Outer House case in concerning the interpretation of the lease of a plot in a chalet park in Lochgoilhead.

Mr and Mrs Ramsay bought a (removable) chalet in the park (for £20.5k) from Drimsynie. As part of the same transaction, the Ramsays entered into a 10 year ground lease of the plot on which the chalet was located. The lease provided that, on expiry of the lease, Drimsynie would have:

 “..the option to acquire the chalet at a price to be agreed, failing agreement at a price to be determined by an arbiter to be appointed in terms of clause FIFTEENTH…or offer to (the Ramsays) a renewal of the lease for a period to be determined by (Drimsynie)….”

When Drimsynie terminated the lease (following a change policy which involved replacing chalets with newer, larger, and more expensive chalets), an arbiter was been appointed to determine the sum to be paid for the chalet and a dispute developed as to how the arbiter should approach the valuation of the chalet. The Ramsays argued that the chalet should be valued on the assumption of a continuing right to occupy it on the plot on which it was located. Alternatively, Drimsynie contended the arbiter should consider only the market value of the chalet itself on the basis it would be removed from the plot.

Lord Malcolm found that his task was to interpret the lease by reference to the understanding of a reasonable person in the position of the parties at the time the lease was entered. It was important to note that the lease was not a stand alone contract and was linked to the associated purchase of the chalet. The effect of the relevant clause was that the Ramsays could remain in occupation of the chalet on the plot in terms of the lease until the chalet was purchased by the Drimsynie. If Drimsynie wanted to put a new chalet on the site and sell it to someone else they would require to purchase the old chalet first. In Lord Malcolm’s view the parties would have understood that Drimsynie was buying out the Ramsays’ right to continue to use the chalet on the plot in terms of the lease. As such, a reasonable person in the position of the parties at the time of the lease would have understood that Drimsynie would purchase the chalet on the same footing as they sold it. He found support for this view from the element of permanence associated with the chalet, noting that:

• the lease described the chalet as having been “erected” on the plot
• although simply resting on its foundations, it was connected to services, including water and drainage
• the chalet had been on the site since about 1967 and was shown on the OS map
• the Ramsays paid council tax in respect of the chalet.

Lord Malcolm therefore held that that the arbiter should value the chalet on the basis that it could be used on the site for so long as it remained habitable.

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.

Inner House case concerning the interpretation of a dilapidations provision contained in a lease of premises at Germiston Industrial Estate in Glasgow.

Surveyors acting for Grove (the landlord) served a schedule of dilapidations on Cape (the tenant). However, the works specified in the schedule had not been carried out by Cape by the expiry of the lease .

The lease provided an obligation on the tenant “to pay to the landlords the total value of the Schedule of Dilapidations [prepared in respect of the tenant’s repairing obligations]”. Grove argued that this obliged Cape to pay the total value as shown in the schedule. On the other hand, Cape argued that they were only obliged to make payment to Grove of the loss actually suffered as a result of the failure to comply with the repairing obligations. Both the sheriff and the sheriff principal agreed with Grove’s arguments and Cape appealed to the Inner House.

Before considering the lease, the court noted that the provisions of a contract must be construed in context and in accordance with the purposes that the contract is intended to achieve and that, where a contractual provision is capable of more than one meaning, the court should adopt the meaning that best accords with commercial common sense.  Adopting this approach, the Inner House allowed the appeal for the following reasons.

1. The contractual context was the termination of a lease where the tenants had not fulfilled their repairing obligations. The most natural way of providing a remedy for the tenant’s breach of contract would be to compensate the landlords for their loss (which would involve a remedy akin to damages).
2. In a case where the landlords intended to reinstate premises in full, Cape’s construction of the clause would allow for full recovery of the costs of reinstatement. (The amount due being calculated after the works had been carried out). On Grove’s suggested interpretation, the sum payable by the tenants would be based on an estimated value before the works were carried out.
3. In cases where the landlords did not intend to reinstate the property, Grove’s construction of the clause would mean that the landlord could recover very much more than the actual loss sustained by them through the tenant’s breach of contract. (The effect being that the amount recovered would essentially be arbitrary and unrelated to the tenants’ breach of contract)
4. Cape’s proposed interpretation of the clause provided full compensation to the landlords for the loss ultimately suffered by them. In the court’s opinion that was in accordance with commercial common sense and satisfied the important requirements of proportionality and predictability.

