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Cite as: [2013] EWCA Civ 1103, [2014] 1 CH 442, [2014] 1 P &CR 8, [2014] 1 Ch 442, [2014] 2 WLR 967, [2014] CH 442, [2013] 4 All ER 1077, [2013] WLR(D) 342

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		Neutral Citation Number: [2013] EWCA Civ 1103
		Case No: A3/2013/0641

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BIRMINGHAM DISTRICT REGISTRY
His Honour Judge Simon Barker QC
1BM30296, 1BM30298, 1BM30299

Royal Courts of Justice
Strand, London, WC2A 2LL

4th September 2013

B e f o r e :

LADY JUSTICE ARDEN
LORD JUSTICE PATTEN
and
LORD JUSTICE BEATSON
____________________

Between:

	(1) FRANK ROBERT GOODMAN (2) MICHAEL STEPHENS (3) M & R PROPERTY HOLDINGS LIMITED	Appellants/ Defendants
	- and -
	BRENDAN ELWOOD	Respondent/ Claimant

____________________

(Transcript of the Handed Down Judgment of
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____________________

Graham Machin (instructed by Elvin & Co Solicitors) for the Appellants
Martin Hutchings QC (instructed by DLA Piper LLP) for the Respondent

Hearing dates : 18th and 19th July 2013
____________________

HTML VERSION OF JUDGMENT
____________________

Lord Justice Patten :

Introduction

This is an appeal by various defendants in some consolidated proceedings which were tried by HH Judge Simon Barker QC (sitting as a judge of the High Court) in September 2012. He determined a series of preliminary issues which related to the defendants' liability to contribute to the cost of maintaining a road on the Colwick Industrial Estate ("the Estate") near Nottingham which provides access to the defendants' premises. Each of the defendants is the freehold owner of a light industrial unit adjacent to the road in question. The road is referred to in the documents of title as Roadway 4 and, for convenience, I will adopt the same terminology in this judgment.

Each of the defendants has been sued by the respondent, Mr Elwood, for arrears of the contributions to maintenance which he alleges they are liable to pay. At one point the defendants' resistance to the claim was limited to a challenge to the method and basis of assessment. At trial, however, they took the position that they have no liability to pay at all either under the terms of the transfers under which they acquired title to the various units or more generally under the equitable principle of benefit and burden illustrated by the decision of Upjohn J in Halsall v Brizell [1957] Ch 169. This is of particular relevance to M & R Property Holdings Limited ("M&R") which is a successor in title to the original purchaser of its unit from a common owner. Both Mr Goodman and Mr Stephens are original purchasers and original covenantors.

As a result of case management directions given earlier, the claim against Mr Goodman was identified as the lead action which the judge tried for the purpose of deciding the various preliminary issues. His decision on those issues is, as a result, binding on the defendants in the other actions and Mr Goodman, Mr Stephens and M&R now seek to challenge the judge's findings on liability. Mr Golar, who is the owner of Unit E, has not appealed the judge's decision.

The judge was concerned with a long series of preliminary issues relating to both liability and the calculation of the maintenance charge. But this appeal is concerned with only three of those issues: the liability of the original purchasers under the covenants in the transfers; their liability in equity under the benefit and burden principle; and whether the maintenance contribution liability extends to an extra 1m wide strip of the carriageway and some lights which were additions to Roadway 4 which post-date the defendants' acquisition of their units.

Conveyancing history

Before I come to those issues I need to set out the relevant documents of title which are said to give rise to the liabilities in issue.

Prior to 1986 the Estate was in the ownership of Dobson Park Properties Limited and a related company which I will refer to collectively and individually as Dobson. The Estate extended to several hundred acres on the north bank of the River Trent. Some of this land was undeveloped but by then the developed part of the Estate included a row of light industrial units ("the Units") each adjoining Roadway 4 which were held by the defendants and others on long commercial leases which included a charge for the use of the Estate roads.

