Restrictive covenants on land and contractual interpretation

In both Cheung v MacKenzie and McDonagh v Reeve, the respective parties hoped for different outcomes in relation to the ability to develop, and therefore had different interpretations of the restrictive covenants in play.  So, when one party believes that a covenant or a clause says one thing, and another party believes it says something else, how does the law resolve the situation?

What’s the correct approach to contractual interpretation?

The starting point for a court (and therefore for any settlement discussions/negotiations between disputing parties) is to look at the actual wording of the contract/covenant itself.  Wherever possible, the courts will strive to uphold the natural and ordinary meaning of the words.  They will apply the objective test of what the reasonable businessperson would understand the clause to mean, even if that results in a ‘bad’ bargain for any party [3].

The court’s task is to ascertain the meaning of the language when read in the context of the factual background known or reasonably available to the parties at the time of the agreement [4].

However, where a covenant or clause might be interpreted in different ways, the court is entitled to prefer the interpretation which is consistent with business common sense [5].

Alternatively, where it is commercially and practically necessary, a court may imply terms into the provision, to ensure business efficacy [6].

In short, a literal approach to contractual interpretation will be adopted wherever possible. However, historic, convoluted or poorly drafted covenants often lack clarity. A court interpreting such provisions may take into account the factual matrix to ascertain the objective meaning.

Recent restrictive covenants cases

In Cheung v MacKenzie, the property was subject to a restrictive covenant in a conveyance.  The covenant prohibited the erection of anything other than a sole detached private residence with associated outbuildings.  In response to a planning permission to demolish a house at the property and erect a block of 9 flats, a neighbouring owner applied to court for an injunction to prevent the proposed development.  The neighbour asserted that erecting 9 flats would breach the restrictive covenant.

Looking at the conveyance as a whole, another contractual provision was also relevant:

Paragraph 11, Third Schedule “The Governors reserve the right to deal with any of the plots situated upon this estate or any of their adjoining or neighbouring land without reference to and independently of these stipulations [one of which was the restrictive covenant in question] and also reserve the right to allow a departure from them”.

The neighbour argued that paragraph 11 comprehensively referred to the landowner/developers’ right to enter other, future dealings (such as future plot sales) on terms which might be different from the terms stipulated in this conveyance of this property.  The landowner/developer argued that paragraph 11 also separately allowed the modification or discharge of the restrictive covenant in connection with the particular property in question.  It was a subtle difference in interpretation, but with very significant consequences.

The court agreed with the landowner/developer.  It held that, as a matter of language, and in particular taking into account the words “and also”, there were two distinct parts to paragraph 11 which had different purposes. The first related to future dealings or disposals with the retained land.  The second was a right to release any of the stipulations (including the restrictive covenant) connected with the property. The natural reading of the words “the right to allow a departure” was said to be broad enough to allow a departure from the restrictive covenant.  The words would have been understood in that way by “a reasonable reader having the background knowledge available to the parties”. The court therefore confirmed that modification of the restrictive covenant to permit the development of the 9 flats was contractually permissible – it would fall within the second right at paragraph 11.

In McDonagh v Reeve, a neighbour had the benefit of a restrictive covenant providing that “no additional buildings whatsoever” should “at any time be erected” on the land. The proposed developers wanted to demolish the existing building and replace it with a substantially larger building.  They sought a court declaration that that wouldn’t amount to a breach of the restrictive covenant.

The court considered (1) whether any building erected on the land, either in addition to or in replacement of, the original building, constituted an “additional building”; and (2) if not, whether, any new building should have to equate to the original building in size or area.  It all came down to contractual interpretation.

The court considered the factual matrix. (For example, non-exhaustively, it decided that the covenant was more concerned with protecting a sea view than any particular density metric; and it noted that there was no wider building scheme to take into account.)  In relation to the first question, the court concluded that, at the time the covenant was made, it was not intended to prohibit the erection/existence on the land, for evermore, of any building other than the specific building that existed at that time.  Rather, the sensible interpretation was that the covenant protected against the erection of buildings in addition to, in the sense of ‘as well as’, the existing building.  In relation to the second question, the court held that if the covenant was intended to place limits upon the size and footprint of any replacement building, or to preclude any alteration, or extension to the existing building, then one would have expected it to expressly say so.  Such a significant interference with a landowner’s rights to deal with its property couldn’t be implied.

So, in another development-friendly decision, the court was satisfied that the restrictive covenant didn’t prohibit the proposed development

What practical advice arises in relation to the modification/discharge of restrictive covenants?

These cases are a reminder that there are different routes available to landowners/developers who wish to develop in potential contravention of a restrictive covenant.  Specialist advice will be required on a case-by-case basis as to whether an application to the Upper Tribunal (Lands Chamber) (UT) under section 84 LPA, or an application to the courts, is appropriate or preferable.

The cases also highlight the importance of reading conveyances, deeds or other contractual documents, or even entire suites of documents, as a whole.  The entirety of the contractual arrangement forms part of the factual matrix which will be considered in any interpretation exercise.

Beware reading with rose-tinted spectacles.  This is a really common pitfall, but can lead to a party seeing only the interpretation it wants to see.  Be objective and strict in your reading of the words, and prioritise their ordinary and natural meaning.

Remember also to read, and to pay full attention to, all of the words that appear.  An entire case can turn on seemingly innocuous words (such as “and also” in Cheung v MacKenzie).

Equally, resist the temptation to imply words or concepts.  The legal test for implying terms is a high bar, so courts will not imply terms lightly.

Restrictive covenants: How we can help

Walker Morris’ specialist real estate litigators are experienced and expert when it comes to the enforcement, modification or discharge of restrictive covenants affecting land – whether that be in relation to freehold or leasehold land, and whether it be in relation to commercial negotiations or legal recourse via an UT or court application.

If you are a landowner or property developer and would like any advice or assistance in relation to the enforcement or relaxation/removal of restrictive covenants, please contact David Manda or any member of our Real Estate Litigation team.

[1] [2023] EWHC 220 (Ch)
[2] [2023] EWHC 933 (Ch)
[3] Arnold v Britton [2015] UKSC 36
[4] Wood v Capita Insurance Services Ltd [2017] UKSC 24
[5] Rainy Sky SA v Kookmin Bank [2011] UKSC 50
[6] M&S v BNP Paribas [2015] UKSC 72