Upton Rocks Healthcare Limited v Halton Borough Council
In 2019 the claimant, Upton Rocks Healthcare Limited, purchased land for development of a healthcare centre. The land was part of a wider development site which had originally been sold by Halton Borough Council in 2011. Overage covenants were agreed at the time of the original sale and, following a series of variations to the original terms, a covenant had been imposed requiring the payment of £240,000 to the Council in the event development works had not commenced on the land within 36 months of the original sale (the Covenant). The Council's apparent aim was to ensure the land was developed rather than being land banked.
A dispute then arose as to whether sufficient development works had been undertaken within this timeframe to satisfy the Covenant and avoid the payment falling due. On the sale of the land to Upton, the dispute continued and the Council refused to release a restriction over the land, preventing its sale, until the sum of £240,000 was paid. On completion of the purchase, Upton brought a claim in restitution pleading, amongst other points, that the payment required under the Covenant was actually a penalty which imposed a detriment out of proportion to the Council's interest in the development of the land.
The High Court agreed with Upton on this point, repeating the key position on penalties decided by the Supreme Court in Cavendish Square Holdings BV v Makdessi and ParkingEye Limited v Beavis. Where a contract requires a payment from the person in breach of a primary obligation under the contract that is out of proportion to the injured party's legitimate interest in the other party's performance of that primary obligation, it will be a penalty and will therefore be unenforceable.
In this case, the High Court found that whilst the Council had a legitimate interest in ensuring the site was developed in a prompt manner, it did not accept the Council's argument that the Covenant protected this interest or its right to overage payable on development. Other provisions in the 2011 transfer were held to be already very extensive in protecting the Council's right to overage. The Covenant was also held to be of very limited utility or value to the Council as it only ensured development was commenced but not completed within a set time. It was therefore held to be an 'extravagant, exorbitant or unconscionable' penalty clause which had unjustly enriched the Council who were ordered to repay the £240,000 to the Claimant along with interest and costs.