In about June 1985 Dobson indicated that it was interested in disposing of parts of the freehold and the tenants of the Units formed a consortium to negotiate the purchase of the freehold of the properties they occupied as lessees. At this time and up to the subsequent acquisition of those freeholds, Roadway 4 was a concrete slab road some 6m wide. On the opposite side from the Units there was a grass verge also about 6m wide which was used by articulated lorries as swing space to enable them to turn into the Units and also as parking for employees.

By June 1986 terms had been agreed in principle for the purchase of the freehold of the Units but at the same time there were ongoing negotiations between Dobson and Mr Elwood for the purchase by him of a substantial area of land on the Estate including the undeveloped land (a former gravel pit) on the side of Roadway 4 opposite the Units. Mr Elwood wanted to acquire the roadways on the Estate as part of his purchase and the judge found that in July 1986 the consortium's property agent advised the defendants that Mr Elwood was insistent on purchasing Roadway 4 but would grant the defendants rights of way over the roadway and maintain it subject to the defendants contributing to the cost of maintaining the section of Roadway 4 in front of the Units but not any unilateral improvements. He was also prepared to grant them a licence to use the grass verge terminable on 6 months' notice.

Mr Elwood completed his purchase of what amounted to a large portion of the Estate on 29^th September 1986. Included in the transfer from Dobson was Roadway 4 and the other estate roads plus the entirety of the undeveloped land on the opposite side of Roadway 4 including the grass verge. Dobson reserved for itself and its successors in title and their tenants and licensees the right:

"to use for all reasonable purposes for the benefit of the Transferors' Estate Premises the said roadways numbered 2 3 and 4 on the Estate…..".

In clause 5 Mr Elwood covenanted with Dobson and its successors in title that he and his successors in title would maintain Roadway 4 and the other estate roads:

"…to not less than the existing standards of construction including street lighting as now subsisting and also the sewers and drains serving those parts of the Estate as are hereby transferred….and as comprise also those parts of the Transferors retained premises (hereinafter called "the Transferors' Estate Premises") as are shown hatched green on Plans B – H in a proper state of repair and condition so as to serve the Estate as an Industrial Estate unless and until the same shall be adopted by the Statutory Authorities as maintainable at the public expense."

The Units were included in the retained premises shown hatched green on the plan.

In return Dobson, in clause 7(b), covenanted with Mr Elwood that:

"…they and their successors in title owners for the time being of …(ii) those parts of the Transferor's Estate premises as lie to the north-east of Roadway 4 and are shown hatched green on Plans G and H (hereinafter called "the Transferor's Roadway 4 premises") will pay to the Transferee or as the Transferee shall direct such sums as shall from time to time be likewise certified by the Transferee's Surveyor as being fair and reasonable proportions of the expenses incurred by the Transferee and his successors in the maintenance respectively of ….. the portion of Roadway 4 upon which the Transferors Roadway 4 premises abut by reference to user thereof by the First Transferee and their successors in title and by the owners and occupiers of other land and premises for the time being served thereby."

The negotiations with the consortium continued and on 8^th December 1986 their solicitor informed them that the "new owner" intended to restrict their use of the verge. On 10^th December 1986 Mr Goodman completed his purchase of Unit F by taking a transfer of the freehold from Dobson. There was no evidence before the judge as to precisely what documents of title (if any) Mr Goodman's solicitors received in addition to their search of Dobson's registered title and it was in issue whether Mr Goodman and the other purchasers of the units were by then aware that the sale from Dobson to Mr Elwood had been completed. But the judge found that, as a result of the negotiations with Dobson to which I have referred, they had no reason to suppose that anyone apart from Mr Elwood was to become Dobson's successor in title in respect of Roadway 4 and the grass verge:

"30. It may have been that, at the time and for the purpose of considering their obligations under the December Transfer, Mr Goodman and the other Consortium members did not give particular thought to the precise sequence of the transfers by Dobson to Mr Elwood and to themselves. However, I do not accept that the Consortium, including Mr Goodman, consciously proceeded on the basis that Dobson retained R4 at the time of the December Transfer or that the Consortium then regarded anyone other than Mr Elwood as the successor in title to Dobson and owner of R4 and the Verge."

