Background
Supreme Court case concerning agreements between RBS and a property developer. In July 2007 the bank and the developer entered written agreements for loans of £845k and £560k in respect of the purchase of two plots of land at Gleneagles on which the developer was to build two houses.

Argument
The repayment date for the loans was in August 2008 and, when the developer failed to repay the loans at that date, the bank sued the developer for recovery of the funds. However, the developer counter claimed arguing that he had only entered into the loan agreements on the basis of assurances given by the Bank that it would make additional funding (of up to £700k) available to fund development on the plots and claimed damages in respect of the bank’s breach of those assurances. The assurances said to have been given by the bank included a telephone call prior to the signing of the agreements in which the developer was told that, in addition to the sums lent to buy the land, the bank would advance further funding for development of the land.

The central issue for the court was whether, on an objective assessment of the exchanges between the parties, the bank had entered into a legally binding agreement to lend Mr Carlyle the money for development of the plots in addition to money for their purchase.

Court of Session decisions
In the Outer House Lord Glennie found that bank had agreed a “collateral warranty” obliging them to lend for the development of the plots. However, the Inner House allowed an appeal finding that the telephone call only amounted to a statement of future intention and that legal obligations would only arise when the parties entered a written contract[1].

Supreme Court decision
The Supreme Court have allowed an appeal of the Inner House decision.

The court found that the Inner House had disagreed with Lord Glennie on questions of fact without having sufficient regard to the limited role an appeal court has in such questions. (Generally speaking, a court of appeal can only interfere with the decision of the judge at first instance on a question of fact where the decision of the judge cannot be reasonably be explained or justified on the evidence before him[2].)

In this case the court found that, although Lord Glennie could have interpreted the evidence differently and concluded that there was no obligation on the bank to lend the money for the development, he had a reasonable evidential basis for coming to the conclusion he had (i.e. that the bank had made a legally binding promise to provide the development funding).

The court also found that use of the term “collateral warranty” had been a distraction in this case and that the bank’s obligation could equally have been described as a “promise” or “unilateral undertaking”. In coming to its conclusion the court noted that, in Scots law, unlike the situation in England, a unilateral undertaking such as a promise can be binding without consideration from the recipient of the promise and that the undertaking or promise does not require to be collateral to another contract.

The full judgement is available from the Supreme Court here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

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 [1] The court said “If the [developer] considered that the [written agreements] did not properly reflect what he understood was to be agreed, or had been agreed orally, then he ought not to have signed the agreements. At all events, whatever the [developer] thought was the position, the informed observer would understand the written agreements to cover all matters agreed to date. It may well be that, at that time, the [bank] fully intended to enter into a further bargain with the [developer] to advance additional funding for the building works. However, they had not done so and did not do so. That may have been contrary to the spirit of the negotiations prior to the signing of the written agreements, but that spirit, or its moral content, cannot be taken as creating a legally binding voluntary obligation.”

[2] Lord Hodge’s judgement refers to the reasons for the restriction on the role of the appeal court highlighting that it is the judge at first instance who hears the evidence and is best placed to assess the credibility of the witnesses and, having heard the evidence over an extended period, will have “greater familiarity with the evidence and a deeper insight in reaching conclusions of fact than an appeal court whose perception may be narrowed or even distorted by the focused challenge to particular parts of the evidence”. Lord Hodge also noted the increased cost which would be incurred if all questions of fact were open for redetermination on appeal.

These new Practice Notes can be found in the ‘Know How’ section of the website.

Sheriff Court case concerning a property dispute between two neighbours in Contin near Strathpeffer. Mr Munro sought declarator that he owned a small piece of ground (described in the case report as “wedge” shaped) between his property and that of Mr and Mrs Finlayson. The Finlaysons occupied the disputed area as a driveway and garden ground and Mr Munro sought an order removing them from it and an interdict to prevent them from using it in the future.