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.

Supreme Court case considering a lease of premises at Wardpark South Industrial Estate in Cumbernauld.  Batley were tenants and North Lanarkshire Council were sub-tenants.

At the centre of the dispute were works which the Council carried out to the property under a minute of agreement. In terms of the minute, the Council had to remove the works and re-instate the premises at the end of the agreement if they were required to do so by Batley.  Batley served a schedule of dilapidations after the end of the sublease.  However, the Council argued that the obligation to reinstate the premises died on the expiry of the sublease and therefore it did not require to comply.

In the Outer House, the temporary judge (Morag Wise QC) found that, in terms of the minute, there was no need for Batley to give written notice requiring removal of the works and allowed a proof to consider whether Batley had adequately conveyed its requirement for re-instatement when a surveyor acting on its behalf had telephoned the Council before the end of the sublease and indicated re-instatement would be required.

The Inner House allowed a reclaiming motion finding that the minute not only amended the sublease but also ratified provisions in the sublease. These included a provision incorporating a requirement for written notice which was contained in the head lease. In the absence of such written notice there was no requirement on the Council to re-instate the premises. An attempt by Batley to claim the cost of re-instating the premises under the general repairing clause in the sublease also failed.

The Supreme Court have allowed an appeal and allowed a proof before answer to hear evidence on the facts.

Construing the words used in the context of the minute of agreement as a whole and the surrounding factual matrix the court found that:

1. the use of the words “if so required by the Mid-Landlord” in relation to the re-instatement requirement in the minute was in contrast to two other provisions in the minute which expressly required written forms (suggesting that, where writing was required, it was expressly stated);
2. to interpret the documentation as requiring written notice required a convoluted construction of both the agreement and head lease whereas the simpler construction (preferred by the court) was that written notice was not required;
3. although the minute existed in the context of the head lease and sub-lease, it was a separate contract and the starting point for interpretation was the words it contained which pointed towards the conclusion that writing was not required for communications in all circumstances and that conclusion was not overturned by the provisions of the head lease and sub-lease; and
4. it made business common sense that written notice was not required as:
   1. although the minute stated that the obligations were incorporated into the sub-lease (containing a requirement for written notice), this was done so as to give the mid-landlord the power of irritancy if the sub-tenant breached its obligations under the minute; and
   2. the landlord would only require removal of the sub-tenants works at the end of the sublease when the sub-tenant would have to address its separate and continuing repairing obligation under the lease and, at the time such repairs were being carried out, the sub-tenant could readily respond to an intimation to remove its works (without the need for formal intimation).

With regard to Batley’s attempt to recover the cost of re-instating the premises under the general repairing clause in the sublease, the Supreme Court found that the repairing obligation was a continuing obligation which did not require notice from the landlord to activate it.

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.

Outer House case considering a break option in leases of office premises situated on Broadway Park in Edinburgh.

The leases were due to expire in 2023 but could be broken as at 7 May 2013. In order to exercise the break option, the tenants (Scottish & Newcastle) required to give 12 months notice and not be “in breach of any of their obligations (under the lease in question) at the date of service of such notice and/or the termination date”.

Scottish & Newcastle served break notices on time but by their own admission, at the date of service of the notices, had not fully performed their repairing obligations under the lease. The business park argued that the leases continued after the notice date and sought payment of rent from the date of the notices.

Scottish & Newcastle argued that:

1. although they had not fully performed their obligations under the lease at the date of the notices, they were not in breach of the lease as the non-performance was remediable; and
2. (even if argument 1. was wrong) for the tenants to lose their option to break they had to be in breach of the lease either:
   1. both at the date the notices were served and at the date of termination; or
   2. at the date of termination.

Lord Malcolm rejected both arguments finding that, in terms of the leases, there was no distinction to be made between non-performance of the obligations and a breach of the obligations and, with regard to the second argument, the natural meaning of the words used was that a notice was invalid if the tenants were in breach of the notice either at the date of the notice, the date of termination or both.

