UK: Restrictive Covenants: Transfer Of Benefit And Burden

Last Updated: 3 December 2013
Article by Emma Humphreys

Goodman & Ors v Elwood [2013] EWCA Civ 1103

Facts

This dispute centred on the Defendants' liability to contribute to the cost of maintaining an estate road used to access their industrial units.

Prior to 1986, the estate – including its roads – was owned by Dobson Park Properties Limited ("D") and there were negotiations for the Defendants to purchase the freehold of their units (which they occupied as tenants). At the same time, D was negotiating with Mr Elwood ("E") to sell part of the estate to him, including the estate roads. The Defendants were aware of this and were informed that E would grant them the necessary rights of way over the estate roads and that E would be responsible for maintaining the road, provided that the Defendants contributed to the cost of doing so.

In September 1986, D sold part of the estate to E. The Transfer reserved a right of way over the road in favour of D, its successors and their tenants and licensees. In return for E's covenant to maintain the road, D covenanted that D and its successors in title would contribute a fair and reasonable proportion of the expenses. Subsequent to this, in December 1986, D sold the freehold interests in the industrial units to the Defendants and granted them the right to use the estate road. In return, they covenanted to contribute to the expenses "incurred by the Vendor and its successors" in maintaining the road.

The Defendants initially challenged E's method of assessing their contribution to the costs incurred in maintaining the road, but subsequently disputed any contractual liability at all. There were two key bases for the challenge, both resulting from the fact that - at the time of the transfers to the Defendants - the road had already been transferred by D to E: (1) E did not have any contractual relationship with D under either of the transfers so as to enable him to force the Defendants to pay the contribution; and (2) E was not D's "successor" so the costs incurred by him in maintaining the road did not fall within the costs recoverable via the contribution covenant contained in the December Transfers to the Defendants.

Following this challenge, D assigned to E the benefit of the contribution covenant given by the Defendants in the December Transfers of their units. The effectiveness of this assignment was not challenged and it therefore dealt with the first of the Defendants' arguments. However, the Court was asked to consider the construction of the contribution clause and whether the costs incurred by E were recoverable from the Defendants pursuant to the December Transfer, or on the basis of equitable principles of benefit and burden (as illustrated by the decision in Halsall v Brizell [1957] Ch 169).

There was a dispute between the parties as to whether the Defendants had been aware of the fact that E already owned the road at the time they purchased their units but the Judge at first instance was satisfied that the Defendants had had no reason to think that the sale to Mr E had not completed nor to expect anyone other than E to become the owner of the road.

The proceedings focused on one of the purchasers of the industrial units ("G"), with the findings to bind the other Defendants.

Issues

The Court had three issues to address on appeal:

  1. G's liability (as a purchaser of one of the industrial units) under the covenants contained in the December Transfer;
  2. G's liability under the equitable principles of transferring benefit and burden;
  3. if so liable, whether the extent of the liability extended to additions to the roadway which post-dated G's acquisition of the unit.

Decision

Liability in contract: the covenant in the December Transfer

G submitted that it was irrelevant that D had assigned the benefit of the covenant contained in the December Transfer to E, on the basis that "successor" could not be construed widely enough so as to include E because it applied only to prospective owners of the estate. Although the Court accepted that a reference to "successors in title" will usually mean subsequent owners of the relevant property, it felt that this would be a "surprising" conclusion where the purpose of a clause was to continue G's liability regardless of a change in the ownership of the estate.

The Court emphasised that the meaning given to words in any contractual document depends upon construing the language against the admissible background facts. Since E's ownership of part of the road would have been a matter of public record by the time of the December Transfer, the Court found that this information would have been available to the reasonable bystander as part of the admissible background and not merely as "extrinsic evidence". Construing the language against this background, the Court felt that the intention of the covenant was to require the owners of the industrial units to contribute towards the costs incurred by D or its successors on maintaining the road and that there was no reason to give the words a "time restricted meaning" which would "exclude the very person who would be the owner and repairer of [the road] for the foreseeable future" and "destroy the commercial purpose of the bargain". The Court described E as "on any view, a "successor" to [D]".

Thus, G was held to be contractually liable to contribute towards E's costs of maintaining the road.

Liability in equity: benefit and burden under the December Transfer

The Court reviewed the three conditions which had been outlined in Davies v Jones [2009] EWCA Civ 1164 as needing to be satisfied in order for the burden of a positive covenant to be enforceable against the covenantor's successors-in-title, namely:

  1. the benefit and burden should be conferred in or by the same transaction;
  2. the receipt/enjoyment of the benefit must be relevant to the imposition of the burden in the sense that it is conditional on/reciprocal to the latter; and
  3. the person with the alleged burden must have/have had the opportunity to reject the benefit, not merely the right to receive it.

E accepted that the second requirement was not satisfied by the December Transfer because the covenant had not been given in return for or in relation to the grant of the rights of way by E. However, E argued that the obligation came from the September Transfer where D covenanted that it and its successors-in-title would contribute to the maintenance costs of the road. Emphasising the importance of substance rather than form, the Court confirmed that there was a "clear and obvious link" between the rights of way reserved over the road and the obligation to contribute to the cost of repairs. The Court rejected the Defendants' argument that D's covenant with E to contribute to the maintenance costs was personal to D and noted that the language of the September Transfer contradicted this.

The Defendants also pointed out that the covenant in the September Transfer assumed that the transferor (i.e. D) continued to own all of the units and not merely one of the units; there was no machinery to cater for sub-division. However, the Court held that a purchaser who obtains part of retained land must assume the burden of contribution appropriate to the land which he acquires, namely "a fair and reasonable proportion of expenses incurred in the maintenance of a portion of [the road] upon which the unit (rather than the units) abuts".

The Defendants also sought to argue that equity required the burden of the contribution covenant to have been registered under s.20(1) Land Registration Act 1925 in order to bind successors-in-title, as a positive covenant which did not constitute an overriding interest. The Court noted the lack of authority on this point and the fact that the Registrar had introduced the concessionary practice of allowing positive covenants to be registered on an annex to the registered title in order to assist parties to decide on the need for indemnity covenants. It also noted that the burden of a positive covenant only gives a third party the personal right to enforce the covenant in equity against the registered proprietor.

The Court concluded that the effect of registration under s.20(1) was to ensure that the purchaser takes the legal estate subject to registered incumbrances but otherwise free for all estates and interests. It therefore felt that – to be registrable – an incumbrance should be capable of creating an estate of interest in the registered land. Since the burden in equity of positive covenant does not do so, the Court concluded that it did not need to be registered in order to bind successors.

Liability for the widened road

On the issue of whether the Defendants were liable to contribute to the costs of maintaining an extra strip of roadway which E had added to the road adjacent to their units, the Court noted that there had been no finding that the Defendants had acquired a right of way to use this additional strip (which did not form part of the road at the time of either the September or December Transfers). The Court therefore held that the Transfers should be construed as referring only to the road existing at that time. Repeating the point that the burden of a positive covenant should only pass where there is a correlation between the rights granted and the obligations imposed, the Court stated that it could not see a liability for the Defendants in relation to the additional area.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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