Background
The sheriff granted declarator to the effect that Mr Munro owned the land but the order removing the Finlaysons from the land was restricted so as to allow the Finlaysons to take vehicular access over the driveway and allow a reasonable turning circle within the garden. The sheriff restricted the order for removal on the basis of the “Anderson v Brattisanni’s principle” which he found entitled the court not to grant an order for removal against a person encroaching on another’s land where:

• the person encroaching has acted in good faith;
• the extent of the encroachment is inconsiderable;
• the encroachment does not materially impair the proprietor in the enjoyment of his property; and
• an order for removal would cause the encroaching party a loss wholly disproportionate to the advantage which it would confer upon the proprietor.

Arguments
Mr Munro appealed against the restriction. He argued that the Anderson principle applied to situations where a structure had been erected on the land rather than where, as with this case, no structure had been built. If he was wrong and the principle did apply, Mr Munro argued that the sheriff had not applied it properly.

Decision
The Sheriff Principal allowed the appeal[1] finding that, although the principle did apply (as there had been encroachment in the building of a driveway and yard), the sheriff had not applied the principle properly. He found that the principle was one which had to be used exceptionally and sparingly and that, in that context, the creation of what would essentially be a servitude right across Mr Munro’s land would be “a step too far”. (If the principle were to be extended to such cases it should be extended in a superior court.)

The Sheriff Principal also agreed with arguments by Mr Munro to the effect that, if he were obliged to keep the disputed land clear (to allow access for the Finlaysons), it would prevent his use of it (noting that it was a necessary inference of the sheriff’s findings that the land could be used for parking and storage) and, as such, the encroachment could not be said to be inconsiderable. The sheriff had found that, if the Finlaysons had to be removed from the property, they would have to incur considerable expense in constructing an alternative access which would be “entirely disproportionate” to the “very marginal benefit” to Mr Munro if they were not to be removed from the property. However, the Sheriff Principal noted that the suggestion that the property provided no benefit to Mr Munro contradicted the sheriff’s earlier conclusions and, more importantly, that, in describing the issue as one of “marginal benefit”, the sheriff had applied the wrong test; the correct test being one of “material impairment”.

The full judgement is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

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[1] The Sheriff also summarised the current law relating to the “Anderson v Brattisanni’s principle” as follows:

1. The principle is part of the law of civil remedies, not the law of property. In its application it creates no new rights; it merely prevents the proprietor from exercising a right;

2. The principle is an exception based on equitable considerations. (Indeed, in Grahame v Magistrates of Kirkcaldy the Lord Chancellor compares it favourably to the law of equity as practised by the English Court of Chancery (at p 96).);

3. The party seeking its application must have acted in good faith, or as in Grahame v Magistrates of Kirkcaldy not done so but thereafter had taken steps to remedy its previous failings;

4. The principle will be applied only sparingly and in exceptional circumstances;

5. It has, to date, been applied only in cases where the encroachment was by a physical thing, such as a gable wall or an extractor flue attached to a wall;

6. The encroachment must be inconsiderable and does not materially impair the proprietor in the enjoyment of his property, by which is meant his property as a whole and not the piece of ground which has been encroached. Indeed, in all the authorities before Anderson v Brattisanni’s the piece of ground upon which the thing was constructed was lost altogether;

7. Its removal would cause to the encroacher a loss wholly disproportionate to the advantage which it would confer upon the proprietor. In calculating that advantage the court will take into account whether or not the encroaching party has offered compensation or, if not, whether it is open to the court on the evidence to fix a value for reasonable compensation;

8. Future as well as past economic loss will be taken into account.

Inner House Case in which the administrators of Oceancrown Ltd and other associated companies (including Loanwell Ltd and Questway Ltd) sought reductions of the sales of various properties by the companies as gratuitous alienations[1].

Background
The companies in administration were part of a group under the control of a Mr Pelosi. The group was involved in the development and letting of commercial and residential properties. Mr Pelosi had effective control of all of the companies which were operated as one enterprise and operated on the basis of one bank account in the name of Questway Ltd. The companies also had a group facility of around £17m from the bank which was subject to cross guarantees by the group companies.

Mr Pelosi negotiated the sale of 278 Glasgow Road, Rutherglen to Clyde Gateway Development Limited. On 10 November 2010 Oceancrown disponed 278 Glasgow Road to Strathcroft (then 99% owned by Mr Pelosi) for £762k. On the same day Strathcroft disponed the same property to Clyde Gateway for £2.1m (plus VAT of £367.5k[2]).

