Land – Restriction on title – Penalty – Claimant seeking to recover payment made to defendant under deed of variation of contract for sale of commercial land – Whether works carried out before deed of variation satisfying requirement to commence development – Whether obligation to make payment unenforceable as penalty – Claim allowed
The claimant owned land in Widnes, Cheshire, which was part of a wider site intended for commercial and residential development. In 2011, the whole site was transferred to a developer which commenced development. The contract provided for payments to the defendant by the developer if planning permission was granted at any time during a long overage period of 50 years starting on the completion date.
In 2012, the developer transferred part of the wider site to Imaan Ltd. The defendant’s consent to that transfer was obtained on the basis that the 2011 transfer would be varied to include a new covenant that the transferee would, within 36 months of the date of the transfer, commence development on a specified part of the land, failing which it would pay to the defendant the sum of £240,000.
In 2019, Imaan wanted to transfer the land to the claimant, which required the defendant’s consent owing to the restriction on title. That could only be obtained if £240,000 was paid by the claimant, subject to the parties resolving their dispute about whether that sum was properly payable at a later date.
The claimant subsequently sought to recover the £240,000 from the defendant on the basis that certain works carried out before the deed of variation satisfied the requirement to carry out development as defined in the deed of variation. Accordingly, Imaan was never obliged to pay the defendant £240,000. In any event, the supposed obligation to pay the £240,000 was unenforceable as a penalty.
Held: The claim was allowed.
(1) Because the time limit in the deed of variation was calculated from the date of the 2011 transfer, and the £240,000 was payable if development had not commenced within the period of 36 months from that date, work done at any time during that 36-month period might satisfy the provision, even if it was done before the deed of variation. The covenant to commence the development, and the covenant to pay, needed to be read consistently with each other. The covenant to pay was in terms which contemplated work being carried out at any time within the whole of the 36-month period starting from the date of the 2011 transfer. It followed that the covenant to commence development was capable of being satisfied by work which predated it. The point of the covenant was, so far as possible, to ensure that development was commenced, and to make it the responsibility of the covenantor and its successors to ensure that it was: commercially, nothing turned on when it was commenced within the 36-month period, or by whom.
(2) The question then was whether, by the works carried out, the transferee had commenced development on the site by the carrying out of a material operation as defined in section 56(4) of the Town and Country Planning Act 1990. Very little needed to be done to satisfy the section. The claimant contended that they fell within section 56(4)(a) and (d) as work of construction in the course of the erection of the building, or any operation in the course of laying out or constructing a road or part of a road. They were essentially necessary and preliminary stages for any such construction. However, it did not follow that they must have been works of construction in the course of the erection of the building, or operations in the course of laying out or constructing a road or part of a road. There was no evidence to that effect and it could not simply be assumed. Accordingly, that part of the claimant’s case which depended on development having been carried out did not succeed: Malvern Hills District Council v Secretary of State for the Environment [1982] EGD 1217; 263 EG 1190; (1983) P&CR 58 considered.
(3) A penalty clause was a clause which, in breach of the primary obligation of the contract, imposed upon a contract breaker a detriment out of all proportion to the injured party’s legitimate interest in performance of the primary obligation. The ultimate question was whether the clause under attack went beyond the legitimate interests of the injured party in performance of the contract: Cavendish Square Holdings BV v Makdessi [2015] UKSC 67; [2016] EGLR 15 applied.
In the present case, it was obvious from the clause itself that the defendant was seeking to protect its interest in promoting prompt development of the site in one way or another, without specifying which, and incentivising the landowner to do so (over and above the covenant to commence development) by obliging it to pay a fixed sum if it did not. That was a legitimate interest for the defendant to protect.
(4) However, the covenant was extravagant, exorbitant and unconscionable. It merely required the commencement of development, but not its completion; it had restricted its protection of any interest of the defendant to a very narrow compass, and one of very little utility or value, if any, since development might be commenced but never completed, or not completed for many years. The overage provisions were already very extensive. If development were undertaken which engaged them but only commenced after the 36-month period, the defendant would be entitled to be paid both overage and £240,000. If development were commenced only one day after the 36-month period, the £240,000 would be payable, whereas if it were commenced only one day before the end of that period, it would not. Having regard to those considerations, there seemed to be no discernible proportion between the sum to be paid and any of the interests of the defendant. That fell squarely within the law relating to penalties, and to render the payment provision unenforceable.
Consequently, the claimant was entitled to restitution of the sum of £240,000 by reason of the basic elements of the principle of unjust enrichment; the defendant was enriched, at the claimant’s expense, which was unjust because the claimant had been induced to pay money which it should not have had to pay.
David Nicholls (instructed by Square One Law LLP) appeared for the claimant; Wilson Horne (instructed by Weightmans LLP) appeared for the defendant.
Eileen O’Grady, barrister
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