to observe and perform scheduled restrictions and stipulations:

• First, not without the consent in writing of the vendors to use, or allow to be used, the property conveyed, or any part of it, for any purposes other than as a site for buildings to be used for educational purposes under the relevant statutes (the user covenant).
• Secondly, not to erect on the property, or any part of it, any buildings except in accordance with plans and elevations first approved by the vendors (the approval covenant). The stated intention here was that the buildings should be in reasonable harmony with the development of the vendors’ Becontree Estate.
• Thirdly, not until 21 years after the death of all issue of King George V, alive at the date of the conveyance, ‘to sell or (except for the purpose aforesaid) part with the possession of the said property hereby conveyed or any part thereof without first offering it for sale to the Vendors’ (the pre-emption covenant). This then provided that, if the vendors decided to purchase within three months of the date of the offer, the purchase money should, in default of agreement, be determined by arbitration. It did not indicate what purchase money was expected nor did it state what was to be the position if the offer was not accepted.

The pre-emption covenant concerned alienation, not use or building, thus it was not a restrictive covenant. As it was made before the Land Registration Act 2002, it did not create an interest in land.

Similar restrictive covenants had been imposed (without a right of pre-emption) in 1923 when the LCC sold other land on the estate to Essex for the site of a primary school.

Devolution of Barking Campus

The campus was used for a technical college and a school. In 1965, under statutory provisions, it became vested in the London Borough of Barking & Dagenham (LBBD) as education authority for the area. There were then arrangements concerning the governing body of a polytechnic occupying the campus. This became a higher education corporation, which succeeded to ownership of the campus in 1989-90. Later it was renamed as the University of East London Higher Education Corporation (UEL).

Devolution of Becontree Estate

LCC was replaced in 1965 by the Greater London Council (GLC). Under statutory provisions, the unsold land on the estate first became vested in GLC along with all associated rights and liabilities. Also under statutory provisions, in 1971-82 the unsold land passed by Transfer Orders, mostly to LBBD and partly to the London Borough of Redbridge (LBR) as housing authorities.

Some houses were sold, in particular under right-to-buy schemes for council tenants. In 2004 the great majority of unsold houses on the estate belonged to LBBD. Only 45 houses on the estate belonged to LBR.

The dispute

The campus became surplus to UEL’s requirements. It wished to sell the campus for housing development. In order to see whether this would be impeded by the covenants referred to above, UEL applied for a declaration from the High Court as to the position.

LBBD and LBR, the first and second defendants, as statutory successors to LCC in respect of the estate, contended that they were entitled to enforce the covenants. They expected to be able to charge substantial consideration for giving consent to UEL’s proposals. In their capacity as education authorities they were concerned at the extra cost of providing education if housing was built on the campus.

One issue was whether the restrictive covenants were also enforceable by council tenants and by owners and tenants of privately owned properties on the estate. Third defendants (‘persons unknown’) were joined in the proceedings. Advertisements and notices were displayed so that some of these persons might participate in the case. No such persons attended or were represented at the trial, perhaps as the real dispute was whether or not UEL had to pay LBBD and LBR to relax the covenants.

The result

What proved to be the decisive factor was not a point taken by the parties to the proceedings but one that was raised by the judge at the close of arguments. He pointed out that the pre-emption covenant applied not only on a sale but also on a parting with possession that was not ‘for the purpose aforesaid’, namely use for education. He held that the intention behind this wording was that on a parting with possession for some other intended use, UEL had only to offer to sell the campus to LBBD and LBR. If the offer was not accepted, UEL could sell the campus free from the covenants.

He also held that if the offer was accepted, the price would be the open market value on the basis that the land was free from the covenants – hardly making the offer attractive.

Comment

The judge’s reasoning is difficult to understand. Surely the intention behind inserting the qualification ‘except for the purpose aforesaid’ was simply that the pre-emption covenant would not be triggered if Essex gave possession to someone carrying on the purpose of education, for example the governing body of a school, other than by sale. The insertion is after ‘to sell or’ and only governs ‘part with possession’. It would not follow that offering to sell the land would wipe out the covenants. On the judge’s interpretation, the express need for the consent of LCC to any change of use could be circumvented easily by parting with possession of the land after offering it to LCC at full development value.

The judge’s interpretation also means that covenants supposedly binding ‘successors and assigns’ would only do so in limited circumstances, in effect where the successors and assigns wished to comply with the restriction to use the land for the purpose of education, and would not be ‘binding’ in the sense of whether they liked it or not.

LCC sold the campus for sums which presumably reflected use for education so as to serve the housing built by LCC. Surely LCC would have expected that it would have the opportunity to participate in any increased value for some other use.

