A claimant has succeeded in a High Court claim in restitution relating to commercial land development in Widnes on the ground that the contractual provision in question, which required payment of £240,000 to a council, was unenforceable as a penalty. David Nicholls explains why.
This was a claim by Upton Rocks Healthcare Limited, which had paid the sum of £240,000 to the Defendant local authority, Halton Borough Council, on 3 December 2019. The sum had been paid in order to obtain the release of a restriction on title that prevented the land from being transferred to the Claimant. The restriction was intended to protect the Council’s interest under a covenant in a transfer of the land made in 2011, which the Council characterised as an overage provision. The Council agreed to the release of the restriction on receipt of payment on the strict understanding that the dispute about whether the payment was properly made would be ventilated at a later date. The Claimant argued that the covenant was unenforceable as a penalty because it imposed a detriment out of all proportion to the Council’s legitimate interest in securing performance of the contract. His Honour Judge Cadwallader (sitting as a Judge of the High Court) agreed following a trial in February 2022 and ordered restitution of the sum paid, plus interest, as well as applying the consequences of Part 36 owing to the Council’s failure to accept the Claimant’s Part 36 Offer.
The land in question was part of a wider site in Widnes that was intended for commercial and residential development. The whole site was transferred to a developer in 2011 who commenced development and the transfer was subject to various overage provisions in conventional form. In 2012, the developer wanted to transfer part of the wider site to a company called Imaan Limited. The Council’s consent to that transfer was sought and obtained on the basis that the transfer of 2011 would be varied to include a new covenant in the following terms:
“The Transferee covenants with the Transferor that it will within 36 months of the date of this transfer commence development on that part of the Property shown hatched black on Plan 4 by the carrying out of a material operation as defined in section 56(4) of the Town and Country Planning Act 1990 (‘Development). If the Transferee has not commenced Development on that part of the Property hatched black on Plan 4 within 36 months from 24 October 2011 the Transferee shall pay to the Transferor the sum of £240,000 plus Value Added Tax thereon.” – “the Covenant”
The land hatched black referred to in the Covenant was part of the wider site that was being transferred to Imaan. At the same time that this land was transferred, the 2011 transfer was varied to include the new Covenant. However, no work was done on the land after Imaan acquired the land until some time after the 36-month period had expired.
In 2019, Imaan wanted to transfer the land to the Claimant but, owing to the presence of the restriction on title, the Council’s consent was required. This consent could only be obtained if the sum of £240,000 was paid by the Claimant, albeit subject to the parties resolving their dispute about whether that sum was properly payable at a later date.
On the Claimant’s claim in restitution to recover the sum paid, there were the following issues for determination at trial:
- The Covenant was made in 2012, varying the transfer of 2011. Did this mean that ‘Development’ done after the date of the transfer of 2011 but prior to the date of the Covenant would be caught by the Covenant or not?
- Was ‘Development’ in fact undertaken within the period of 36 months from 24 October 2011?
- If not, was the obligation to pay the sum of £240,000 unenforceable as a penalty?
- Was the Claimant entitled to restitution of the sum paid?
The Court concluded the effect of the variation meant that any ‘Development’ done in the period of 36 months from the date of the 2011 transfer would satisfy the Covenant, even if done before the deed of variation. The Court also concluded that, based on the expert evidence, it was clear that some works had been done at the site during the 36-month time period. However, these works did not amount to the carrying out of a material operation as defined in s.56(4) of the Town and Country Planning Act 1990, notwithstanding the fact that the authorities such as Malvern Hills DC v Secretary of State for the Environment (1983) P&CR 58 demonstrate that very little needs to be done to satisfy this requirement.
In considering the issue of whether the obligation to pay the sum of £240,000 in the Covenant created a penalty, the Court agreed with the Claimant. The starting point in this regard was the Supreme Court decision in Cavendish Square Holdings BV v Makdessi and ParkingEye Limited v Beavis  UKSC 67, which decided that a provision in a contract will be a penalty if it imposes an obligation on a contract breaker that is a detriment out of all proportion to the injured party’s legitimate interest in performance of the primary obligation. In the instant case, the Court recognised that the Council was seeking to protect its interest in promoting prompt development of the site one way or another. The intention was to incentivise the landowner to develop the site by obliging it to pay a fixed sum if it did not do so within a specified period of time. The Court accepted that this was a legitimate interest for the Council to protect.
But the Court rejected the Council’s argument that the Council was seeking to protect its right to overage on development. The effect of the Covenant went well beyond such protection because it was not limited to development of the kinds that gave rise to a right to overage under the transfer of 2011. This was not a legitimate interest of the Council.
Above all, the Covenant was held to be extravagant, exorbitant and unconscionable. This was because, first, it merely required the commencement of development, not its completion. It therefore restricted the protection of any interest of the Council to a very narrow compass, which was of limited utility or value. For instance, development might be commenced but never completed; or it might not be completed for many years. The Covenant would not stop land banking. Furthermore, any development, once commenced, could be undone again. Whether development was commenced before or after the end of the 36 month period was neither here nor there and the Court concluded that there was no discernible proportion between the sum to be paid and any of the interests of the Council.
This meant the obligation in the Covenant to pay the sum of £240,000 was unenforceable, with the consequence that the Claimant was entitled to restitution of that sum by reason of the basic elements of the principle of unjust enrichment; namely that the Council was enriched, at the Claimant’s expense, and its enrichment at its expense was unjust because the Claimant had been induced to pay money which it should not have had to pay.
The Court made a declaration that the obligation to pay was unenforceable as a penalty, required the Council to repay the sum of £240,000, plus interest; awarded the Claimant its costs, and applied the consequences of Part 36 following the Council’s failure to accept the Claimant’s Part 36 offer made over a year before trial.
The Judgement can be found here.