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How do you assess damages when there has been a breach of a restrictive covenant? The starting point, of course, is that any damages should be ‘compensatory’, and that means that they will initially be based on the diminution in value of the land by reason of the breach.
However, in many cases that approach will not provide sufficient compensation to the claimant, since it will not take into account what the claimant has lost or will lose in the future (eg the right to enforce the covenant at any time by means of an injunction). Accordingly, the court may decide that the defendant should have to pay the claimant an amount that the defendant would reasonably have been willing to pay to secure his release from the covenant.
But, how do you assess the ‘price of release’? The starting point will be to look at the anticipated net profit to be made by the defendant from the development (alternatively, it could be the net development value of the land – which is the amount by which the value of the land is increased due to it being free of the covenant). The percentage to be applied to that is conventionally expressed as the ‘Stokes’ [1962] percentage, and is one third. But, that percentage is not immutable and different percentages have been applied in other cases (eg, as high as 50%, and as low as 5%). One of the leading commentators says that, in practice, claimants should be warned against over-estimating the prospects of recovering a Stokes payment, whilst, at the same time, being advised that a Stokes percentage is a good starting point. From the defendant’s point of view, he may be concerned to reach a quick settlement (especially if a development is pending) and he can at least point to the 5% authority as a starting point for negotiation. In practice, both sides will need to get their surveyors together to see if a price can be negotiated, and it is then important to test the outcome of the hypothetical negotiations against the words used by the court in Amec [2001], where it was said: ‘at the end of the day, the deal has to feel right’. In short, there are no tariffs that can be applied in these cases, but a Stokes one-third percentage is a good starting point. Source: Restrictive Covenants and Freehold Land: A Practitioner’s Guide, by Andrew Francis (2nd edition), published by Jordans, £85.
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