He also found that the consortium had no reason to think other than that the sale to Mr Elwood had completed. He therefore concluded:

"37. Having regard to all the evidence, I find that at all material times (that is on and from 3 November 1986 at the latest) the Consortium (including Mr Goodman) in fact proceeded on the basis that (1) Mr Elwood had already acquired title to R4 from Dobson; and, (2) Mr Elwood had, in consequence, assumed Dobson's responsibilities and rights in relation thereto".

The dispute about the defendants' contractual liability to contribute to the maintenance of Roadway 4 stems from the fact that Dobson was no longer the owner of the estate roads when it completed its sale of the Units. The December Transfer (as I shall call it) described Dobson as the Vendor and transferred to Mr Goodman the freehold of Unit F:

"TOGETHER WITH the right for the Purchaser [i.e. Goodman] and his successors in title and all persons authorised by them to be enjoyed in common with the Vendor and all other persons similarly entitled to use for all reasonable purposes the roads on the Vendors Colwick Industrial Estate (the Estate) and (so far as the Vendor can grant the same) the right to make connections with use (sic) in common as aforesaid (of) all sewers and drains (etc)".

By clause 3(a) Mr Goodman covenanted with the Vendor:

"that he and his successors in title will pay to the Vendor or as the Vendor shall direct such sums as shall from time to time be certified by the Vendors Surveyor (whose certificate except in the case of manifest error shall be final and binding on the parties) as being a fair and reasonable proportion of the expenses incurred by the Vendor and its successors in the maintenance of Roadway 4 on the Estate by reference to user thereof by the Purchaser and his successors in title and by the owners and occupiers of other land and premises for the time being served thereby".

The formula for calculating the amount of the contribution is identical to that contained in clause 7 of the September Transfer. But the nomination of the Vendor's Surveyor (which it is common ground must mean Dobson's surveyor) created an obvious complication in the process of administering the charge because by the time of the December Transfer Dobson was no longer the owner of the roads. More fundamentally, the charge has to be a fair and reasonable proportion of the expenses incurred "by the Vendor and its successors in title in the maintenance of Roadway 4" even though by the date of the transfer Dobson, having sold the roads to Mr Elwood, had ceased to be in the position to carry out those works and had contracted under the September Transfer that Mr Elwood, as the new owner of the roads, would do so.

It is again common ground that clause 3(a) of the December Transfer is not to be construed simply as a covenant by Mr Goodman to indemnify Dobson against its contractual liability to contribute to maintenance under clause 7 of the September Transfer. Mr Elwood had the additional problem that because he was not a party to the December Transfer he could not enforce the covenant.

Some of these points were raised in Mr Goodman's defence with the result that on 8^th September 2011 Dobson assigned to Mr Elwood the benefit of the purchaser's covenant under clause 3(a) of the December Transfer and irrevocably appointed Mr Elwood's surveyor as the "Vendor's Surveyor" for the purpose of carrying out the certification process in respect of the contribution to maintenance. Notice of the assignment has been duly given to Mr Goodman. No point is taken on this appeal about the effectiveness of what I shall call the Assignment to pass to Mr Elwood the benefit of the clause 3(a) covenant and the right to enforce it. Mr Machin, on behalf of the appellants, was anxious to stress that the Assignment did not effect any material change in the terms or scope of the clause 3(a) covenant nor could it have done so because Mr Goodman and the other defendants were not parties to it. That is beyond argument. The Assignment was effective to overcome two problems faced by Mr Elwood in his claim: his lack of privity with Mr Goodman in relation to clause 3(a) and the requirement that the process of certification should be carried out by a surveyor appointed by Dobson. But it leaves open for argument the issue of construction on clause 3(a) which is whether the phrase "expenses incurred by the Vendor and its successors in the maintenance of Roadway 4" includes Mr Elwood notwithstanding that he had acquired title from Dobson prior to the execution of the December Transfer.

Construction of clause 3(a) of the December Transfer

As I have already indicated, Mr Machin accepts that, as a result of the Assignment, the covenant contained in clause 3(a) is enforceable between Mr Elwood and Mr Goodman according to its terms. But he contends that the word "successors" is purely prospective in meaning as from the date of the transfer and is not therefore capable of including any maintenance expenditure either in the past or in the future by Mr Elwood.

