When property meets construction

Archor recently successfully acted for Rose Builders in a long-running dispute over the validity and construction of covenants arising from a land swap agreement.

While the case focussed on property issues as opposed to purely construction matters (including the classification of the covenants, the requirements for their assignment under the Law of Property Act 1925, and the effect of the original beneficiary being dissolved), the Court’s findings provide critical insights that will nevertheless be of interest to parties involved in land development and construction projects.

Case Facts

Rose was the claimant in the proceedings. Alpha was the defendant and is a multi-academy trust operating five schools including a high school previously operated by Manningtree High School (MHS), which has since dissolved. As a result of its dissolution, Alpha acquired MHS’s property, assets and liabilities in 2019.

Back in 2015 when MHS was still operating, Rose and MHS entered into a land swap agreement under which a field some distance away from the school (known as the “Green Land”) was to be transferred from MHS to Rose in exchange for land close to the school being transferred from Rose to MHS. As part of this agreement, Rose agreed to develop, entirely at its own expense, the land close to the school in order to provide certain community benefits for MHS, including building a multi-use games area, expanding and levelling MHS’s on-site playing field, and creating a bus park to improve pupil safety. Rose also agreed to an overage provision that would entitle MHS to receive 50% of the development value of the Green Land in the event it was developed within 25 years.

MHS ultimately transferred the Green Land to Rose in July 2018 (the “MHS Transfer”). The MHS Transfer contained a covenant as follows:

“The Transferee for its[elf] and its successors in title so as to bind the [Green Land] and each and every part of it covenants with the Transferor for its own personal benefit that the Property and any part or parts thereof will not for a period of twenty five (25) years from the date of this Transfer be used for the Prohibited Use”.

The MHS Transfer went on to define Prohibited Use as the use of the land other than as agricultural land.

In April 2022, following MHS’s dissolution, Alpha transferred to Rose a small parcel of land known as the Sliver (the “Alpha Transfer”). The Sliver had intended to form part of the Green Land already transferred to Rose but was accidentally omitted. The Alpha Transfer contained a covenant in materially the same terms as that included in the MHS Transfer.

Both the MHS Transfer and the Alpha Transfer contained provisions allowing the release of the relevant covenant (the “Release Clauses”) on payment of a Variation Price, if payable in accordance with the mechanism set out in the Release Clauses.

Rose subsequently obtained planning permission for the development of the Green Land and the Sliver in March 2023 and was considering releasing the covenants if the Variation Price was acceptable to it. However, as a result of Alpha seeking millions of pounds for that Variation Price (initially £4,536,090.34 and subsequently £3,615,729.56), a dispute arose between Rose and Alpha as to:

(1) Whether Alpha has the benefit of the covenant and/or the Release Clauses in relation to the Green Land; and

(2) The construction, meaning, application and effect of the Release Clauses in relation to both the Green Land and the Sliver.

Judgment on Point 1

The Court determined that the covenant in the MHS Transfer was not annexed to any land and served a purely financial purpose. This classification as a personal covenant meant that it did not automatically transfer with the main school land when Alpha acquired the same upon MHS’s dissolution. Alpha was unable to convince the Court otherwise given that the covenant stated on its face that it was for the personal benefit of MHS. In addition to that, the main school site is on the other side of the village to the Green Land and so it could in no way be said that the main school land is capable of benefiting from a covenant over the Green Land.

The Court went on to find that there was also no valid assignment of the covenant to Alpha because the requirements under section 136 of the LPA 1925 were not met. Specifically, there was no express written assignment identifying the personal covenant to be assigned, nor was there any express notice of such an assignment given to Rose.

Alpha sought to rely on a deed of variation entered into by Rose and Alpha in April 2022 (the “DoV”) to try and cure what it considered to be a defective transfer. The DoV principally corrected a number of errors where the words ‘transferor’ and ‘transferee’ had been inadvertently transposed, but it also contained a recital affirming that Alpha was the successor in title to MHS and so had the benefit of the covenants contained in the MHS Transfer. Although the Court acknowledged the recital was evidence that the parties assumed at the date of the DoV the benefit of the covenant had been transferred from MHS to Alpha, it found that it was not an effective provision and did not constitute an assignment of the benefit of the covenant.

Another unsuccessful argument deployed by Alpha was that Rose was estopped from denying Alpha’s alleged entitlement to the benefit of the personal covenant. In particular, it was said by Alpha that the unambiguous statement in the recital of the DoV could not be resiled from by Rose due to an ‘estoppel by deed’. However, the Court found that the recital rested on a clear assumption that MHS had properly transferred the benefit of the personal covenant to Alpha, which was not the case, and so Alpha could not enforce the same. Further, Alpha had a significant difficulty in relying on estoppel by deed as the authorities suggested the party that continued to be entitled to the benefit of the covenant (i.e. MHS) is required to be a party to the deed, and the DoV was between Rose and Alpha only.

For all these reasons, the Court concluded that Alpha was not entitled to the benefit of the covenant in relation to the Green Land. The question that followed was what happened to the covenant now that its beneficiary had been dissolved. The Court accepted Rose’s submission that the terms of the land swap agreement adequately deal with this, in particular providing that Rose is entitled to give notice of termination if MHS ceases to exist. The result was therefore that Rose’s obligations fell away and all Land Registry entries registered against the Green Land were to be removed.

Judgment on Point 2

In light of the judgment on Point 1, the construction, meaning, application and effect of the Release Clauses in relation to the Green Land fell away. However, this remained a live issue as they applied to the Sliver.

Rose sought certain declarations in respect of the Release Clauses to aid how they should be interpreted but, by the time of the trial, Alpha conceded on some of them which meant that they did not need to be considered by the Court.

Of the declarations that were outstanding, the Court granted declarations in line with Rose’s interpretation of the provisions. This included but was not limited to a declaration that Rose was not obliged, once it had started the procedure to release the covenant, to proceed to pay the Variation Price as agreed between the parties or as determined by an expert no matter how uncommercial. Rose is therefore free to choose to abandon the process and leave the Sliver as undeveloped agricultural land. That is so, said the Court, because there is no obligation on a person who obtains planning permission to carry out the works.

Our Take Aways

The Court’s findings underscore the importance of adhering to statutory requirements for the transfer of personal covenants including those in construction agreements. Developers and contractors must ensure that personal covenants are properly assigned, as well as to consider the implications of corporate dissolution on contractual obligations more generally. The findings also highlight the limitations of relying on recitals in contract documents to establish an entitlement.

While much turned on the specific facts of this case, it still serves as a cautionary tale for parties involved in land development and construction projects all the same.