The bank’s solicitors were advised that sale of 278 Glasgow Road to Strathcroft was part of a series of transactions also involving 110, 210 and 260 Glasgow Road, and 64 Roslea Drive (owned by Oceancrown, Loanwell and Questway and over of which the bank held standard securities), the total sale price for which was £2.414m. When the bank’s solicitor (who was unaware of the subsequent sale of 278 Glasgow Road to Clyde Gateway for £2.4m) received the sale proceeds, it delivered discharges of the securities. Dispositions were executed (On 24 November 2010) transferring 110, 210 and 260 Glasgow Road to Stonegale Limited (of which Mr Pelosi’s son was the sole shareholder and director) and 64 Roslea Drive to Mr Pelosi’s son. The son then sold 64 Roslea Drive to a third party for £125k. Although no money was paid, the dispositions for the four properties recorded a consideration of £1.652m in total. Stonegale did not dispute that all the funds paid to the bank to discharge the securities came from the purchase of 278 Glasgow Road by Clyde Gateway.

Argument for the administrators
The administrators argued that a large proportion of the money received from Clyde Gateway (in respect of 278 Glasgow Road) was attributed to the other dispositions in order to make it appear that the transfers to Stonegale and Mr Pelosi’s son were made for consideration. In the view of the administrator, the back-to-back sale and transfers had been structured so as to keep £1.7075m out of reach of the bank and to transfer the properties to Stonegale and Mr Pelosi’s son for no consideration. The court was therefore asked to reduce the transfers of 110, 210 and 260 Glasgow Road, and 64 Roslea Drive.

Argument for Stonegale
Stonegale argued that the issue for the court was whether the alienations of 110, 210 and 260 Glasgow Road and 64 Roslea Drive, Glasgow were made “for adequate consideration”. Oceancrown, Loanwell and Questway had each received consideration which was paid to their secured lender. The parties agreed that the sums attributed to 110, 210 and 260 Glasgow Road, and 64 Roslea Drive exceeded their market value. The source of the funds was irrelevant. The bank had decided to discharge the security over 278 Glasgow Road on the basis of a valuation it had received and had made a bad bargain. The other transactions were separate. Consideration had been paid to Oceancrown, Loanwell and Questway as they had reduced their indebtedness to the bank.

Outer House Decision
In the Outer House Lord Malcolm found otherwise. “Consideration” is “something which is given, or surrendered, in return for something else”[3] No one paid anything for 110, 210, 260 Glasgow Road and 64 Roslea Drive. Oceancrown, Loanwell and Questway did not receive anything in return for the dispositions. They gifted the properties to the disponees. The fact that the bank was misled into using part of the sale price of 278 Glasgow Road to discharge all the standard securities did not supply the missing consideration. If the bank had known that 278 Glasgow Road had been sold for £2.4m, the same overall reduction in bank indebtedness would have occurred, but only the standard security over 278 Glasgow Road would have been discharged. The transfers under challenge were gratuitous alienations. As such, reductions of the dispositions of 110, 210, 260 Glasgow Road were granted and Mr Pelosi’s son was be ordered to repay the £125k paid to him by the third party for the purchase of 64 Roslea Drive.

Appeal to Inner House
On appeal to the Inner House, Stonegale argued that Lord Malcolm had erred in reaching the conclusion that no consideration had been paid in respect of the transfers being challenged. Firstly, Stonegale contended that the fact that the bank was not aware of the sale to Clyde Gateway (and would not have discharged the standard securities if it had been) was irrelevant to the question as to whether consideration had been provided for the properties.  Secondly, Stonegale argued that the fact that the consideration had been paid to the bank by Strathcroft (and not Stonegale and Mr Pelosi Junior) did not preclude its contention that adequate consideration had been paid. Essentially Stonegale argued that the payment by Starathcroft to the bank (in return for which the bank discharged the standard securities over the properties) reduced Oceancrown’s debt to the bank (which was guaranteed by Loanwell and Questway) and that consideration could include the discharge of a debt. As the consideration was in excess of the open market value of the properties, it was “adequate”[4].