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.

Outer House case concerning a lease of premises at the Gyle Shopping Centre in Edinburgh under which the 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. Gyle sought declarator from the court to the effect that (1) that the building of the Primark store did not breach the lease and (2) Marks and Spencer had consented to the building of the new store. (Gyle also made a further argument based on personal bar, which would only require to be considered if the Court found in favour of Marks & Spencer on the first two arguments).

A breach of the lease?
The essence of Gyle’s argument was that the right to the car park granted to Marks & Spencer under the lease was not a real right.  In particular they argued that a self-standing grant of tenancy to a pro indiviso share in land could not meet the requirements of a lease conferring a real right. As a consequence they contended that the right was only enforceable against the original landlord (Gyle’s predecessor in title) and not Gyle. Lord Tyre rejected that argument finding that the right in the car park was granted as a pertinent of the lease which conferred a real right enforceable against the landlord’s successors and, as such, the right in the car park was also enforceable against the landlord’s successors. Consequently, building the Primark store in the car park would constitute a breach of Marks and Spencer’s lease.

Consent to the new store?
In the absence of a variation recorded in the appropriate register, the lease could only be varied in accordance with its terms. Gyle argued that Marks and Spencer had approved the building of the store at a meeting of the shopping centre management committee and that the approval had been recorded in the minutes and signed by all of the parties (including Marks and Spencer). However Lord Tyre found that there was nothing in the lease conferring a power to vary the lease upon the management committee. Although he did not require to decide the issue, Lord Tyre also found that the terms of the lease required that a change to the car parking area would require probative (i.e. signed and witnessed) writing.

Having regard to the outstanding issue of personal bar, Lord Tyre put the case out By Order to discuss further procedure.

The full judgement is available from Scottish Courts here.

(See also summaries of decisions in which the court found (1) that M&S was not personally barred from preventing Gyle from erecting the store on the car park and (2) that M&S was not unreasonably withholding consent to the Primark development.)

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

Outer House case in which Fordell sought £338k from Deloitte it said was due under an alleged agreement relating to a dilapidations claim in respect of a lease of property at 18 Charlotte Square and 4 Charlotte Lane in Edinburgh.

The lease came to an end in March 2012 and before that a schedule of dilapidations was served. A dispute then took place as to the scope and cost of the remedial works required following which surveyors liaised on behalf of each of the parties with a view to reaching a negotiated agreement.

Fordell argued that a binding agreement had been reached between the parties that Deloitte would pay £338k in full and final settlement of the claim. Deloitte argued that there had been no concluded contract because:

1.     the communications did not record an intention to be bound by the exchange of emails;
2.     there was no evidence that Fordell would use the money for the dilapidations works;
3.     the phrase “without prejudice” was used in Deloitte’s surveyor’s emails;
4.     there was a need for a formal legal document; and
5.     there was no agreement on a date for payment.

After considering the authorities[1] Lord Malcolm found that the proper approach in such cases was well settled:

“In summary, both parties must have manifested an intention to be immediately bound to all the legally essential elements of the bargain. In assessing this, the court adopts an objective approach, based upon what an informed reasonable person would have understood by the words and conduct of the parties or their agents.”

Lord Malcolm held that the negotiations had not resulted in a concluded contract between the parties. One of Deloitte’s emails contained a condition that Fordell would use the money for the dilapidations works which was not withdrawn and remained unmet. An email which Fordell argued had concluded the bargain did not waive or abandon that requirement. Fordell contended Deloitte were not entitled to require such evidence. However, Lord Malcolm took the view that, whatever the law on dilapidations claims, Deloitte were entitled to insist on such evidence as they wished, and to make it a condition for payment.

Lord Malcolm also took the view that the use of the words “without prejudice” and the need for a formal agreement reflected a shared understanding that neither of the surveyors could bind the parties. That was made clear in the correspondence. At each stage, before making a binding offer, or counter offer, the surveyors had required direct instructions from their respective clients and the words “without prejudice” required to be seen in that context[2]. Lord Malcolm described the lack of agreement regarding a date for payment as a “loose end” but saw it as further demonstration that the parties’ minds had not met on the key aspects of the deal.

