Coastal Partnerships Ltd v Beddy & Ors

This is the trial of an application for declarations to be made under s. 84(2) of the Law of Property Act 1925.

The claimant is the freehold owner of property on the coast of Devon, currently known as the Preston House Hotel (“the property”).

The defendants (“the estate”) are owners of a considerable proportion of adjoining land.

The property is subject to certain covenants contained in the conveyance dated 11^th June 1971. For the purposes of this hearing only, it is not disputed that the estate is entitled to the benefit of the covenants.

Other adjoining landowners are also entitled to the benefit of the covenants, and comprehensive efforts have been made to notify them of these proceedings. Many have responded. In particular my attention was properly drawn to a letter from a Mrs. Thorneycroft dated 7^th June 2006. However, none of those contacted has asked to be joined as a party.

Neither the claimant nor the estate has suggested that the court should not hear and determine this matter, although the estate asks me to bear in mind the impact on non-parties arising from s. 84(5) of the Law of Property Act when considering what, if any, relief to grant.

The relevant covenant is contained in schedule 5 to the conveyance:

“1 not to carry on or permit to be carried on upon any portion of the property any trade or business whatsoever other than that of an hotel or furnished holiday flats;

2 not to erect or permit to be erected on the property firstly hereinbefore described any building other than one single house (which includes the building standing thereon at the present time) with necessary outbuildings, stable, garage accommodation and greenhouse; nor on the property secondly hereinbefore described any building other than three garages for motorcars (which includes the building standing thereon at the present time)”.

In the course of argument the first covenant has come to be known as “the user covenant” and the second as “the building covenant”.

As at the date of the conveyance, it is apparent that the property was or was expected to be used as an hotel or holiday accommodation. That is apparent from the second schedule which, in para. 1, provides that:

“Subject to compliance with the following conditions by the purchaser, a right of way on foot only in common with the vendors, their tenants and servants and/or others entitled to the like right for all purposes in connection with the use and enjoyment of the property as an hotel or furnished holiday flats over the path coloured green on the plan provided that ...”.

Planning permission for a proposed development was granted on 26^th April 2005. Condition 6 provided that:

“The development hereby approved shall be occupied for the purposes of holiday accommodation only”.

The proposed development involves the demolition of the existing building and the erection of a new building consisting of 16 apartments, a swimming pool and various other common parts. There will be a single entrance to the building and the apartments will each be accessed internally from the common parts.

The external elevation of the proposed building is designed to be closely similar to the existing building which is no doubt one reason why planning permission was finally granted after earlier unsuccessful applications.

The claimant is currently undecided as to whether it will retain ownership on completion of the development and let the apartments on short furnished holiday lets, or sell them off on long leases. If it sells them off, it will include in the leases a covenant providing that the premises may only be used as holiday accommodation and that no trade or business may be carried on there other than that of furnished holiday flats.

The question is whether the development and the proposed lettings would involve a breach of the building covenant or the user covenant.

There is no dispute between the parties over the correct approach to this question. First, it is agreed that the words of the covenants must be construed in context, bearing in. mind the apparent object of the covenant.

Secondly, it is agreed that the case law dealing with comparable covenants may provide useful illustrations as to the possible meanings of the words used in this covenant or of cognate expressions, but they can do no more than that. They are not binding precedents.

Thirdly, my attention has been drawn to the comments of Lord Justice Neuberger as he then was in GLN Copenhagen Southern Limited v Tunbridge Wells Borough Council [2004] EWCA (Civ) 1279 para.51, where he said this:

“While deprecating the notion that one should construe a covenant in an artificially narrow way simply because it is restrictive of the use to which an owner can put his property, I am of the view that a restrained rather than a generous interpretation of such a covenant is normally appropriate”.

It is also agreed that it would be convenient to deal first with the building covenant. So far as that is concerned, each of the parties took me to a number of authorities, namely Kimber v Admans [1900] 1 Ch 412, Rogers v Hosegood [1900] 2 Ch 388, Ilford Park Estates v Jacobs [1903] 2 Ch 522 and Calar Homes v Carver [2003] EWHC 1995 (Ch).

