Outer House Case considering a lease of premises at Wardpark South Industrial Estate in Cumbernauld.  Batley acquired the tenant’s interest in the lease and North Lanarkshire Council were sub-tenants.

Central to the dispute was a minute of agreement entered into between Batley’s predecessors as tenants and North Lanarkshire Council regulating the terms and conditions on which the Council could carry out alterations to the property.  It provided:

“By the expiration and sooner determination of the period of the sub lease (or as soon as the license hereby granted shall become void) if so required by the mid landlord and at the cost of the sub tenant to dismantle and remove the Works and to reinstate and make good the premises and to restore it to its appearance at the date of entry under the sub lease, such reinstatement to be carried out on the same terms (mutatis mutandis) as are stipulated in this license with respect to the carrying out of the works in the first place (including as to consents, the manner of carrying out works, reinstatement, inspection, indemnity, costs and otherwise).”

 The lease came to an end on 18 February 2009. On 20 February 2009 the Council received a schedule of dilapidations in respect of the property.  However, they claimed that, as they had received the schedule after the expiry of the sublease, there was no obligation to remove the alterations (it having died on expiry of the lease). They argued that the notice provisions from the head lease were incorporated in the sub lease and any notice required to be in writing and to be served prior to the end of the lease.

This argument was rejected by the temporary judge (Morag Wise QC) who noted:

 “the wording of clause 2.5 which obliges the sub-tenant “if so required by the mid-landlord to remove the works” makes no mention of a notice. The means by which the sub tenant can be so required are not specified. In my opinion, it cannot be said to be a mandatory term of the Minute of Agreement that the mid-landlords convey in writing to the sub-tenants the requirement to remove the works unless [it] can be implied that service of some form of notice or request is part of that term.  If written notification of the type envisaged in clause 5.8 of the head lease cannot be so implied, then clause 2.5 would seem to me to permit the pursuers to offer to prove that they required the defenders to remove the work by conveying that to them orally.”

 And further:

“It seems to me that the [Council's] argument is predicated upon a notice being necessary for the purposes of clause 2.5. However, there is nothing in that provision of the Minute of Agreement to support the contention that something formal is necessary before the sub-tenants can be required to remove the works. For that reason I do not accept the submission that the notice provisions of the lease automatically apply to the “if so required” provision of clause 2.5.”

 An amendment to the pleadings was allowed in which Batley claimed that surveyors acting on their behalf had contacted the Council on 22 December 2008 and, after receiving confirmation that the Council were intending to leave the premises, advised them that the surveyors would require access to the property to prepare a schedule of dilapidations and that Batley would require reinstatement of the premises to their original condition.

The temporary judge found that this was ‘just’ sufficient to entitle Batley to a proof before answer on the question of whether or not they had adequately conveyed the requirement for reinstatement of the premises to the Council before the expiry of the sub lease.

 The full judgement is available from Scottish Courts here.

(NB: See also appeals to Inner House and Supreme Court)

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

Outer House case concerning the creation of a servitude right of access by prescriptive possession. Mr and Mrs Gray owned 40 Montgomerie Drive, Fairlie and a lane running to it from Montgomerie Drive.  Mr and Mrs Jones owned 38 Montgomerie Drive and sought declarator that a servitude right of pedestrian and vehicular access had been created in favour of no 38 over part of the lane leading to the rear of their property and garage.

The Joneses also said that the Grays had erected a lockable post and fence in front of their garage so as to obstruct access to it from the lane and sought a decree ordaining removal of the obstructions and interdict preventing the Grays from interfering with the disputed area.

Section 3(2) of the Prescription and Limitation (Scotland) Act 1973 provides:

“If a positive servitude over land has been possessed for a continuous period of twenty years openly, peaceably and without judicial interruption, then, as from the expiration of that period, the existence of the servitude as so possessed shall be exempt from challenge.”

In support of their action, the Joneses claimed that their predecessors in title had taken access over the disputed area including daily access to the garage with their car and with their sailing dingy from time to time between April 1979 and June 2007.  The access had been free and uninterrupted and it was consistent with exercise as a matter of right. The Joneses had taken access over the disputed area from June 2007 for parking their car in the garage, unloading their car and getting from the lane to the garage doors.

