Forestview Nominees Pty Ltd and ANOR v Perpetual Trustees WA Ltd P62/1996 [1997] HCATrans 324 (20 October 1997)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Perth No P62 of 1996

B e t w e e n -

FORESTVIEW NOMINEES PTY LTD

First Applicant

SILKCHIME PTY LTD

Second Applicant

and

PERPETUAL TRUSTEES WA LTD

Respondent

Application for special leave to appeal

TOOHEY J

GUMMOW J

HAYNE J

TRANSCRIPT OF PROCEEDINGS

AT PERTH ON MONDAY, 20 OCTOBER 1997, AT 3.28 PM

Copyright in the High Court of Australia

MR D.M.J. BENNETT, QC: If the Court pleases, I appear with my learned friend, MR D.M. STONE, for the applicants. (instructed by Williams & Hughes)

MR W.S. MARTIN, QC: If the Court pleases, I appear with my learned friend, MR B. DHARMANANDA, for the respondents. (instructed by Mallesons Stephen Jacques.

TOOHEY J: Mr Bennett.

MR BENNETT: Your Honours, the decision in this case represents a significant departure from basic principle in relation to restrictive covenants. Before restrictive covenants can be enforced against an assignee of the original covenantor one of the requirements is that it must touch and concern the land. That has been held to involve the requirement that it is capable of benefiting the land. There has never yet been a case before this one in which a court has held that a restrictive covenant which is expressed to inure only for the benefit of some, but not all, the holders of interests in the land can be a valid restrictive covenant. So much the more so - - -

GUMMOW J: Is that right?

MR BENNETT: Your Honour, the only cases cited against us are - there are two types of case. There are cases involving landlord and tenant where there are covenants in leases which are obviously of a different category because there, in a sense, the land on one side is the leasehold interest. There are also one or two cases involving English mortgages where there are questions about the covenant being given by a mortgagor only or mortgagee only, but those cases are concerned with who creates the covenant rather than with who it binds. Either the covenant - - -

GUMMOW J: The first question is to construe the covenant, is it not?

MR BENNETT: Yes, your Honour.

GUMMOW J: And one asks to whom it is given.

MR BENNETT: Yes. And, your Honour, the covenant is contained on page 32 and clause 2 on that page says:

the Restrictive Covenant will not enure for the benefit of any tenant for the time being of the Benefited Land or any part or parts of it.

So one starts with a covenant expressed not to inure for the benefit of people who may hold an interest in the land.

TOOHEY J: Well, who may have a particular interest in the land, namely as lessee.

MR BENNETT: Yes, your Honour.

GUMMOW J: But land has all sorts of estates and interests in it.

MR BENNETT: Yes, it does, your Honour, but there has not yet - - -

GUMMOW J: You could hardly say - another thing that puzzled me a bit about this - one can hardly say this does not touch and concern the land. It is all about how it is used and for what purposes and so on. This is really a question of who can enforce against whom and what you really have to say, I think, is that there is something internally repugnant in the nature of the original covenant because of the limitation in the identity of the interests of those who have the benefit of it and who can subsequently enforce it.

MR BENNETT: Your Honour, there is no case anyone has found involving such a covenant. So one has to go back to first principles. Going back to first principles, the covenant has to be for the benefit of the land. It must touch and concern the land and, in a practical sense, that must mean, I would respectfully submit, the person who is in possession of the land, more than any other, because ultimately, benefiting the land means benefiting the person in possession; by increasing the enjoyment of the land or increasing the money he or she can earn from the land. That is the way land is benefited.

Now, this is a covenant which is specifically said not to inure for the benefit of such people so that it would not, for example, operate against the owner of the land or an associated company of the owner of the land if it chose not to enforce it, a tenant, the person who is the one primarily benefited by - - -

GUMMOW J: But we are not talking about burden, we are talking about benefit, are we not?

MR BENNETT: Yes, your Honour. It is the benefit which is not available to those whom it is expected to benefit.

