The Supreme Court held that a covenant by a shopping-centre developer, preventing substantial competing retail units in favour of an anchor tenant, did not engage the common-law doctrine against restraint of trade. Covenants of this kind have long formed an accepted part of commercial leasing arrangements, so they are enforceable without any inquiry into reasonableness. The Court departed from the pre-existing freedom test adopted by the majority in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd.
In 1979 Mr Shortall, a property developer, bought about five and a half acres at Springtown, Londonderry, which had been zoned for retail use. He obtained planning permission for a shopping centre and sought an anchor tenant. Early in 1980 he agreed outline terms with Dunnes Stores: Dunnes would take a long lease of part of the site for a premium of £50,000 and a nominal ground rent, and Mr Shortall would not permit a unit of more than about 3,000 square feet for the sale of food or textiles on the remainder.
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Heads of Agreement followed in November 1980. On 2 February 1981 a 999-year lease was granted to Dunnes Stores (Bangor) Ltd. Dunnes paid the premium, covenanted to erect a store of at least 15,000 square feet and to contribute to the common areas, and Mr Shortall covenanted to build at least six shop units. He also gave the restrictive covenant in issue, providing that development on his land should not contain a unit of 3,000 square feet or more for trading in textiles, provisions or groceries. He promised that any assignee would covenant to observe his obligations. The centre opened in October 1982. In April 1983 Mr Shortall assigned his freehold interest to Peninsula Securities Ltd, a company he controlled. The centre later declined, and Peninsula blamed the covenant.
The proceedings below
Peninsula sought modification or extinguishment under the Property (Northern Ireland) Order 1978 and also claimed that the covenant was unenforceable at common law as an unreasonable restraint of trade. The common-law claim was brought in the High Court. A competition claim was withdrawn. Only the question whether the covenant engaged the doctrine was decided; reasonableness was not reached.
McBride J applied the majority view in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd. A restriction on the use of land engaged the doctrine only if the covenantor surrendered a pre-existing freedom. Mr Shortall had been free to develop the land before the lease, so the doctrine was engaged while he held it. Peninsula became bound at the same moment as it acquired the land and had surrendered no earlier freedom, so the doctrine ceased to apply on the assignment.
The Court of Appeal agreed that the doctrine had been engaged against Mr Shortall, but held that public policy required it to remain engaged after the assignment. It remitted the case for consideration of reasonableness. Dunnes appealed.
The Supreme Court’s reasoning
Lord Wilson, with whom Lord Lloyd-Jones, Lady Arden and Lord Kitchin agreed, reviewed the doctrine. A covenant within it is unenforceable unless reasonable. In Esso the majority, including Lord Reid, adopted a pre-existing freedom test: a person who takes land already subject to a restriction gives up no freedom previously enjoyed, whereas a person who fetters land he already owns does. Lord Wilberforce preferred a trading society test, under which restrictions that have become part of the accepted machinery of a type of transaction generally found acceptable and necessary fall outside the doctrine.
Lord Wilson found no public-policy reason for treating an identical restraint differently according to whether the covenantor previously enjoyed freedom to use the land. The distinction had been criticised as formal rather than substantive and had been rejected in Australia. The Court therefore departed from the pre-existing freedom test, using the facility recognised in the 1966 Practice Statement, and adopted the trading society test. A land covenant does not engage the doctrine if it has passed into the accepted and normal currency of commercial or conveyancing relations, unless changed circumstances require the position to be re-examined.
Application of that test was straightforward. The evidence was that negative covenants in favour of anchor tenants were not uncommon, especially in long leases where the landlord had received a premium and thereafter had no financial interest in how the centre traded. Canadian and Australian authority confirmed that such covenants have long been accepted in shopping-centre leases. There was no basis for concluding that social change required a different result. The covenant had therefore never engaged the doctrine.
Lord Carnwath agreed that the pre-existing freedom test should be discarded and that the trading society approach was preferable. He added that the arrangement was essentially a transaction in land, not a trade agreement between traders. No authority supported protecting the mere possibility that a future occupier might wish to trade in the restricted goods. Although the doctrine can extend to restraints on a developer’s business, the ability to offer an anchor-tenant covenant facilitates rather than restricts that business. Mr Shortall had a free choice between accepting Dunnes’ terms and proceeding without an anchor tenant, and public policy did not require the contract to be undone.
The statutory claim
Both judgments recorded that Peninsula’s alternative claim under the 1978 Order, which gives a discretion to modify or extinguish an impediment to enjoyment of land and to consider compensation, should now be heard. Nothing in the Supreme Court’s reasoning was to influence the issues arising under that Order.
Verdict: The Supreme Court unanimously allowed Dunnes’ appeal and dismissed the common law claim. The anchor-tenant covenant did not engage the restraint of trade doctrine, so its reasonableness did not have to be decided. Peninsula’s separate statutory claim to modify or extinguish it remained outstanding.
Source: Peninsula Securities Ltd v Dunnes Stores (Bangor) Ltd [2020] UKSC 36