Lightman J said that there was no provision for the price payable to be restricted, for example on the basis of a sale to a third party in the open market but subject to the covenants. Since the provision was entirely silent about the basis of the price, why should not the market value be on the basis that any purchaser other than LCC would have to pay for consent to a change of use?

Benefit of the covenants

Lightman J held that the benefit of the covenants had been assigned to LBBD and LBR under the statutory vesting arrangements. Each had the benefit of the covenants. To give any consent, approval, or to accept any offer under the covenants, they had to concur.

The judge held that the benefit of the covenants was confined to LCC and to any other body to which, by statute, LCC’s statutory housing functions and the estate are transferred with the associated contractual rights. He said that the purpose of the covenants was to impose on Essex and its statutory successors the obligation to fulfil the purpose for which LCC conveyed the land to Essex, and to confer on LCC and its statutory successors the right to require Essex and its statutory successors to fulfil that obligation.

This of course begs the question: if this had been the sole purpose of the covenants, why was that obligation so easy to remove though the pre-emption covenant?

Annexation of benefit

Having held that the benefit of the covenants was assigned, Lightman J said that it was unnecessary to decide whether the benefit was annexed to land. He did however express the view that the benefit was annexed to each and every part of the estate. He referred to the decision of the Court of Appeal in Crest Nicholson Residential (South) Ltd v McAllister [2004] (discussed in PLJ 133). He held that s78 of the Law of Property Act 1925 annexed the benefit of the restrictive covenants to the estate for LCC’s statutory successors, since he saw no contrary intention manifested in the conveyances.

For the purposes of that section, ‘successors in title’ are deemed to include the owners and occupiers of the land of the covenantee intended to be benefited. Lightman J, however, said that the area of the estate protected by these restrictive covenants had at all times been subject to reduction by sales of properties. As the successors envisaged were only those succeeding to LCC’s statutory functions regarding the estate, he held that tenants of LBBD or LBR were not entitled to the benefit of the restrictive covenants nor were purchasers of properties sold off.

In theory the judge’s decision on this point would not have been influenced by the absence of active participation by any council tenants, or owners or tenants of privately owned properties on the estate. However, it is a pity that argument was not pressed on behalf of such persons. Evidently he accepted that the conveyances indicated that there was an intention to benefit the estate. There was no express statement limiting benefit to land from time to time remaining unsold.

Arguably, there was no need to invoke s78. Although the conveyances did not contain words of annexation, the covenants were stated to be in favour of the vendors, their successors and assigns. They indicated that the estate was the land intended to benefit. The vendors were entitled to give consents and to approve plans, but such powers are not unusual. Their existence is not inconsistent with subsequent purchasers having the benefit of the covenants, subject to those powers of granting dispensations or giving approvals.

UEL argued that the references to successors and assigns were only to indicate that the covenants were not personal ones between the parties. That was evidently not accepted by Lightman J.

Burden of the covenants

In line with his decision on the benefit, Lightman J held that these covenants were only binding on Essex and those to whom any of Essex’s functions for provision of education together with the campus were statutorily transferred. Hence purchasers, tenants and licensees were not intended to be bound by the covenants. This accorded with his decision that the pre-emption covenant implied that Essex and its statutory successors could sell or part with possession of the campus for non- educational purposes.

This is in contrast with the normal position, under which restrictive covenants bind whoever may own or occupy the land. Suppose for example that Essex overlooked the pre-emption covenant and just sold off the campus. On the judge’s interpretation, the purchaser would be free to use the land for any purpose (subject to planning control). In theory Essex might then have been liable for not offering to sell to LCC, but it would have been difficult for LCC to establish loss if it would not have bought the land back at full value, assessed free of the covenants.

Conclusion

Having ruled that nobody else could enforce the covenants, Lightman J commented that it was a financial dispute between public bodies. He urged them to settle any outstanding difficulties without further expensive litigation. However, he later gave leave for LBBD and LBR to appeal on certain issues which may or may not be pursued at public expense.

In 1931, on the basis of what was thought to be the legal position at that time, neither LCC nor Essex would have supposed that each tenant on the large Becontree Estate would be entitled to enforce the restrictive covenants. This would have been academic as it was LCC that could give consents and approvals under these covenants.

On the other hand, they could not have expected that restrictive covenants similar to these imposed in 1923 on a previous sale would be given an entirely different meaning by the addition of a few words in parenthesis in an additional covenant creating a right of pre-emption. That right would have been considered a benefit rather than the route for driving a coach and horses through the restrictive covenants.

The moral for draftsmen is to beware of loose words in one provision which may be taken to alter the effect of other provisions in the document. The moral for litigators is that you never know if the judge’s own point will salvage or scupper the client’s case. © Property Law Journal