TOOHEY J: That is if the land is leased. It might be retained by the registered proprietor, the covenantee, and used by the covenantee for commercial or other purposes.

MR BENNETT: It might, your Honour, theoretically. It is unlikely with a shopping centre, but it is possible.

TOOHEY J: But that is the point at which this declaration or relief is sought by the applicant, is it not, at a point where the land is in the hands of the original covenantee?

MR BENNETT: The land is owned by the original covenantee. There is no issue here about the passing of the benefit, but what we say is the burden does not pass unless the covenant touches and concerns the land. One cannot have a covenant in gross. One could not, for example, I could not give a covenant to the National Trust over my land that I would not build a modern wing on my house. That would not be a covenant enforceable against my successors in title.

TOOHEY J: But the covenant here is given by reason of the juxtaposition of the lots.

MR BENNETT: Yes, it is, your Honour, but in order for the covenant to touch and concern the lot benefited, the covenant must be capable of annexation to the lot. There are a number of authorities for that. We say this is not capable of annexation because annexation is not full annexation. It is not, as a covenant must be, we say, for the benefit of every person who holds an interest in it. When one talks of a covenant touching and concerning the land, one means that it is available for the benefit of every person who holds an interest in the land. That is what is meant by "the land".

TOOHEY J: It may or may not, depending upon the terms of the original covenant, but your proposition appears to be that if anyone holding at any time an interest in the land of the covenantee is not the owner of the land, using that terms loosely, then the covenant cannot run with the land, what, even as against the original covenantee?

MR BENNETT: As between the original covenantor and original covenantee, different principles apply because there it is just a matter of contract.

HAYNE J: You are relying on contract there, yes.

MR BENNETT: Here the covenant is sought to be enforced against a transferee of the covenantor so the burden has passed to my client. The burden has passed to my client, it is said, because we took with notice of the covenant. What we say is the burden only passes if the covenant is one which touches and concerns the land - - -

GUMMOW J: Yes, it seems to.

MR BENNETT: And the cases say touches and concerns the land if, among other things, it is capable of being annexed to the land. This is not capable of being annexed to the land because it would not inure for the benefit of everyone having an interest in the land.

TOOHEY J: That is a giant step.

GUMMOW J: That is the big step, it seems to me.

MR BENNETT: That is the novel issue which no court has considered, which has arisen for the first time - - -

GUMMOW J: Just assume the text of the covenant was it was said to be, looking at the text there, paragraph 2, made for itself and its assigns and it did not say anything else, there are cases that say that does not include lessees.

MR BENNETT: First of all, under the - - -

GUMMOW J: There is a case in (1919) 1 Ch 159 at 171 which says as much.

MR BENNETT: Section 47 would solve that problem, your Honour, because section 47 would then imply that it is for the benefit of all persons having an interest in the land and, indeed - - -

GUMMOW J: That is right. Why cannot one then qualify that?

MR BENNETT: That is the second leg of the argument on which we failed at first instance but which the Full Court expressed no view on. That is the issue whether section 47 solves the problem for my learned friend. We say the answer to that lies in an English case called Roake v Chada. The section does not enable one to override the terms of the covenant itself. The purpose of the section is to enable the courts to imply that it operates for the benefit of all people having an interest in the land, as in your Honour's example. But that would not apply in a case where a group is specifically excluded. In Roake v Chada the covenant said, "This covenant is not entered into for the benefit of my successors in title" or words to that effect and the court said you could not use the English equivalent of section 47 in that situation to say that it did.

Here, we say that is exactly what this covenant does, although to a lesser degree. It says - - -

TOOHEY J: So if the respondent transferred the land in this case, the registered proprietor, you would say, subject to the Property Law Act provisions, could take no benefit on the footing that there was a restrictive covenant?

MR BENNETT: Yes, your Honour, we say there is no restrictive covenant. There was a contract, of course, between the original parties, but we say there is no restrictive covenants because it does not satisfy one of the requirements of restrictive covenants?

GUMMOW J: Which is?

