Peninsula Securities Ltd v Dunnes Stores (Bangor) Ltd (Northern Ireland) [2020] UKSC 36

A developer leased part of a shopping centre to Dunnes Stores, covenanting not to allow competing large units elsewhere on the site. The developer's assignee later challenged the covenant as an unreasonable restraint of trade. The Supreme Court rejected the pre-existing freedom test, adopting the trading society test instead.

Facts

In 1979, Mr Shortall, a property developer, purchased approximately five and a half acres of land zoned for retail use in Springtown, Londonderry. Seeking an anchor tenant for a proposed shopping centre, he negotiated with Dunnes Stores. In February 1981, Mr Shortall granted Dunnes a 999-year lease of just over one acre of the site, in consideration of a £50,000 premium and £100 annual ground rent. The lease contained a restrictive covenant by the lessor that any development on his adjoining retained land would not contain a unit of 3,000 square feet or more for trading in textiles, provisions or groceries (“the covenant”).

In 1983, Mr Shortall assigned his freehold interest to Peninsula Securities Ltd, a company he controlled. Following a decline in the centre’s success, Peninsula sought a declaration that the covenant was an unreasonable restraint of trade and therefore unenforceable.

Issues

The narrow issue before the Supreme Court was whether the covenant engaged the doctrine against restraint of trade at all. This required the court to consider the validity of the “pre-existing freedom test” adopted by the majority in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269, under which a covenant restricting the use of land engages the doctrine only if the covenantor surrendered a pre-existing freedom to use the land.

Arguments

Dunnes (Appellant)

Dunnes initially argued that because Mr Shortall and Peninsula were a property developer and property holding company respectively, rather than traders, no restraint on them could amount to a restraint of trade. More substantively, Dunnes invited the court to depart from the pre-existing freedom test, contending that such covenants in favour of anchor tenants were a common and accepted feature of shopping centre developments.

Peninsula (Respondent)

Peninsula contended that the covenant engaged the doctrine and was unreasonable. It relied on the Court of Appeal’s reasoning that public policy provided a surer foundation than the pre-existing freedom test and that there was no reason of public policy why the doctrine should cease to be engaged upon assignment.

Judgment

Lord Wilson (with whom Lord Lloyd-Jones, Lady Arden and Lord Kitchin agreed) allowed the appeal and dismissed Peninsula’s common law claim. Lord Carnwath delivered a concurring judgment.

Rejection of the Pre-existing Freedom Test

Lord Wilson conducted a detailed analysis of the speeches in the Esso case, identifying three competing criteria: Lord Reid’s “pre-existing freedom” test (supported by Lords Morris and Hodson), Lord Pearce’s “sterilisation of capacity” test, and Lord Wilberforce’s “trading society” test. He reviewed the academic criticism, notably from J D Heydon, and surveyed common law jurisprudence from New Zealand, Ireland, Canada and Australia, noting that Australian courts had progressively rejected the pre-existing freedom test.

Lord Wilson held that the pre-existing freedom test had no principled basis in public policy, which is the foundation of the doctrine. There was no explanation why a restraint should engage the doctrine if the covenantor enjoyed a pre-existing freedom but not otherwise. Invoking the Practice Statement (Judicial Precedent) [1966] 1 WLR 1234, the court departed from the majority reasoning in Esso.

Adoption of the Trading Society Test

The court adopted Lord Wilberforce’s trading society test: a covenant restraining 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, contractual or conveyancing relations. Lord Wilson recognised that public policy is not constant and that changes in society’s circumstances may require re-examination of whether particular types of covenant engage the doctrine.

Application to the Facts

On the evidence of Mr Crothers, the chartered surveyor, it was not uncommon to find negative covenants in leases in favour of anchor tenants, particularly in long leases where the landlord had received a premium. Drawing on the Canadian authorities Russo v Field [1973] SCR 466 and F W Woolworth Co Ltd v Hudsons Bay Co (1985), and the Australian decision in Specialist Diagnostic Services Pty Ltd v Healthscope Ltd (2012), the court concluded that such covenants have long been accepted and normal in shopping centre developments. The covenant therefore had at no time engaged the doctrine.

Lord Carnwath’s Concurring Reasoning

Lord Carnwath emphasised that the present case concerned a transaction in land rather than an agreement between traders. The business of developing a shopping centre inevitably involves regulating land use to balance competing interests and the ability to offer such terms facilitates, rather than restricts, the developer’s business. He drew a parallel with a prospective lessee faced with a limited choice: Mr Shortall could either take Dunnes on the offered terms or have no anchor tenant.

Implications

This decision represents a significant development in the law of restraint of trade in the United Kingdom. The principal implications are:

First, the pre-existing freedom test has been authoritatively rejected. The criterion for whether a covenant restraining the use of land engages the doctrine is now whether the covenant is of a type that has passed into the accepted and normal currency of commercial or conveyancing relations.

Second, restrictive covenants granted by developers in favour of anchor tenants in shopping centre developments are, at least on the evidence before the court, established as part of the accepted machinery of such transactions and therefore do not engage the doctrine. This provides welcome commercial certainty for developers and anchor tenants negotiating such arrangements.

Third, the judgment acknowledges that the trading society test remains context-sensitive. As Lord Carnwath noted, what matters is whether, in the light of established practice, there is any public policy reason for interfering in the free process of negotiation between the parties. Social or economic changes may in future require re-examination of whether particular types of covenant continue (or cease) to engage the doctrine.

Fourth, the court noted that the Property (Northern Ireland) Order 1978 (and, in England and Wales, section 84 of the Law of Property Act 1925) provides a more satisfactory statutory vehicle for addressing obsolete or unreasonable restrictive covenants. Peninsula’s alternative claim under the 1978 Order remained to be determined.

The decision matters to property developers, commercial landlords, anchor tenants, and practitioners advising on retail and commercial property transactions. It clarifies that covenants routinely used to protect anchor tenants’ commercial interests will generally be enforceable without needing to satisfy the reasonableness test applicable within the restraint of trade doctrine.

Verdict: Appeal allowed. Peninsula Securities Ltd’s common law claim that the restrictive covenant was in unreasonable restraint of trade was dismissed. The Supreme Court held that the covenant did not engage the doctrine against restraint of trade because it was of a type that had become part of the accepted and normal currency of commercial and conveyancing relations in shopping centre developments. The court departed from the pre-existing freedom test in Esso Petroleum v Harper’s Garage and adopted Lord Wilberforce’s trading society test.

Source: Peninsula Securities Ltd v Dunnes Stores (Bangor) Ltd (Northern Ireland) [2020] UKSC 36