Restraint of trade
Covenant preventing lettings to competitors with "anchor tenant" - Supreme Court
A covenant restricting a developer of a shopping centre from letting units to retailers in competition with its “anchor tenant” did not fall within the restraint of trade doctrine and was therefore enforceable. In doing so, the Supreme Court departed from the “pre-existing freedom” test for the doctrine, as enunciated by the majority of the House of Lords in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd  AC 269, in favour of the “trading society” test preferred by the minority.
A developer of a shopping centre in Springtown, Londonderry leased part of it to Dunnes Stores, a well-known retailer (“the Lessee”). The developer covenanted with Lessee that he would not allow any substantial shop to be built on the rest of the centre in competition with the retailer, before assigning his interest to Peninsula Securities Ltd, a property holding company (“the Lessor”). The Lessor considered that the centre was ailing and that the covenant was preventing its revival. Accordingly, the Lessor claimed against the Lessee for a declaration that the covenant fell within the restraint of trade doctrine, which will render a covenant restraining trade unenforceable unless it is reasonable.
The trial judge held that the covenant was enforceable against the Lessor according to the “pre-existing freedom” test set out by the majority in Esso. This stated that a covenant restrictive of the use of land engaged the doctrine only if the covenantor had, by entry into it surrendered a pre-existing freedom to use the land as he wished. On that basis, the judge considered that the doctrine had been engaged whilst the developer held the land, since he would have been free to build retail units of any size before he became bound by the covenant. However, the judge held that the doctrine ceased to apply upon the lease being assigned to the holding company: since the Lessor had become bound by the covenant at the same time as it had begun to hold the land, it had not surrendered a pre-existing freedom in subjecting itself to the covenant. The Lessor appealed.
Decision on first Appeal
In allowing the Lessor’s appeal, the Court of Appeal disagreed with the judge that the doctrine ceased to apply upon the assignment. Whilst a strict application of the “pre-existing freedom” test would permit the judge’s conclusion, the Court reminded itself that the doctrine was founded on public policy and that this was a surer foundation for inquiry into the continuing engagement of the doctrine following the assignment. In terms of logic, there was no reason of public policy why the doctrine should not have continued to be engaged. The Lessee appealed.
The Supreme Court considered that its duty on appeal was to determine whether, in terms of logic and public policy, the developer should have enjoyed the benefit of the doctrine in the first place just because he had surrendered a pre-existing freedom. This required the Court to consider whether that test was an acceptable criterion for engagement of the doctrine.
Decision of the Supreme Court
The Supreme Court unanimously allowed the Lessee’s appeal. Lord Wilson (giving the leading the leading judgment) noted that “the passage of half a century since the appellate committee in the Esso case established the pre-existing freedom test has not generated a reasoned defence of it”. In terms of public policy, there was no explanation as to 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. This had the potential to produce highly capricious results since public harm could result in either case. The doctrine should not, therefore have been confined to the former scenario in Esso. Indeed, the test had already been rejected in Australia and in parts of Canada.
Having rejected the “pre-existing freedom” test, Lord Wilson moved on to consider the viability the alternative “trading society” test, as preferred by the minority in Esso. Under this test, a covenant which restrains the use of land does not engage the doctrine if it is of a type which has “passed into the accepted and normal currency of commercial or contractual or conveyancing relations” and which may therefore be taken to have “assumed a form which satisfies public policy”. Unlike the “pre-existing freedom” test, this was considered to be consonant with the doctrine.
Applying that test to the facts of the case, Lord Wilson unhesitatingly concluded that the covenant did not engage the doctrine, on the basis that is has long been accepted and normal for the grant of a long lease in part of a shopping centre to include a restrictive covenant on the part of the lessor in relation to the use of other parts of the centre. Indeed, such a covenant can be seen to provide a mechanism for a landlord to attract an anchor tenant to a shopping centre with a view to increasing economic activity there as a whole.
The Court’s decision may present some challenges to practitioners advising on the enforceability of covenants that have the effect of restricting trade (and where s84 of the Law of Property Act 1925 has no application). Indeed, the judgment acknowledges that the “trading society” test is “no more than an imprecise guide”. However, where more novel covenants are encountered, further guidance can be found in Lord Carnwarth’s supporting judgment.
This makes it clear that covenants affecting trade should be seen as “essentially a trade agreement between traders”, rather than a transaction in property. This means that the key question in applying test is whether, in the light of established practice, there is in the relevant context any public policy reason for interfering in the free process of negotiation between the parties or seeking to redress the balance of interests between them. The historical pedigree (or otherwise) of the covenant is relegated to secondary importance.
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