MR BENNETT: Which is that the covenants touch and concern the land and the relevant aspect is that it be capable of being annexed to the land. This covenant - - -

HAYNE J: And going on from there, is of benefit to all who are interested in the land, whatever form that benefit may take.

MR BENNETT: Yes, your Honour.

HAYNE J: And you say there is no benefit to the tenant of the shopping centre in having the land next door sterilised.

MR BENNETT: No, I do not say that for a moment. The tenant may have a very great interest in that, but this covenant is expressed not to inure for the benefit of the tenant.

HAYNE J: I understand that.

MR BENNETT: So if the owner for the time being of the land, through associated companies say, buys the adjoining land - I say an associated company so there is no merger - and decides not to enforce the covenant, there is nothing the tenant can do if he chooses to build a supermarket. We submit that to touch and concern the land it must be capable of operating for the benefit of every person who has an interest, and that is supported - - -

HAYNE J: Including, for example, the mortgagor of the land?

MR BENNETT: Yes, your Honour, the mortgagor or mortgagee. And that is illustrated by section 47 itself. Section 47 appears at page 59 of the application book and your Honours see:

(1) A covenant relating to any land of the covenantee shall be deemed to be made with the covenantee and his successors in title and the persons deriving title under him or them, and has effect as if those successors and other persons were expressed.

(2) ....."successors in title" shall be deemed to include the owners and occupiers for the time being -

Now, the reason for that provision was to validate covenants that might otherwise be invalid.

GUMMOW J: That is right. But it was not to withdraw from the parties the capacity to have a covenant that was something less. That is the question, is it not?

MR BENNETT: That is the question, your Honour. The question is whether that was ever permitted.

GUMMOW J: Section 47 is an enabling provision out of the English 1881 Act, I think. You seek to use 47 as a restrictive provision.

MR BENNETT: Your Honour, it is an important point because it enables a major inroad to be made in the rule that you cannot have a covenant in gross. The fact that I cannot give a covenant to the National Trust not to add a wing to my house, which will bind my successors in title, and that I cannot give a covenant to Westfield not to build a supermarket on my land if it chooses to acquire covenants like that dotted all over the city so as to damage competitors or make it difficult for competitors, the fact that one cannot do that is part of the law of restrictive covenants. The issue in this case is testing, for the first time, how far one can limit that by saying, well, all you need to do is have a covenant for the benefit of some small part of the interest holders in the adjoining land - in this case, it is a large part, it is the owner of the fee simple excluding tenants; but in the next case it may be a smaller part - and that, we submit, is a very important and very basic question on the law of restrictive covenants.

TOOHEY J: I must say I find it hard to view it as a covenant in gross, given the relative positions of the land, the purpose for which the covenant was given and taken. That is not necessarily destructive of your argument, but in what sense is it a covenant in gross, which implies that it is unrelated to the land?

MR BENNETT: No doubt, your Honour, the reason why it was not conferred on tenants was that the owner wished to be able, if it ever acquired the adjoining land, to do what it wished with it. It did not wish to be bound by the covenant it was taking, which suggests that although it intended it to inure for future owners of the land, it did not intend it to inure for present or future tenants of the land. That, we submit, is simply inconsistent with an intention to annex the covenant to the land - - -

TOOHEY J: Is that the reason for the provision that it can be dissolved by mutual agreement or is that for some other reason?

MR BENNETT: That is no doubt part of it, your Honour. But it is the first step towards a covenant in gross. The law has always said that a covenant must touch and concern the benefited land, be capable of being annexed to it and no one has ever yet tried to say, "I'll annex it, but only to people holding a particular interest in the benefited land." That is the novel question in this case and that, in my respectful submission, is an important question.

The section 47 question I have referred to. We submit the section helps us more than hinders us but, in any event, it cannot be used to contradict the covenant itself. Of course, the trial judge held that it could be used to contradict the covenant. He held that an additional reason why the covenant was valid was that section 47 had the effect that the restriction simply had to be read out of it. That, itself, is an important issue arising in the case although, of course, I need to succeed on both in other to succeed.

