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Beware the intention behind restrictive covenants

Jones and another v Oven and another [2017] EWHC 1647 (Ch)

The High Court has recently ruled in the above case that the definition of “retained land” in a transfer included land which might (and might not) be transferred back to the owners at a later date as provided for in the transfer. This case highlights how a court may be willing to construe the meaning of a contract against its literal interpretation.

The facts

This case centred on a dispute between two neighbours regarding a transfer of a strip of land 4 metres wide (Strip).

The Strip had been part of a parcel of land sold by Mr & Mrs Jones in 2003 to Mrs & Mrs Oven’s predecessor in title, for the purpose of residential development. The contract and transfer for this sale contained a provision that if a barn on the land transferred was demolished, the owners of that land (in this case, the Ovens) would re-transfer the Strip, without charge, back to the Joneses.

Within the original transfer, the Joneses entered into restrictive covenants so as to bind their retained land, for the benefit of the land sold, by prohibiting the carrying out of agricultural activities that would be a nuisance to residential neighbours.

In 2005 the Ovens’ predecessors in title transferred part of the land as a residential property and the transfer contained similar provisions to the 2003 transfer. In 2009 the barn was demolished and the parties were unable to agree on whether the restrictive covenants that the Joneses gave in 2003 should apply to the transfer back of the Strip.

The Joneses sought an order for specific performance of the promise to transfer back the Strip and damages for Mr and Mrs Oven’s breach of contract.

The Ovens requested the court to construe “retained land” in the 2003 sale contract to mean not only the land held at the time but also the Strip, and further that the transfer back of the Strip should be subject to a restrictive covenant from the Joneses on the same terms.

The issues

  1. Do the restrictive covenants entered into in 2003 apply to the Strip once transferred back to the Joneses?
  2. Should the court order specific performance of the covenant for the re-transfer of the Strip, originally entered into by the Ovens’ predecessors in title in 2003 and then by the Ovens in 2005?
  3. If so, should specific performance only be ordered on terms that the Joneses agree to use the Strip in accordance with the restrictive covenants of 2003?
  4. Are the Ovens in breach of contract in failing to transfer the Strip at any time since 2010?
  5. If they are, have the Joneses suffered any recoverable loss?

The basics

A restrictive covenant is, in basic terms, a restriction on the use of land which in some way benefits another person’s land. It will be negative in nature (i.e. it will not require someone to actively do something) and will be enforceable by and against successors in title.

The High Court relied on the ruling of Lord Neuberger in the case of Arnold v Britton [2015] AC 1619 in analysing the correct interpretation of contracts as “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean”. This is to be applied by considering the actual provision, the remainder of the contract, the facts and background to the contract by giving appropriate weight to business common sense or the commercial purpose of the contract, and avoiding giving the literal meaning to words where that would lead to an unreasonable result.

The court’s decision

The court decided that the definition of “retained land” included the Strip and awarded specific performance of the Ovens’ covenant to transfer the Strip.

The argument was whether the phrase “retained land” could include land which is not at that time retained, but is adjacent to the retained land, and is later transferred. On a literal reading the Strip could not be part of the “retained land” as defined.

The court found that the consequence of a literal reading were startling, as although the Joneses were restrained from carrying out certain activities that would be a nuisance on the retained land, they would not be so restrained in relation to the Strip between the retained land and the Ovens’ residential property. This negated the purpose of entering into the covenants in the first place.

The court highlighted that it was clearly the intention of the parties that the land that the Joneses retained in the vicinity of the Ovens’ property was to be burdened by covenants in order to make the Ovens’ property a viable residential development. “Retained land” was therefore construed as including the Strip.

The court held that if the above construction was wrong, then a term had to be implied to give business efficacy to the transaction.

Practice points

  1. Although this is an unusual case, it does highlight the need for developers to review the terms of restrictive covenants on potential acquisitions to fully understand the context of their imposition.
  2. This case highlights that a court may construe the meaning of a contract against its literal interpretation where the consequence of a literal interpretation would be incomprehensible.
  3. It is imperative for practitioners to ensure that their drafting is sufficiently clear to accurately reflect the terms of the deal.

Published: September 2017


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