Each party was understandably keen to point out any similarities between this case and such of those decisions as reached a result favourable to their cause. However, bearing in mind the agreed approach to the case law, there is no particular benefit in going through each of those decisions in detail and comparing it with this case. For present purposes it is more useful to draw a number of general propositions from the case law and then to venture some observations of my own for deciding this kind of issue.

I would draw four propositions from the authorities. First, the word “house” does not refer exclusively to private residential dwellings with single occupation. Depending on the context, it can equally well refer to an hotel or to a building that is internally divided to provide multiple residential accommodation. It is the context that will inform the particular meaning to be given to the word in any particular case.

Secondly, part of the context consists of the other words that are used in the relevant building covenant. Expressions such as “private” “dwelling house” or “detached” will connote a residence with single occupancy, while their absence will allow a broader interpretation to be applied to the word “house”.

Thirdly, part of the context also consists of the presence or absence of any related user covenant. If there is some restriction on using the premises other than as a private dwelling, for example, then that will obviously inform the meaning of the word “house” in any related building covenant. On the other hand, if there is no such restriction on user, again a broader interpretation may be applied to the word “house” in the building covenant.

Finally, the internal configuration of any proposed building may affect the question whether it can properly be regarded as a house or as multiple accommodation under one roof.

I would also advance two further propositions which do not emerge expressly from the authorities cited, but which must he right as a matter of principle. They both flow from the undoubted fact that the object in interpreting a covenant is to identify the intention of the parties (which is after all the reason why the context must be taken into account).

The first proposition is that it must be relevant to take into account the practical implications and consequences of the rival interpretations. The court is entitled to assume that the parties did not intend to produce absurd or illogical results or to impose conditions which in real terms cannot significantly benefit them.

Secondly, it must also be relevant to take into account as part of the context the degree of similarity if any between an existing structure at the time the covenant was imposed, and any proposed new structure that is to be built.

Applying that approach to the present case, the following observations can be made: first, the word “house” in the building covenant is not used in conjunction with any other word that connotes a private residence with single occupation. None of the words I have mentioned above has been used, or anything similar. The only formulation that is said by the estate to indicate a building with single occupancy are the words “one single”. However, the word “one” may say something about the number of permitted structures, but it says nothing about their nature. And it is highly likely that the word “single” has been added in order to avoid the effect of section 61(c) of the Law of Property Act 1925. If it adds anything at all, it is emphasis to the word “one”. Again, it docs not qualify the nature of the permitted structure.

The second observation is that the building covenant must be interpreted partly in the light of the user covenant. It is apparent from the wording of the user covenant that, the property can be used as an hotel or for furnished holiday lets. That being so, the implication to be drawn from the user covenant is that a broad interpretation can be applied to the word “house” in the building covenant.

Thirdly, this also leads to a consideration of the practical implications of the rival interpretations that have been advanced. Counsel for the estate acknowledged in the course of argument that the existing premises could be demolished, a new building could be erected for use as a single dwelling house and then converted to hotel use or for letting as furnished holiday accommodation without offending against the building covenant. But, he says, a new building cannot be erected from scratch if it is designed for use as an hotel or for holiday lets from the outset.

In my judgment there is no logical reason why the parties should have intended the covenant to produce such a result. If the ultimate outcome which the claimant wishes to achieve can be attained indirectly, there is no obvious reason why it should not be allowed directly. That is another factor weighing against the estate’s interpretation.

Fourthly, the configuration of the proposed development involves a single front door with access to each apartment from the common parts rather than separate external front doors to each separate unit. That arrangement is marginally more consistent with the concept of a house than not.

Filially, the overall appearance of the proposed development is closely similar to the existing structure. As such there is an argument for saying that it lies within the range of new structures contemplated by the building covenant.