There is also section 129B which refers to the ability to discharge a covenant which, again, requires all persons having an interest in the land to be parties to the discharge.

GUMMOW J: Some of these covenants sometimes stipulate for a third party to have a power of release.

MR BENNETT: Yes, that has certainly been the practice in New South Wales where the Conveyancing Act specifically provides for it, but that is dealing with a different question. That is not the question of who has the benefit or who can enforce it. That is the question of who has a specific right to discharge it. There are a number of cases which have held that restrictive covenants in favour of local councils, being covenants in gross, are invalid. But, on the other hand, it is quite common in New South Wales at least to have a covenant which can be released by the local council, where it is thought that having all the people having the benefit may be too cumbersome and the original subdivider does not wish to be involved any more. So, on occasions - - -

GUMMOW J: That does not offend general principle, does it?

MR BENNETT: That does not, no, your Honour.

TOOHEY J: Is there any question of indefeasibility here, Mr Bennett?

MR BENNETT: No, your Honour.

TOOHEY J: The restrictive covenant is endorsed on the servient - - -

MR BENNETT: It is endorsed on the title. The question is its validity. There is no question about that. For those reasons, your Honour, we submit this is an important question in the law of restrictive covenants, it is a novel question and it is one in which the courts below, in our respectful submission, have fallen into error. May it please the Court.

TOOHEY J: Thank you, Mr Bennett. Mr Martin.

MR MARTIN: May it please your Honours, there is no question in this case that the covenant touches and concerns the land. That is clear from the very nature of the covenant and the contiguity of the parcels. There is no authority whatever for the proposition that that effect is destroyed by the failure to provide that the covenant inures for the benefit of each and every estate holder in the dominant land.

TOOHEY J: It depends on your first step, I think. Mr Bennett puts it slightly differently. He says it does not touch and concern the land because it does not inure for the benefit of everyone who has an interest in the land.

MR MARTIN: I use "touch and concern" in the sense in which it is traditionally used in the cases, that is that it is a covenant which, in its nature, is capable of beneficially affecting the use and enjoyment or the value of the dominant land. If it meets that criteria, which we say - and, indeed, there is no dispute that it does, his Honour at first instance so found - then the next question is, is the effect that would normally follow at law from the characterisation of the covenant in that manner lost by the fact that there has been an attempt, which may or may not have been successful, to exclude from the benefit necessarily some persons who had an interest in the land.

My learned friend's proposition, to be accepted, would require the Court to hold that the omission of the holder of the most minor interest in the dominant land, let us say the beneficiary of an easement running across some portion remote from the area in question, if that person was denied the benefit of the covenant, on my learned friend's argument the intention of the parties so amply demonstrated by the language they used in the covenant would be defeated because the Court would be required to hold that the omission to fasten the benefit to the holder of every estate in the dominant land, no matter how small or insignificant, is totally destructive of the covenant.

GUMMOW J: I think Mr Bennett says the parties can have that agreement then to say that is fine, that is for them, but if they want the benefit of the doctrine of restrictive covenants, they cannot do it because they have done something that - - -

MR MARTIN: That proposition suggests that there is a doctrine of restrictive covenants that is single where, of course, this case demonstrates that there are many various forms in which the question of enforceability of a particular covenant may arise. In this case, we are the original covenantee so no question of the running of the benefit arises - - -

GUMMOW J: Mr Bennett is not, is he?

MR MARTIN: No, he is the original covenantor. So the question is, does the burden run? The answer to that question, found by his Honour at first instance, was the burden runs if the assignee takes with notice and the covenant is of a kind which touches and concerns the land. That is conventional law. There is nothing novel about it and to hold otherwise would be, with respect, to turn the law of restrictive covenant on its head.

TOOHEY J: Is the relief sought here by way of declaration?

MR MARTIN: It is.

GUMMOW J: And injunction?

MR MARTIN: And injunction, I think.

TOOHEY J: An injunction to prevent what?

MR MARTIN: I think it is an injunction to restrain us from holding out that we had the benefit of the covenant.