Decision
The Inner House refused the appeal.  It was noted that, although a court can conclude that alienation has been made for adequate consideration irrespective of what the individuals involved think, the intention of the individuals may be relevant if only because the alienation must be foradequate consideration. In this case the whole motivation for the transaction was to divert the company’s assets away from its creditors which was exactly what the legislation is intended to prevent. The argument that the consideration for the transactions was the reduction of the debt was an artificial construct which bore no relation to the intention of the controlling minds of the companies involved (Mr Pelosi and his son). Oceancrown could be taken to have received £2.4m but, in disponing 278 Glasgow Road, it had conveyed a property which its controlling mind had previously agreed to sell at that price. In the absence of further evidence, Oceancrown could be regarded as having received adequate consideration for 278 Glasgow road (the transaction for 278 Glasgow Road was not challenged) but not for the other properties. With regard to the argument that consideration could be the reduction of debt over which the companies were guarantors, it was noted that attaching a value to the reduction in debt over which the guarantee was held was difficult and complex. However, the court followed the guidance of Lord Drummond Young in Jackson v The Royal Bank of Scotland plc [5] to the effect that “if the transaction as a whole appears commercial it should generally be assumed that the consideration is adequate”. In this case the court found that:

 “[t]he transactions under consideration were devices for the diversion of assets from creditors, facilitated by a misrepresentation to the banker of the companies which were involved.  They were accordingly not commercial transactions.”

The full judgement is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

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[1] In terms of s242 of the Insolvency Act 1986.

[2] The administrators investigations indicated that the VAT element on the sale of 278 Glasgow Road had not been paid to HMRC.

[3] MacFadyen’s Trustee v MacFadyen 1994 SC 416 at 421

[4] In terms of s242 of the 1986 Act.

[5] 2002 SLT 1123 at 1128D.

Background
Sheriff Court case concerning an action for recovery of possession of a shop premises in Edinburgh. The shop was let on a 25 year full repairing and insuring lease commencing in December 2002.

The lease contained a clause stating: ‘[t]he weekly rent shall be payable by Bank Standing Order to the Landlord’. However, in practice, the rent was paid in cash. The landlord kept rent diaries which recorded the dates when rent was paid and the dates when rent was not paid. On 31 March 2014 the landlord terminated the lease after following the irritancy procedure in respect of 35 weeks of unpaid rent. The landlord then raised an action to recover both possession of the shop and the unpaid rent.

The tenant argued that the rent had been paid in full. In response to the landlord’s evidence that it had not, the tenant pointed to the provision in the lease for the rent to be paid by standing order and the lack of bank records or accounts showing how the rent was received, rent receipts or a rent book.

Decision
After hearing evidence from various parties, the sheriff preferred the evidence of the landlord and his witnesses and granted decree in the landlord’s favour. With regard to the clause indicating that the rent would be paid by standing order, the sheriff found that it meant that the landlord would be bound to accept rent paid by standing order if the tenant paid by that means. However, it did not prevent the landlord from dealing in cash if the tenant wished to pay that way.

As regards the evidence produced by the tenant, the sheriff said the following:

 “In my judgement it was always open to the [tenant] to organise his business affairs in such a way that he could pay the rent by standing order and be in a position to demonstrate he paid the rent regularly and was up to date. I consider this is basic business management. It is his responsibility to organise his business affairs in such a way that he can at least demonstrate he pays the rent. His own parole evidence in my opinion was worthless. The onus of proof is on the [landlord] to prove his case but the fact that the [tenant] is incapable of clearly demonstrating something as basic as regular rent payments, in my view, makes it easier to accept the [landlord]’s case which is at least based on a system, primitive though it may be.”

The full judgement is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

The following Practice Notes have been updated:

• Introduction to Inheritance Tax planning
• Introduction to Trusts
• Introduction to Aggregates Levy
• Introduction to UK Landfill Tax
• Introduction to VAT ‘Transfer of a Going Concern’
• Introduction to VAT ‘Opting to Tax’

These can be found in the ‘Know How’ section of our website.

Background
This is an Outer House case concerning a lease of premises at the Gyle Shopping Centre in Edinburgh under which Gyle was the landlord and Marks & Spencer, the tenant.