For all these reasons, and adopting the approach indicated by Lord Justice Neuberger, in my judgment a building erected in accordance with the planning permission granted on 26^th April 2005 would not involve a violation of the building covenant.

The question then arises whether the claimant’s proposed exploitation of the development would involve a breach of the user covenant. It is common ground that there would be no breach if the claimant retained ownership and itself let the apartments on short furnished holiday lets.

However, the estate argues that the grant of long leases would necessarily violate the user covenant in two respects. First, it is said that the act of granting such leases would amount to carrying on a trade or business other than running an hotel or granting furnished holiday lets. Alternatively, it is said that managing the common parts of a building where each unit has been let on long leases would involve carrying on a business other than that of an hotel or furnished holiday flats.

As to the estate’s first argument, I would reject it for two reasons. For certain purposes a single one-off transaction or a succession of individual transactions is clearly capable of constituting the conduct of a trade or business. However, the correct approach to the interpretation of those words “trade or business” in this context is provided by Rolls v Miller (1883) 27 ChD, 71 at 87-89.

The key is in identifying the object of the covenant. In this case the object was clearly to prevent the property itself being used as commercial premises. That object is not violated by the mere act of granting long leases of units at the property. Such activity simply does not offend against the vice to which the user covenant was directed. Secondly, even if the grant of such leases could be described as the conduct of a trade or business, it certainly does not involve the carrying on of such trade or business ‘upon any portion of the property’. The grant of a lease in relation to the property cannot properly be described in this context as the carrying on of any trade or business at the property.

That leaves the estate’s second argument, namely that managing and servicing the common parts of a building where each unit has been let on long leases would involve carrying on a business where it is other than that of an hotel or furnished holiday flats.

In assessing that argument the following consideration should be borne in mind. If the claimant retains the freehold and grants short furnished holiday lets, it will have to manage and service the common parts. That, says counsel for the estate, is permitted within the user covenant. If the claimant retains the freehold and grants long leases of all the units, it will still have to manage and service the common parts. But that, says counsel for the estate, is not permitted within the covenant. So, exactly the same activities by the claimant might fall within or without the covenant depending on the length of the leases that have been granted. That is a surprising result for the parties to have intended to achieve.

Nevertheless, it is the court’s function to interpret the words used, not to rewrite the bargain in a manner which it considers to be reasonable. The user covenant prohibits the carrying on of any trade or business upon any portion of the property other than that of an hotel or furnished holiday flats. That wording seems, in my judgment, to lead to the following conclusions. If the claimant lets all the units on long leases and the lessees of all those units use them as holiday accommodation for themselves, in other words they do not sub-let their units as furnished holiday flats, and if the claimant then provides management services for a fee, it probably will be carrying on a trade or business at the property which is not related to furnished holiday flats. That would seem to fall outside the user covenant.

But the position would not be so straightforward if, for example, not all the units were let on long leases or if some of the tenants under those long leases do sub-let their units as furnished holiday fiats. In that situation the claimant would, at least arguably, be carrying on the business of providing furnished holiday flats even if to some extent it were also providing the same services to others.

Another possibility is if the claimant retains the freehold and grants short furnished holiday lets and, instead of managing and servicing the common parts directly through its own employees, it chooses to engage a management company. At least arguably, that would not involve a violation of the user covenant because the management company would be operating as the claimant’s agent and for the purposes of the user covenant the claimant itself would be regarded properly as carrying on the only relevant business at the property.

Similarly, if the claimant lets the units on long leases and the management of the common parts is taken over by the residents on a not -for-profit basis, then, again, at least arguably that would not involve the carrying on of a trade or business at the property.

I do not propose to lengthen this judgment by setting our a comprehensive list of all the hypothetical situations that might arise in future and ruling in the abstract as to whether they would or would not fall within the user covenant - partly because they are all hypothetical and it is undesirable to give judgments other than by reference to identified facts, and partly because I have not heard argument on those hypothetical situations. The most than can be usefully said at this stage is that the grant of long leases might - but it might not - involve a breach of the user covenant depending on how the arrangements were structured.