If this is right then it is a surprising conclusion when one bears in mind that the obvious purpose of the reference to successors was to make Mr Goodman liable regardless of a change in ownership of the roads. Mr Machin's response to this is that the December Transfer was drafted on the mistaken assumption that Dobson was still the owner of Roadway 4 and that had this been the position the reference to successors would not have led to the problems which Mr Elwood now faces. Even giving it its usual prospective meaning, the liability to contribute would have continued regardless of any subsequent changes in the ownership of the road. However, the fact that the assumption that Roadway 4 remained in the ownership of Dobson was mistaken is not sufficient (absent, perhaps, rectification) to allow the reference to successors to be construed so as to include Mr Elwood. The anomaly is simply the product of the mistake.

The judge rejected this construction of clause 3(a) and so do I. Although I accept that a reference to successors in title will usually by its nature refer to subsequent owners of the relevant property (see Re Ecclesiastical Commissioners for England's Conveyance [1936] Ch 430), the meaning to be given to words in any contractual document depends upon a consideration of the language against the admissible matrix of background fact.

If one applies the test of what meaning the relevant words would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties at the time of executing the document (see Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896), then that person would know that the purpose of the covenant was to require the owners of the units to contribute to the costs of maintenance to the road carried out by Dobson or its successors from the date of the transfer and that in September title to the roads had passed to Mr Elwood. That fact was a matter of public record by the date of the December Transfer and would have been known to the parties from their searches of the register in respect of Dobson's title. The information would have been available to the reasonable bystander as part of the admissible background from the same source. We are not therefore concerned with the problems of extrinsic evidence considered by this Court in Cherry Tree Investments Ltd v Landmain Ltd [2012] EWCA Civ 736 but the reasoning of Arden LJ in that case supports the admissibility of the September Transfer as part of the factual matrix relevant to the construction of the December Transfer. In these circumstances, it seems to me most unlikely that the objective bystander would conclude that what the parties intended by the words used was to exclude the very person who would be the owner and repairer of Roadway 4 for the foreseeable future. As the judge said, that would serve to destroy the commercial purpose of the bargain. Since Mr Elwood is, on any view, a "successor" to Dobson, I can see no reason for giving the words the time restricted meaning for which Mr Machin contends. It follows that Mr Goodman is contractually liable under the covenant to contribute towards the cost of the maintenance works which otherwise fall within the terms of the covenant.

Benefit and burden

In Davies v Jones [2009] EWCA Civ 1164 at [27] the Chancellor, Sir Andrew Morritt, identified from the authorities three conditions which need to be satisfied in order for the burden of a positive covenant such as the one in this case to be enforceable against the covenantor's successors in title. They are, he said:

"(1) The benefit and burden must be conferred in or by the same transaction. In the case of benefits and burdens in relation to land it is almost inevitable that the transaction in question will be effected by one or more deeds or other documents.

(2) The receipt or enjoyment of the benefit must be relevant to the imposition of the burden in the sense that the former must be conditional on or reciprocal to the latter. Whether that requirement is satisfied is a question of construction of the deeds or other documents where the question arises in the case of land or the terms of the transaction, if not reduced to writing, in other cases. In each case it will depend on the express terms of the transaction and any implications to be derived from them.

(3) The person on whom the burden is alleged to have been imposed must have or have had the opportunity of rejecting or disclaiming the benefit, not merely the right to receive the benefit."

Mr Hutchings QC for Mr Elwood accepts that the second of these requirements: the need for correlation between the obligation imposed and the right granted which is derived from the decision of the House of Lords in Rhone v Stephens [1994] 2 AC 310; is not satisfied in respect of the December Transfer because the covenant in clause 3(a) was not given in return for or in relation to the grant of the rights of way. They had been created under the reservation in favour of Dobson in the September Transfer and simply passed to Mr Goodman under the December Transfer as rights appurtenant to the freehold title he thereby acquired. Mr Elwood's case is that the source of the obligation is the September Transfer under which Dobson covenanted that it and its successors in title would contribute to the maintenance which Mr Elwood agreed to carry out to Roadway 4 over which the rights of way were reserved. There was therefore a proper correlation between the rights granted and the obligation to pay; both were derived from the same transaction; and it is theoretically possible for Mr Goodman to reject or surrender the rights of way.