The Grays argued that the Joneses had not adequately specified the continuity, volume and frequency of the possession in their pleadings nor had they demonstrated that possession had been continuous for the prescriptive period or that it was open and ‘as of right’. They contended that the action should be dismissed on the basis the Joneses arguments were irrelevant and/or that they did not give fair notice of important matters to the Grays.

Lord Doherty was not satisfied that the case should be dismissed. Applying the test set out in Jamieson v Jamieson (1952), it was not a case which would necessarily fail even if all of the Joneses arguments were proved.  Several of the issues between the parties involved questions of fact and degree which would be capable of determination after a proof (e.g. whether possession was continuous). Lord Doherty was also not persuaded that there was a lack of fair notice on important matters. The crux of the Grays’ complaint was that the use of the word “included” suggested that the Joneses would be able to lead evidence of other unspecified modes of access of which no notice had been given. Lord Doherty considered that use of the word “included” did not reserve them a free hand to do so and if it were to happen the Grays would be entitled to object to such evidence being led.

A proof before answer was allowed.

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 damages payable as a result of a solicitor’s professional negligence.  VMH LLP advised Kirkton in relation to the purchase of a site at 144 to 148 Slateford Road in Edinburgh in 2005 from HBJ 590. The site had the benefit of conditional planning permission for 19 terraced townhouses and 8 apartments.

Two of the conditions related to a requirement for the installation of a ventilation system to a fish and chip shop (the Codfather) situated adjacent to the site to ensure that odours from the shop exited at a suitable level.

In March 2005, the owner of the Codfather, Slateford Developments entered into an agreement with HBJ 590 allowing HBJ 590 to carry out the works to install the ventilation system.

Kirkton[1]  concluded missives for the sale of the site from HBJ 590 in April 2005 and in July 2005 Slateford Developments sold the Codfather to Ian McDonald Enterprises.

Kirkton began construction of the Development in autumn 2005. However, Ian McDonald disputed Kirkton’s entitlement to install the ventilation system and requested a payment of £75k in return for allowing the installation. Kirkton refused this offer on advice from VMH to the effect that they had a legal right to install the system.   However, it was subsequently found that Kirkton did not have a real right enforceable against the new owner of the Codfather.

In November 2007, having sought and failed to obtain a variation of the planning permission, Kirkton agreed to pay Ian McDonald £324k in return for the grant of a right to install the vent. In the meantime Kirkton had postponed active marketing and the launch of the development. Unfortunately for Kirkton the events also coincided with the onset of the property slump.

Kirkton argued that, as a result of VMH’s breach of duty, marketing and sales were delayed and VMH were liable for the consequences of the delay including the additional bank borrowing costs and lower sales prices as obtained a result of their increased exposure to the vagaries of the property market.

Having initially argued otherwise, VMH accepted that an enforceable right could have been constituted against the shop owner, it was their duty to advise Kirkton of that and take the required steps to constitute the right and that, by failing to do so, they were in breach of their duties to Kirkton. However, they contended that the losses claimed in respect of additional bank charges and diminution in sales proceeds were not within the scope of their duties. VMH  had not assumed the risk of such losses and it would not be fair and reasonable to impose it on them.

Lord Doherty disagreed:

“In my opinion the scope of the [VMH’s] duties to [Kirkton] was sufficiently wide to include the duty to avoid causing them each of the kinds of loss and damage they say were sustained…

They were not merely providing information to [Kirkton]. Their duties were more exacting. They were under a duty to take the necessary legal steps to protect the position of the [Kirkton] in relation to the ventilation issue at the time they concluded missives; and they were under a duty to advise them correctly of their legal position at the time of the proposal by [Ian McDonald] so that a properly informed decision could be made then as to what action to take…

Having regard to the nature and content of [VMH's] duties to [Kirkton], and to the whole circumstances in which they arose and were breached, it appears to me to be fair, just and reasonable that the scope of [VMH’s] duties should extend to the kinds of loss and damage  claimed… It was reasonably forseeable that [VMH’s] breach of duty might result in interruption to the planned progress of the development and sale of the properties, and might occasion delay and expense. [VMH] were aware that the development was being financed by bank borrowing. It was reasonably foreseeable that delay would result in additional borrowing costs. It was reasonably foreseeable that delay in achieving sales might result in longer exposure to the vagaries of the property market.”