Fordell’s claim for payment was dismissed.

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.

Sheriff court case concerning the meaning of “a premium” in the context of residential leasing.

Mr Cross and others (the students) sought a lease of property at Elmfield Avenue in Aberdeen. They completed an application form supplied by Aberdeen Property Leasing which revealed that the rent was to be £1,300 per month, and that a deposit of £1,300 and an “Admin fee” of £125 plus VAT thereon were to be paid prior to entering into the lease. The students paid the deposit and administration fee. In June 2009 they entered into the lease and were granted an assured tenancy of the property.

The students subsequently raised a small claims action seeking repayment of the administration fee which they argued was an illegal premium.

At the time the lease was entered section 82(1) of the Rent (Scotland) Act 1984 provided:

“any person who, as a condition of the grant, renewal or continuance of a protected tenancy, requires, in addition to the rent, the payment of any premium or the making of any loan (whether secured or unsecured) shall be guilty of an offence under this section”.

And s90 of the 1984 Act provided:

““premium” includes any fine or other sum and any other pecuniary consideration in addition to rent”

On 29 November 2012 s90[1] of the 1984 Act was amended by section 32(3) of the 2011 Act and now provides:

“”premium” means any fine, sum or pecuniary consideration, other than the rent, and includes any service or administration fee or charge.”

Aberdeen Property argued that the administration fee had been legitimately charged as, at the time the lease was entered into (i.e. prior to the amendments), administration fees were not prohibited.

The students argued that administration fees were prohibited at the time the lease was entered into and that the amendments made by section 32(3) of the 2011 Act simply clarified the meaning of “a premium”. They explained that the clarification was necessary because of confusion on the part of some landlords about what they could and could not charge and because of poor and inconsistent practices adopted by many landlords in relation to the imposition of charges and fees in addition to the rent and refundable deposit.

The sheriff agreed with the students’ interpretation and granted decree for repayment of the administration fee with interest:

“In my opinion the definition was not changed – it was improved to make it crystal clear to all involved in residential leasing that administration fees ought not to have been imposed and ought not to be imposed. The administration fee imposed by the defender is “a pecuniary consideration in addition to the rent” (s90 of the 1984 Act – prior to amendment). I asked [Aberdeen Property’s representative] if she could explain to me what the administration fee of £125 could possibly be if not “a pecuniary consideration in addition to the rent”. She has yet to answer that question. I have concluded that the administration fee imposed by [Aberdeen Property] was a prohibited payment and accordingly the pursuers are entitled to the return of it.”

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.

Outer House case concerning the lease of a fast food restaurant and car parking spaces at Queens Drive Leisure Park, Kilmarnock.

Background
The lease contained a prohibition on subletting but stated that the landlord could not unreasonably withhold or delay consent to a subletting to a subtenant who was “respectable and responsible”. Burger King were the tenants under the lease and wished to sublet the premises to Caspian Food Retailers Limited. Burger King’s solicitors wrote to Castlebrook requesting consent for the subletting and providing some information on Caspian. Castlebrook’s agents replied seeking further information (including 3 years audited accounts and references from at least two previous landlords). Burger said that they had no accounts or references for Caspian as it was a new company.

Arguments
Castlebrook argued that, as Caspian had no track record, they had no idea whether the company was “respectable and responsible” but indicated that, if the main company in the group were to grant a guarantee or take the sublease itself, consent would be granted.  Burger King argued that, when taken with the fact that Castlebrook could continue to rely on Burger King’s covenant as tenant, there were no reasonable grounds to refuse the subletting. Castlebrook acknowledged the excellent track record of other companies in the group but contrasted that with Caspian itself which had no track record and refused to grant consent. Burger King sought declarator from the court that Castlebrook had refused consent unreasonably and a decree ordaining Castlebrook to issue the consent.