Mr Machin relies on two arguments as to why no burden runs in equity based on the September Transfer. The first is that any such liability is excluded by the terms of clause 7(b) which, on its true construction, was intended to impose only a personal liability on Dobson. I am not persuaded by that. As mentioned earlier, it is common ground that clause 3(a) of the December Transfer did not create an indemnity covenant as one would expect if Mr Machin's submission is correct and if therefore one looks at the scheme of the conveyancing overall there is nothing to support the idea that Dobson was to give only a personal covenant as opposed to accepting the inevitable personal liability attaching to an original covenator.

But my second, and to my mind decisive, reason for rejecting this submission is that it is contradicted by the language of clause 7(b) which in terms contemplated payments being made not only by Dobson but also by its successors in title.

Mr Machin puts the same point in a slightly different way by arguing that clause 7(b) as a personal covenant by Dobson cannot also satisfy the second of the requirements in Davies v Jones of being conditional on or reciprocal to the grant of the rights of way by operating as a qualification of those rights. But one needs to be careful about this. As I pointed out in Wilkinson v Kerdene Limited [2013] EWCA Civ 44 at [27], the requirement for the rights to be conditional on the performance of the payment obligations is a matter of substance rather than form and in this case there is a clear and obvious link between the rights of way reserved over Roadway 4 and the obligation to contribute to the cost of repairs.

Mr Machin's second argument is that there is a mismatch between the rights granted and the scope of the covenants in clause 7. The rights of way reserved under the September Transfer were in general terms over all of the estate roads whereas clause 7(b) contains a specific covenant to contribute to the cost of maintaining a specific part of Roadway 4. There is also the problem that in clause 7(b) (unlike in clause 3(a) of the December Transfer) the covenant assumes that the covenantor continues to own all of the units ("the Transferor's Roadway 4 premises") and not merely one of those units. The clause contains no express machinery to cater for sub-division.

I think the answer to this objection is that a purchaser in title who succeeds on a purchase of part of the retained land to the rights of way relevant to that property must assume the burden of contribution appropriate to the land he has acquired. I can see no difficulty in principle about equity treating the new owner as liable to contribute a fair and reasonable proportion of the expenses incurred in the maintenance of the portion of Roadway 4 upon which the unit (rather than the units) abuts. This would be in accordance with the terms of the covenant applied to the property which the successor in title acquires. There is no reason in principle why that reduced obligation should not be enforced. It is directly proportionate to the legal estate which the successor has acquired derived from the original conveyance.

Mr Machin also raised a subsidiary point (which the judge rejected) to the effect that the burden of the covenant would pass to the occupiers rather than to the owner for the time being of the dominant tenement. I am bound to say that I do not really understand this point. The burden of the covenant passes in equity to a subsequent owner of the rights and estate granted by the original conveyance which imposed the obligation. An occupier (including a tenant) does not derive his rights from that conveyance nor does he seek to exercise those rights. His rights depend on the terms of the lease or licence under which he occupies the relevant property. The judge was, I think, right to reject Mr Machin's argument on this point.

Mr Machin's other objection to the burden of clause 7(b) passing to Mr Goodman and the other successors in title to Dobson is that the burden of the covenant has not been registered against the title. Section 20(1) of the Land Registration Act 1925 provides that:

"In the case of a freehold estate registered with an absolute title, a disposition of the registered land or of a legal estate therein, including a lease thereof, for valuable consideration shall, when registered, confer on the transferee or grantee an estate in fee simple or the term of years absolute or other legal estate expressed to be created in the land dealt with, together with all rights, privileges, and appurtenances belonging or appurtenant thereto, including (subject to any entry to the contrary in the register) the appropriate rights and interests which would, under the Law of Property Act 1925, have been transferred if the land had not been registered, subject—

(a) to the incumbrances and other entries, if any, appearing on the register; and

(b) unless the contrary is expressed on the register, to the overriding interests, if any, affecting the estate transferred or created,

but free from all other estates and interests whatsoever, including estates and interests of His Majesty, and the disposition shall operate in like manner as if the registered transferor or grantor were (subject to any entry to the contrary in the register) entitled to the registered land in fee simple in possession for his own benefit."