After discussion as to causation and valuation of the loss, Lord Doherty awarded damages of more than £1.1m broken down as follows:

1. the settlement payment paid to Ian McDonald-                   £324,000
2. the other extrication costs-                                                  £55,812
3. diminution in sales proceeds-                                              £545,818
4. additional bank borrowing costs-                                         £209,742

The full text of the decision 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 concerning the interpretation of commercial missives for Stewart Milne’s purchase of development land from Aberdeen City Council.  The missives contained the following provision for an uplift in the price on the occurrence of certain events:

“In addition to the purchase price detailed in Clause 2 hereof, the Purchasers and the Sellers have agreed that the Sellers shall be entitled to a further payment (‘the Profit Share’) upon the Purchasers purifying the suspensive conditions contained in Clause 4 hereof and issuing a notice to the Sellers intimating to the Sellers that the Purchasers wish to purchase the relevant part of the profit-share as defined in the Schedule to which the Sellers are entitled. The Sellers’ entitlement to the relevant part of the profit-share will also be triggered by the Purchasers disposing either by selling or by granting a lease of the whole or part of the Subjects.”

The clause therefore contains 3 triggers for the payment of the uplift (or profit share):

1. Stewart Milne could buy out the Council’s share by serving a notice on them indicating that they wished to do so;
2. the Council would be entitled to a share on the sale of the property by Stewart Milne; or
3. the Council would be entitled to a share on a lease of the property by Stewart Milne.

 Profit Share was defined in the schedule as follows:

“‘the Profit Share’ means 40% of 80% of the estimated profit or gross sale proceeds or lease value less the Allowable Costs as herein defined.”

Stewart Milne sold the property to a group company and then argued that the uplift payable should be based on the actual price paid (£483k- which meant that no uplift was payable) rather than the open market value (£5.67m) of the property. The Council argued the reverse.

It may have been intended that “estimated profit”[1]  applied to the notice procedure, “gross sale proceeds” applied to a sale of the property and “lease value” applied to the lease of the property with the prospect of a sale to group company simply not considered[2] (by the Council at least).

However, although the Supreme Court[3]  (Lord Hope giving the leading judgement) observed that, it was not stated that “gross sale proceeds” are only to be used in the event of a sale on the open market, it also noted that there was nothing in the definitions to say that “estimated profit” (or “open market value”) could not also be applied to a sale.

Having observed that it was a reasonable assumption that all three methods were intended to produce the same figure (albeit by different routes) and that basing the calculation in the open market was (on a fair reading of the agreement) the commercial purpose the various methods were intended to achieve, the Supreme Court came to the conclusion that the context showed that the base figure was to be the open market value of the subjects.

Alternative argument
The Supreme Court also allowed Stewart Milne to introduce an alternative argument (which they had been prevented from presenting to the Inner House) to the effect that the word “disposal” in clause 9 should be read as referring to an arms length transfer at market value but not to an associated company for a notional value. Thus the sale to the group company would not trigger the uplift but instead the onward sale by the group company on the open market would trigger the uplift.  However, the Supreme Court rejected that argument observing that that interpretation did not fit with the words of the contract. Also, as the group company were not party to the contract between the Council and Stewart Milne, adopting the argument would mean that it would have been necessary to re-write the contract to protect the Council against the obvious risks that the arrangement would entail. That was not an option open to the court.

Helping the feckless?
Lord Hope also referred to the argument that a party who has been feckless in drafting a contract should not be protected from its fecklessness by the court’s application of a commercially sensible approach[4] However, Lord Hope did not view the current case in that way. In this case the context showed that the parties’ intention must be taken to be that the base figure for the calculation of the uplift was to be open market value. The fact that this made good commercial sense was simply a makeweight, the words of the contract making it clear that open market value must have been what the parties had in mind when they entered the contract. The only question was whether effect could be given to the unspoken intention without undue violence being done to the words; the court finding that it could.

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.

Case in which Dawn Developments sought judicial review of Lanarkshire Council’s decision to grant planning permission to JHAG Ltd for a development which included a superstore, garden centre, filling station and hotel at Redwood Crescent in East Kilbride.

Dawn applied for planning permission for the erection of a superstore at West Mains Road in East Kilbride (approximately 1 km from JHAG’s proposed development) on 29 March 2010.  JHAG’s application had been lodged on 17 February and an objection to it was lodged on behalf of Dawn on 30 March.

Dawn had written to the Council requesting that its application should be considered at the same time as JHAG’s. However, at a meeting on 7 September 2010, the planning committee decided to consider JHAG’s application ahead of Dawn’s.