Gyle entered an agreement with Primark for the erection of a new store on land which included part of a car park. However, Marks & Spencer’s premises were let together with a one-third pro indiviso share of shared areas which included the car park. In two previous decisions Lord Tyre found (1) that M&S had not consented to the building of the Primark Store and that the building of the store without consent would be a breach of the lease[1] and (2) that M&S was not personally barred from preventing Gyle from erecting the store on the car park[2].

In this case Gyle sought declarator that any refusal of consent to the Primark development by M&S would be amount to an unreasonable withholding of consent. The relevant clause in the lease provided that works on the shared areas could be carried out with the consent of M&S (to the effect that they accepted that any works would not render the mall or shared areas materially less adequate, commodious or convenient to them) and that that consent could not be unreasonably withheld.

Arguments
After Lord Tyre rejected an argument by M&S that the relevant clause could not be construed so as to permit works which effected a permanent alteration to the extent of shared areas, the question for the court was whether it was unreasonable for M&S to withhold consent.

Gyle offered a number of arguments why it was unreasonable for M&S to refuse consent to the development including contentions that the proposed development would benefit public access to the shopping centre, that car parking would remain in excess of the requirements and that the alterations were sufficiently remote not to have a significant impact on the servicing and usage of the M&S store. As a result of the various arguments, Gyle expressed the opinion that it would be unreasonable to conclude that the development would render the Mall or the Shared Parts materially less adequate, commodious or convenient to M&S.

M&S did not challenge those arguments or Gyle’s opinion. However it argued that (1) that the proposed “works” were too unspecific; (2) that loss of ownership rights in relation to the shared areas was sufficient of itself to render them less adequate; and (3) that as the case was ongoing at the time when the Gyle sought M&S’s consent, it could not be said that M&S acted unreasonably in withholding consent.

Decision
Those arguments were rejected by Lord Tyre who found: (1) that the proposed works were detailed in plans provided to M&S prior to its refusal of consent (and in respect of which planning permission had been granted); (2) the loss of M&S’s interest in the shared areas as tenant under the lease did not of itself render the shared areas materially less adequate (the criteria of adequacy, commodiousness and convenience being concerned with practical consequences rather than the technicalities of characterisation of M&S’s right under the lease); and (3) M&S’s entitlement to withhold consent in terms of the relevant clause had to relate to the three specified criteria. (Thus the fact that there was subsisting litigation was not a relevant matter at the time when consent was refused.)

The full judgement is available from Scottish Courts here.

(NB: see appeal to Inner House here.)

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

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[1] Gyle Shopping Centre General Partners Ltd as Trustee for and General Partner of Gyle Shopping Centre Limited Partnership v. Marks and Spencer Plc, 25 March 2014. See summary here.

[2] Gyle Shopping Centre General Partners Ltd as Trustee for and General Partner of Gyle Shopping Centre Limited Partnership v. Marks and Spencer Plc, 6 August 2014. See summary here.

Background
Sheriff Court case concerning a lease of property at Hopetoun Crescent in Edinburgh. The landlord initially failed to pay a deposit (of £1000) into an approved scheme and also failed to provide the tenant with the prescribed information[1] required in terms of Tenancy Deposit Schemes (Scotland) Regulations 2011.

The lease was to run from 1 July 2013 to 31 January 2014 but, despite an unsuccessful attempt to evict the tenant at the end of 2013, continued by tacit relocation until decree for recovery of possession of the property was granted on 27 June 2014. The deposit was paid into an approved scheme on 27 January 2014 (when the landlord became aware of his duties).

Where a landlord has failed to comply with its requirements under the 2011 regulations, regulation 9 provides that the tenant can apply to the sheriff for an award of an amount of money as a sanction against the landlord for its failure to comply with its duties. The question for the sheriff in this case was how much the landlord should have to pay.

Arguments
The tenant argued that he should receive (the maximum award of) three times the deposit contending that the sheriff’s discretion as to the amount of the award was unfettered[2].