The burden of the covenant does not, he submits, constitute an overriding interest under s.70(1) of the Act and should therefore have been included on the register as an incumbrance. The registered title to Mr Goodman's Unit refers to the rights granted and reserved by the December Transfer but makes no reference to any charge or incumbrance arising from the September Transfer.

The question whether the burden in equity of a positive covenant requires to be registered in order to bind successors in title seems to be free from authority. The judge relied on a passage in Barnsley's Conveyancing Law and Practice (4^th ed) at page 497 which states that such covenants do not require to be registered, although the Registrar has introduced a concessionary practice of allowing them to be set out on an annex to the registered title to assist vendors and purchasers to decide on the need for indemnity covenants.

The editors of Ruoff & Roper on the Law and Practice of Registered Conveyancing state at 42.024 that estoppels and mere equities should be registered but these are, of course, capable of creating proprietary rights over the registered title in favour of the person entitled to enforce, for example, a proprietary estoppel or right of rectification in respect of the land. By contrast, the burden of a positive covenant gives the third party nothing more than a personal right to enforce the covenant in equity against the registered proprietor.

I think that the judge was right to reject Mr Machin's argument on this point. The effect of registration under s.20(1) is that the transferee takes the legal estate subject to registered incumbrances but otherwise free from all other estates and interests whatsoever. This, I think, confirms that to be registrable an incumbrance (such as the rights based on proprietary estoppel) must be capable of creating an estate or interest in the registered land. Since the burden in equity of a positive covenant does not have this effect, it does not, in my judgment, require to be registered in order to bind successors in title of the original covenantor.

Scope of the liability

The remaining point is whether Mr Goodman and the other defendants are liable to contribute to the costs of maintaining the 1m wide strip of roadway which was added to Roadway 4 by Mr Elwood in about 1996 using part of the grass verge opposite the Units. There is also the question of the maintenance of the street lights which were constructed at the same time along the grass verge.

The judge held that the maintenance of these items was in both cases within the scope of clause 3(1) of the December Transfer. He relied on the decision in Crane Road Properties LLP v Hundalani [2006] EWHC 2066 (Ch) where a dirt track over which there was a right of way was considerably widened and reconstructed. The judge held that the owners of the dominant tenement who had an obligation to contribute to the cost of repairs were not liable for the more extensive works of improvement but were liable to contribute to a widened section of the roadway over which they had acquired a prescriptive right of way. It was accepted that the acquisition of the extended right of way should be on the same terms as the original grant.

But in this case there has been no finding that the defendants have acquired a right of way (as opposed to a licence to use) the additional 1m strip which did not form part of Roadway 4 at the date of either the September or the December Transfer. The same goes for the grass verge over which they only ever had a terminable licence. In my view, the maintenance of Roadway 4 where it appears in both transfers falls to be construed as referring to the roadway then existing over which the rights of way had been reserved. This point applies with particular force to the September Transfer where, under clause 5, Mr Elwood's covenant to repair was limited to "street lighting as now subsisting" and where, for the reasons I have explained, the burden of the covenant only passes if there was a correlation between the rights granted and the obligations imposed. I cannot see how the burden of contributing to the cost of subsequent improvements satisfies that test absent the grant of a right of way over the additional strip and possibly the grass verge.

There are, of course, dangers for the defendants in taking this point because it must follow that any licence which they or their licensees have to use the widened carriageway could be terminated on notice if they refuse to pay. But, in my view, the judge was wrong to include the costs of maintaining the additional 1m strip and the street lights as part of the defendants' liability.

Conclusions

For these reasons, I would allow the appeal against the judge's order in respect of scope of the obligation to contribute but otherwise dismiss the appeal.

Lord Justice Beatson :

I agree.

Lady Justice Arden :

I also agree.