Dawn argued:

1)     that the council had failed to properly apply the sequential test; and

2)     that the procedure leading to the decision had been unfair.

Application of the sequential test

National Planning Policy requires application of the sequential test when considering applications for retail development. The test is designed to protect the commercial viability of town centres and involves considering locations for development in order from the town centre outwards.

In the first place Dawn said that when considering JHAG’s application the Council should also have had regard to its application which was sequentially equal. They questioned whether the Council was entitled simply to disregard its proposals generally as relating to a sequentially equal site, and whether, in considering the cumulative impact of JHAG’s proposed development with other actual or potential retail developments, their site should be taken into account.

In the second place they argued that, in assessing whether JHAG’s proposals could be accommodated elsewhere, the scale of the development should not be determined by JHAG’s application without considering whether a development on a smaller scale might be accommodated elsewhere.

When considering the authorities, Lord Drummond Young noted that the width of discretion that is available to a planning authority in applying national planning policies. In particular he referred to Tesco Stores [2010] CSOH 128 [2011] CSIH 9:

 “the sequential test … should be treated as a statement of policy designed to facilitate the delivery of national government objectives, not a rule of law. It was very difficult to suggest that there was one correct method of applying the test to the exclusion of other possible approaches. The correct method was a matter for the exercise of the planning judgment of the planning authority as to how to apply the sequential test. On that basis, a challenge to the application of the test would only be successful if the disappointed person could establish that the planning authority’s decision was unreasonable in the Wednesbury sense.”

 Lord Drummond Young found that a report prepared by the Council’s Executive Director (Enterprise Resources) and  considered by the Planning Committee at a meeting held on 5 October 2010 fully addressed the sequential approach and dealt with the cumulative effect of the development.

Lord Drummond Young also took the view that the reports conclusions fell squarely within the planning judgment of the local authority and was not persuaded that an incorrect approach had been adopted.

Procedural unfairness

With respect to procedural unfairness, Dawn argued that the Council’s officers significantly misinformed the Planning Committee.  Reports to, and comments made by, officers at the Committee’s meeting of 7 September 2010 were said to have contained inaccurate descriptions of the status of their application. The officers, it was said, gave the Committee to understand that there were fundamental problems with the Dawn’s application, in relation to both transportation issues and the period of time within which it was likely that such issues could be resolved.

However, the court heard that the Dawn had been represented at the meeting on the 7^th and that their representative had put their case clearly.  Lord Drummond Young took the view that Dawn was given a clear opportunity at that meeting to state its case and to refute any misleading statements made by Council officers.  The request to conjoin the applications was refused the meeting and no attempt was made to reduce that decision. It could not be said that there was any unfairness in taking JHAG’s application (which had been received first and proceeded rapidly) ahead of Dawn’s. Further delay would have prejudicial to JHAG and it was open to the Council to consider whether that prejudice was outweighed by the prejudice to Dawn in not having its application considered.

 As the decision not to conjoin the applications had been made and not challenged directly it was not necessary to consider the events after the meeting of 7 September. However, correspondence and other documentation after revealed that there were significant issues to be resolved with Dawn’s application which appeared to justify the statements made about the preparedness of Dawn’s application.

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.

Appeal by Dundee City Council against a decision of Dundee Valuation Committee. The question in dispute was whether Mr Hanson, the landlord of a number of (apparently unoccupied) flats in Dundee was liable for council tax on those flats.

The council had determined that Mr Hanson was liable for council tax. However, the Valuation Committee allowed an appeal by Mr Hanson on the basis that, as a valid lease existed over each of the flats, the tenants and not Mr Hansen were liable for the council tax.

The committee found that the leases had been continued by tacit relocation and, although the flats were unoccupied, there was no rule of law requiring the landlord to serve a notice to quit or seek to recover the property where the tenant is not paying rent or appears to have abandoned the property. On the basis there were tenants with leases, the tenants were responsible for the council tax in terms of s75 of the Local Government Finance Act 1992.

The Second Division of the Inner House allowed the council’s appeal finding that the committee had erred in the procedure it had adopted meaning it had reached a decision which was “illogical, erroneous in law and based on inadequate findings in fact”.

Procedure

At the root of the procedural failings was the Committee’s failure to make findings in fact before making its decision. In particular it had failed to consider whether the properties were unoccupied because they had been abandoned by the tenants or whether the tenants were merely absent temporarily from the property.