The landlord’s solicitor argued that the landlord was not a commercial landlord and was a 30 year old first time amateur landlord who “had made a hash of the let”. He had also paid the deposit into an approved scheme as soon as he had become aware of the requirement and (following a dispute) the deposit had been adjudicated on under the scheme and repaid to the tenant. The landlord also contended that the tenant had been using the threat of sanction under the regulations as a weapon in a dispute over rent arrears (with the suggestion being that judicial sanction regarding the deposit would not be pursued if the landlord were to waive his claim for rent arrears.) In essence the landlord considered that he was being blackmailed by the tenant.

Decision
The sheriff accepted that he had discretion as to the amount of the award but did not agree that the discretion was ‘unfettered’ as it had to be exercised for sound reasons and could not be exercised in a manner which was arbitrary, automatic or capricious. Further, the resulting decision had to be fair and just and could not be disproportionate (in that trivial noncompliance could not result in the maximum penalty).

The sheriff noted that a landlord’s ignorance of the regulations could be no excuse. He also found that there had been no blackmail in this case.

“In my view, the bona fide use, by tenants, of this right as supplementary leverage against landlords, is not illegal and if it becomes widespread, it should further enhance good market practice and regulatory compliance. It is not a bar to sanction against the landlord.”

However, after taking account of the various mitigating factors in favour of the landlord, the sheriff took the view that the award in favour of the tenant should be at the lower end of the scale and awarded the tenant the sum of £333.33 (one third of the deposit).

The full judgement is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

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[1] Relating to the safekeeping of the deposit, the status of the landlord as a registered landlord under the scheme and how any future disputes over the money could be resolved.

[2] See summaries of Fraser v Meehan, 2013 S.L.T. (Sh Ct) 119 and Tenzin v Russell, 28 January 2015 (and 19 December 2013 here) in which the sheriff’s discretion was described as ‘unfettered’.

Background
Inner House case relating to a landlords’ failure to comply with the Tenancy Deposit (Scotland) Regulations 2011 in respect of a property at 4/6 Admiralty Street in Edinburgh.

The landlords failed to pay a deposit of £750 into an approved tenancy deposit scheme as required by regulation 3 of the 2011 regulations and made deductions from the deposit before returning it to the tenant at the end of the lease. In terms of regulation 10, where the landlord fails to comply with its duty under regulation 3, (following an application by the tenant) the sheriff must order the landlord to make a payment not exceeding 3 times the deposit to the tenant. Following an application from the tenant, the sheriff ordered the landlord to pay the maximum monetary payment of three times the deposit.

The sheriff principal refused an appeal by the landlords on the basis of technical points relating to the tenants’ pleadings[1] and on the basis that the sheriff had made an error when exercising his discretion to award the maximum penalty (noting that the sheriff had “complete and unfettered discretion” as to the award to make).

Arguments
The landlords appealed to the Inner House which refused the appeal and found no flaws in the decisions of the sheriff and sheriff principal. With regard to the sheriff’s decision to award the maximum penalty, the landlords argued that the sheriff had failed to take into account the fact that the landlords were only in breach of the regulations for 34 days and had placed weight upon the fact that the landlords had held the deposit for several months prior to the tenancy deposit protection deadline. Further, the landlords argued that the sheriff should have taken account of the facts that, at the time of the breach, the regulations were new and complex, that the breach had occurred during the transitional period of the regulations coming into force, and that the breach had occurred during a period in which the tenant had given notice of his intention to vacate the property.

Decision
The Inner House emphasised the limited role which it (as an appellate court) could play in considering an exercise of the sheriff’s discretion noting that it could only interfere where, for example, the sheriff had not exercised his discretion at all, had taken into account irrelevant considerations, or had failed to take into account relevant ones. The sheriff had set out in detail his reasons for awarding the maximum penalty and the Inner house could find no fault with his reasoning:

 “It is plain that he reached the conclusion that the breach by the defenders in this case was indeed a serious one.  There is, in our opinion, no basis upon which we would be entitled to interfere with the decision he reached.  It is not insignificant that the defenders had until 30 November 2012 to register the pursuer’s deposit with one of the approved schemes.  That was over four months after the regulations had first come into force.  They chose not to do so.”

The full judgement is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

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[1] For which see LKS summary of earlier decision here.