TOOHEY J: It can hardly by an injunction to preclude you creating interests in your own land.

MR MARTIN: That is the nature of the relief sought. Your Honours, the problem with my learned friend's proposition is that it runs counter to a number of other established doctrines. The first is that if the covenant is so expressed to inure for the benefit of every part of the land, it is no impediment to the running of the covenant that the holder hold only a portion of the land.

GUMMOW J: That is a geographic-type problem. This is not a geographical problem.

MR MARTIN: It is not, your Honour, but then my learned friend runs foul of the proposition - the cases to which he referred whereby the holder of a limited estate in the land, such as a mortgagee, can itself create a covenant and that covenant can pass. So the law has sanctioned the passage of covenants which are restricted both in geography and in interest. Now, my learned friend would say, well, there is something immutable, something sacrosanct about annexation to the entire interest in the land without which the covenant fails. That, with respect, is contrary to the principle emerging from those cases.

My learned friend also prays in aid the statutory provisions. We respectfully submit it is plain that section 47 is facultative. It enables, it permits a draftsman to adopt a particular form of language. It has no other or more significant effect. The effect of 129B is simply to ensure that all persons who have an interest in the covenant, whether factual or legal, are consulted before it is discharged. So there is nothing in those statutory provisions which purports to alter the substantive law with respect to restrictive covenants.

TOOHEY J: Mr Martin, is there a case - or which case comes closest to this situation?

MR MARTIN: Your Honour, this proposition has never been put before. One could speculate as to the reasons for that. We would ascribe one reason to that. There is no case that specifically ruled - - -

GUMMOW J: The Golden Lion Case does not seem to help you very much.

MR MARTIN: It is of limited support, your Honour, as his Honour Justice French recognised in that portion of his judgment, but if one goes back to principle, then we would say why would equity put this doctrine in a straitjacket? What is the reason in principle or purpose or social utility that would be achieved by such a technical approach to the enforcement of covenants of this kind and upon which the commercial community, of course, places significant reliance. It would be a step in - - -

TOOHEY J: Of course, one might ask why would the covenant be expressed in that way to begin with.

MR MARTIN: Your Honour, the answer was a pragmatic one, and that was to avoid having to consult 73 tenants every time there was to be a variation in the covenant or a discharge in the event that, for example, the land was subdivided as was the intention. The subservient land in this case was contemplated as a subdivision for an old persons' home and there is a provision in the covenant that your Honour referred to earlier which permitted the covenant to be discharged when the land was subdivided into parcels so small that its subsequent use posed no threat to the commercial vitality of the centre. That circumstance, in order to secure a discharge under section 129B of the Act, you would have to have run around and got 74 signatures on the document. That was the only purpose that was sought to be achieved by this provision. My learned friend's argument is that that pragmatic purpose results in destruction of the benefit of the covenant. In our respectful submission, that simply cannot be right.

Can I tell your Honours that this is a relatively - so far as we can see, there are no other cases similar to this. It is therefore not, in our submission, a point of general application.

GUMMOW J: I do not know. There are a lot of these shopping centres around with multiple tenancies.

MR MARTIN: There are a lot of shopping centres, but this particular circumstance arose somewhat unusually because of the subdivision of a portion of the land after the centre had been constructed with tenancies in place.

GUMMOW J: And retirement villages could be another problem area, I suppose.

MR MARTIN: Indeed. If this case gave rise to questions of general importance in those sorts of circumstances, then it might be an appropriate vehicle, but this case involves a particular covenant, written in unusual circumstances, in which the original covenantee remains in possession of the land and which, therefore, simply would not be the vehicle for the determination of what might be those interesting questions.

The case is also part-heard, your Honours. There are other issues yet to be tried which have not yet been determined. Your Honours, in our submission, all those reasons point to compel the conclusion that special leave should not be granted.

TOOHEY J: Thank you, Mr Martin.

We need not trouble you, Mr Bennett. There will be a grant of special leave.

MR BENNETT: If the Court pleases.

AT 3.55 PM THE MATTER WAS CONCLUDED