Legal error

The committee’s understanding was that when the term of a lease expired, the lease was automatically renewed by tacit relocation and continued so to be renewed until either party served notice of termination or the landlord obtained a court order for eviction. Therefore, in the view of the committee, since none of these events had occurred, the tenancies continued by operation of law.

However the Inner House found that interpretation to be unsound:

 “In leases of heritable property, the broad general principle is straightforward. If at the expiry of the contractual endurance of the lease neither party indicates to the other that he does not consent to the renewal of the lease, the lease is held to be renewed on the basis that the mutual consent of the parties is to be presumed from their silence. At common law, any overt indication by either party that he does not consent to the prolongation of the lease is sufficient to exclude tacit relocation.”

 In considering whether the leases have been terminated by notice of termination or by a decree of removal, the Committee has overlooked the rule that the operation of tacit relocation is excluded where the tenant does not retain possession after the contractual ish”

It was noted that, where a flat let under a short assured tenancy appears to be vacant at the end of the lease, the question of whether the tenant has abandoned it will be particularly fact-sensitive.

A special problem in this case was that the landlord’s typical tenant would not be minded to give notice to the landlord and would simply vacate the flat and cease to pay rent. At first sight, that would be evidence of abandonment.  It may be supposed that those facts will come to the notice of the landlord. However, in view of the many diverse circumstances which can prevent the operation of tacit relocation, it was essential that the Committee should hear evidence in respect of each flat and make a decision based on the special facts applying.

Decision

The Inner House allowed the appeal, recalled the committee’s decision and returned the cases to the committee with a direction that it should hear evidence in respect of each flat and to make findings in fact and law in order to decide whether the tenancies remained in force.

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 Land Registration etc. (Scotland) Bill has now been introduced in the Scottish Parliament. The Bill:

• reforms and restates the law on the registration of rights to land in the land register;
• enables electronic conveyancing and registration of electronic documents in the land register;
• provides for the closure of the Register of Sasines;
• allows electronic documents to be used for certain contracts, unilateral obligations and trusts that must be constituted by writing; and
• provides for the formal validity of electronic documents and for their registration.

The Bill is available from the Scottish Parliament here

The explanatory notes are available here.

Outer House case concerning damage to an Indian restaurant in Glasgow following the demolition of the floors above by Glasgow City Council.

The Council demolished the first, second and third floors of a tenement on North Street in Glasgow in the autumn of 1996 after serving notice (under s13 of the Building Scotland Act 1959) on the owners. However, on 6 November part of the gable wall and chimney (exposed after the demolition) collapsed in high winds and fell through the roof of the Koh I Noor restaurant which formed the ground floor of the tenement.

The owners of the restaurant sought damages from the Council claiming that the Council knew or ought to have known that, after completing the works, they had left the former mutual dividing wall in a condition which presented a foreseeable danger to people and the adjacent property in the event of high winds.

Morag Wise QC (sitting as a temporary judge) found that it was a clear case of common law breach of duty. Whilst the Council had initially acted under the 1959 Act, after it had made the decision to demolish part of the building, a relationship was created between them and the neighbouring proprietors that gave rise to a common law duty of care.

The decision to demolish had been taken by a director of Building Control at the Council. However, he also decided to delete tying works (reducing the contract sum by about £12,000) to the exposed wall from the contract  despite having received  a survey report indicating that it would not be safe to leave the wall without tying or other stabilisation works.  Morag Wise QC came to the conclusion that the Council knew that without carrying out gable stabilisation works there was a material risk of harm to people or property in the vicinity of the wall.

The Council’s argument that they should be free of responsibility for the collapse as they had written to the restaurant owners indicating that future maintenance of the structure would be their responsibility was rejected. There was no evidence of the restaurant owners having been advised that the exposed wall lacked stability and had not been tied. The restaurant owners were entitled to assume that the Council had carried out the work in a manner that did not create a new structural instability.

The Council’s further contention that any liability had been extinguished by limitation in terms of the Prescription and Limitation (Scotland) Act 1973 was also rejected. The Council were relying on the fact that the limitation period began on the date they completed the works and left the site knowing the wall lacked stability. However, the court found that in this case the loss and damage occurred when the masonry fell through the roof of the restaurant on 6 November. Before that no relevant proceedings could have been taken.

The full judgement is available from Scottish Courts here.

(See appeal to the Inner House here.)