Decision
Lord Tyre found merit in Castlebrook’s argument to the effect that the landlord should first consider whether the proposed subtenant was respectable and responsible and then, if it found that it was not, the landlord was entitled to refuse consent without justifying that refusal by reference to any reason other than the non-respectability and/or non-responsibility of the sub-tenant. Lord Tyre referred to support for this approach in Bates v Donaldson:

“It will be seen that it is only when a respectable and responsible person is proposed as assignee or undertenant that this clause (as to the permission not being unreasonably withheld) comes into play. If the person proposed be not a respectable and responsible person, the lessor has an absolute right to refuse permission; if, however, the person proposed be respectable and responsible, then the lessor cannot unreasonably withhold his permission.”[1]

With regard to the meaning of “respectable and responsible”, Lord Tyre noted that “respectability” had been held to refer to the manner in which the company in question conducted its business and to its reputation and that “responsibility” had been held to refer to financial capacity. In each case he found that supporting evidence should relate to the proposed subtenant itself and not to other group companies or other entities that could provide assistance to the proposed subtenant:

“In my opinion a landlord who stipulates that a proposed sub-tenant must be responsible is reserving to himself the right to be satisfied as to the financial soundness of the sub-tenant itself and not as to the soundness of individuals or entities who might or might not provide assistance in the event of financial difficulty. So far as respectability is concerned, it may be that little should be required to satisfy the landlord, but once again I consider that evidence of respectability should relate to the proposed sub-tenant itself. A company does not acquire respectability automatically along with its certificate of incorporation, although it may not be long before its mode of carrying on business affords sufficient indication that it could not reasonably be regarded as anything other than respectable. That is not, in my view, the same as an assessment of the respectability of the company’s owners or of other companies in common ownership.”

Lord Tyre dismissed Burger King’s action but noted that if Burger King had provided material demonstrating even a successful first few months’ initial trading by Caspian, including landlords’ references, it might have been difficult for Castlebrook to justify a refusal of consent.

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.

Case from the Court of Appeal for England and Wales considering the treatment of rent payable during an administration and whether part of a payment of rent payable in advance could be treated as an expense of administration (and thus paid in priority to unsecured debts).

One of the companies in the Game group of companies was the tenant of many hundreds of properties from which the group traded. The rent in respect of most of those properties was payable quarterly in advance on the usual English quarter days (which include 25 March). On 25 March 2012 approximately £10m in rent became due under the leases and on the following day the Game Group went into administration. Trading continued from some stores which were included in a sale of the business and assets of the group to Game Retail Limited which was outwith the group. Approximately £3m in rent was said to be outstanding in respect of those stores.

The cases of Goldacre (Offices) Limited v Nortel Network UK Limited[1] and Leisure (Norwich) II Limited v Luminar Lava Ignite Limited[2] had decided that part of an instalment of rent cannot be treated as an expense in the context of insolvency. In Goldacre  it was found that, where a quarter’s rent payable in advance fell due during a period in which the administrators were retaining the property for the purpose of the administration, then the whole of the quarter’s rent was payable as an administration expense, even if the administrators were to give up occupation later in the same quarter. In Luminar  it was decided that, where a quarter’s rent payable in advance fell due before entry into administration, none of it was payable as an administration expense even if the administrators retained possession for the purposes of the administration.

As a result of Goldacre and Luminar it has become increasingly common for companies to enter administration on the day immediately following a quarter day, thus avoiding liability to pay the rent in full even if they retain possession of their leased property. A quick sale of the business to a new company can also mean that the new company can, in effect, trade for the first three months rent free.

The High Court in this case followed Goldacre and Luminar. However, the Court of Appeal applied the “salvage principle” under which liability for rent incurred before the winding up may be treated as if it were an expense of the winding up (on equitable grounds) where a liquidator or other office holder retains the property for the benefit of the winding up or administration. Consequently, the court allowed the Landlords’ appeal and over-ruled Goldacre and Luminar finding that an application of the salvage principle means that:

“the office holder must make payments at the rate of the rent for the duration of any period during which he retains possession of the demised property for the benefit of the winding up or administration (as the case may be). The rent will be treated as accruing from day to day. Those payments are payable as expenses of the winding up or administration. The duration of the period is a question of fact and is not determined merely by reference to which rent days occur before, during or after that period.”

The full judgement is available from BAILII here.

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