Non-competition leasehold covenants
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Non-competition leasehold covenants
Where a tenant takes a lease of a substantial property (and incurs a substantial investment in fitting out or otherwise committing to that property) it will often seek a covenant from the landlord not to allow competing uses on any part of the remainder of the estate.
Until the recently reported case of Peninsula Securities Limited -v- Dunnes Stores, the leading judgment on these covenants was handed down in the House of Lords in Esso Petroleum -v- Harpers Garage. The Esso case was authority that some (though significantly not all) covenants may be treated as being unenforceable as a restraint of trade where one party was considered to have less economic power than the other and had given up some “pre-existing freedom” . This test was considered by the Supreme Court in the Peninsula Securities case. The claimant was the landlord of a shopping mall and the defendant a retailer with the benefit of a restrictive covenant preventing competing retail use within a shopping mall.
Peninsula sought a declaration that the restrictive covenant was unenforceable.
On the facts of the case, the High Court considered the pre-existing freedom test couldn’t apply since the current landlord was, in fact, an assignee of the owner of the freehold at the time the covenant was imposed. The current landlord hadn’t therefore surrendered any pre-existing freedom in purchasing the freehold interest and did so with a clear understanding as to the implications of the covenant. The Court of Appeal considered the covenant wasn’t contrary to public policy and there was no reason why it shouldn’t continue to apply and be enforceable following the assignment. The case was then appealed to the Supreme Court.
The Supreme Court concluded that it was actually fairly normal market practice to impose restrictive covenants concerning the use of other parts of an estate or shopping centre where any one tenant was making a significant commitment in entering into a lease.
When the original lease was entered into with Dunnes, the landlord at that point had a choice as whether they wished to accept the tenant and the terms on which it was prepared to contract (i.e. the non-competition covenant). The landlord had free rein as to how to deal with the tenant at that point and chose to accept the restrictive covenant. Lord Carnwath commented “no public policy required that if the landlord fully contracted he should be excused from honouring his contract”. Peninsula’s claim was dismissed.
The fact that an application could be made to vary or discharge the covenant under legislation similar to Section 84 of the Law of Property Act 1925 appeared to feature in the thinking of the court, however the overall analysis here must be that where parties routinely enter into restrictive covenants of this nature, they will remain enforceable from a public policy perspective.
If you have any queries concerning the issues raised in this blog, please contact Mark Withers.