Landlord and tenant – Restrictive covenant – Restraint of trade – Appellant appealing against decision that restrictive covenant in lease was unenforceable as unreasonable restraint of trade – Whether doctrine of restraint of trade applying to restrictive covenant in lease granted by respondent’s predecessor to appellant – Appeal allowed
A developer (S) wished to develop a shopping centre on land that he owned in Londonderry. He granted a lease to the appellant, a subsidiary in a Dublin-based group of retail companies, as an anchor tenant, in order to attract other retailers. In the lease he covenanted that any development on the site would not contain a unit of 3,000 sq ft or more whose purpose was the sale of food or textiles. The appellant built its store and the centre opened. S later assigned his freehold interest in the land, together with the burden of the covenant, to the respondent, a property holding company which he managed and which he and his wife owned.
When the success of the shopping centre declined, the respondent brought a claim in the High Court seeking, among other things, a declaration that the covenant was unenforceable at common law as an unreasonable restraint of trade. The judge held that, following the decision of the House of Lords in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 (a leading authority on determining whether covenants restricting the use of land fell within the doctrine of restraint of trade) it was necessary, in order to determine whether the covenant engaged the doctrine, to ask whether S or the respondent had, on entry into the covenant, surrendered a pre-existing freedom to use the land. She concluded that S had surrendered such a freedom, but that the respondent had not. Accordingly, the covenant had engaged the doctrine only until the assignment to the respondent. The respondent’s appeal was allowed. The court held that the doctrine had been engaged both before and after the assignment: [2018] NICA 7. The appellant appealed to the Supreme Court.
Held: The appeal was allowed.
(1) In Esso, Lord Reid, with the support of the majority, formulated the “pre-existing freedom” test whereby a covenant restraining the use of land would engage the doctrine of restraint of trade if, on entering into it, the covenantor gave up some freedom which otherwise he would have had. Lord Wilberforce put forward a different test, known as the “trading society” test, under which a covenant restraining the use of land did not engage the doctrine if it was of a type which had passed into the accepted and normal currency of commercial, contractual or conveyancing relations and which might therefore be taken to have assumed a form which satisfied the test of public policy.
(2) The court’s duty in this case was to look more closely at the decision in Esso in the light of the questions of logic and public policy on which the Court of Appeal touched and ask whether the surrender of a pre-existing freedom was an acceptable criterion for engagement of the doctrine.
The appellant’s preliminary argument, that as neither S nor the respondent was a trader no restraint on them could be a restraint of trade, was too narrow. The doctrine extended to restraints not only of trade but also, more generally, of business, thus including that of a developer. In any event, the covenant did restrain trade because it restrained the respondent from causing or permitting a trade in specified goods in a retail unit of a specified size on the site.
(3) The passage of half a century since the appellate committee in Esso had established the pre-existing freedom test had not generated a reasoned defence of it. Early academic criticisms remained unrebutted. In terms of public policy, which was the foundation of the doctrine of restraint of trade, there was no explanation why a restraint should engage the doctrine if the covenantor enjoyed a pre-existing freedom but why an identical restraint should not engage it if he did not do so. By contrast, the trading society test was consonant with the doctrine.
The court should therefore make use of its ability, recognised in the Practice Statement (Judicial Precedent) [1966] 1 WLR 1234, to depart from one of its previous decisions, and should depart from the pre-existing freedom test formulated in the Esso case. Apart from the fact that, even at the time, Lord Wilberforce chose not to associate himself with it, the objections to the test were that it had no principled place within the doctrine; it had been criticised for over 50 years but scarcely defended; and courts in Australia and parts of Canada had rejected it.
(4) The application of the trading society test to the facts of this case was straightforward and so there was no need to send the matter back to a lower court. It had long been accepted and normal for the grant of a lease in part of a shopping centre to include a restrictive covenant on the part of the landlord in relation to the use of other parts of the centre. It followed that the covenant in the case had at no time engaged the doctrine of restraint of trade.
(5) The respondent sought an alternative remedy under the Property (Northern Ireland) Order 1978, which empowered the Lands Tribunal or the High Court to modify or extinguish the covenant if it constituted an impediment to the enjoyment of land. That was a more satisfactory vehicle for resolution of the issues in the present case.
(6) (Per Lord Carnwath concurring) As an exception to ordinary principles of freedom of contract, the doctrine of restraint of trade should not be extended without justification beyond established categories. What mattered was the practical effect of the restriction in the real world, and its significance in public policy terms. This case was different from Esso and the other trading cases: the agreement was not in essence an agreement between traders but a transaction in land. The only trade which might be inhibited was that of a potential future occupier. None of the authorities suggested any public policy reason or legal basis for protecting that mere possibility. The covenant in the present case did not restrict, but rather facilitated, the developer’s business.
Michael Humphreys QC and Margaret Gray QC (instructed by Pinsent Mason Belfast LLP) appeared for the appellant; David Dunlop BL and Alistair Fletcher BL (instructed by A & L Goodbody, of Belfast) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read a transcript of Peninsula Securities Ltd v Dunnes Stores (Bangor) Ltd