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

Application for an administration order in respect of FM Front Door Ltd. The application followed FM’s failure to make payments under a loan from the Dunfermline Building Society obtained to assist with the purchase of flats at the Skyline development on Finniestoun Street in Glasgow.  The loan was secured by a floating charge and standard securities over each of the flats. FM’s parent company FM Developments also granted a guarantee for the loan.

Clause 13 of the loan agreement provided that the grounds for default included:

1. failure to pay sums due under the loan agreement;
2. inability to pay debts as they fall due (or deemed inability in terms of the Insolvency Act 1986); and
3. circumstances arising, which in the opinion of the building society, had a materially adverse effect on the ability of FM to perform it’s obligations under the agreement or on the value, validity and enforcement of the security or the security documents.

In terms of the loan agreement, FM were to make quarterly payments to the building society. They failed to do so timeously (in respect of payments due in July and October 2010 also January and April 2011) but on each occasion paid after they were sent reminders by the building society which noted the sum due and the bank account to which it was to be paid. However, when FM again failed to pay the sum due in July 2011, the building society wrote to FM indicating that they were in default and demanding payment of the principle sum with interest.

The defaults on which the building society sought to rely were the late payment of the July instalment, a reduction in the value of the property which in its opinion constituted a materially adverse effect on both FM’s ability to perform its obligations under the loan agreement and also on the value of the securities.  It also took the view that the administration of the guarantor, FM Development materially affected the value of the guarantee.

FM argued that it was not in default contending that the parties had varied their contract so that FM did not have to pay the quarterly instalments of interest until the building society had informed it of the sum due and the bank account into which the sum should be paid. Further, FM claimed that the building society had acquiesced in late payment and was personally barred from founding on the delayed payment in July.

Lord Hodge rejected these arguments and granted the administration order sought by the building society.

In terms of the Insolvency Act 1986, before a court can grant an administration order, it must be satisfied that:

1.  the company is or is likely to become unable to pay its debts; and
2.  the administration order is reasonably likely to achieve the purpose of the administration. 

Default
Variation of the contract
Lord Hodge was not persuaded that the email correspondence vouched for any variation of contract. It was consistent with the building society politely reminding its borrower that sums were overdue and pressing for payment. It did not establish the agreed practice claimed by FM. Also there was no suggestion that, before the default, anything occurred to cause uncertainty as to the amount due for quarterly payment. On the contrary, the sum due in each quarter remained the same and the bank account into which it was to be paid did not change. 

The loan agreement also contained a “no waiver” clause to the effect that failure or delay on the part of the building society to exercise powers or rights under the agreement did not preclude further exercise of the powers or rights. Whilst there is some uncertainty as to the boundaries of the efficacy of “no waiver” clauses, the effect of the clause was that FM could not found on a failure by the building society to assert a default when there had been a delay in making a quarterly payment in order to argue that the building society could not give notice of a default on the occurrence of a further failure to make a payment. Personal bar seeks to prevent unfairness caused by inconsistent behaviour. But in this case FM had to be taken to have been aware of the clause and thus to have known that a failure by the building society to exercise a right or remedy did not amount to an abandonment of that right on a later non-performance.

FM was therefore in default when it failed to make the payment on 1 July 2011. 

Materially adverse effects under clause 13
Lord Hodge was also satisfied that the building society has established a default under clause 13. The insolvency of FM’s guarantor, FM Developments was likely to have had a material adverse effect on the value of its guarantee.  Further, the building society was entitled to take the view that the fall in value of the flats which FM acquired was likely to have a material adverse effect on the value of its standard securities and on FM’s ability to repay the advances.  Whilst both parties relied on different valuations, whichever valuation was taken, it was clear that there has been a material fall in the value of the properties and that the outstanding balance of the loan exceeded their value. That was a position which was materially adverse to the circumstance in 2007 when the building society stipulated that the maximum that it would lend was 85% of the market value of the properties.

The administration order
Inability to pay debts
Having found that the building society was entitled to treat FM as being in default, Lord Hodge was satisfied that FM was unable to pay its debts as they fell due. FM’s failure to repay the principal sum in response to the building society’s demand and the evidence of the current value of its property portfolio demonstrated that inability.

The effect of the administration order
As to whether an administration order was likely to achieve the purpose of the administration, one of the two purposes which the intended administrators advanced was to make a distribution to the building society as a secured creditor. There is no suggestion that they would not be in a position to do so and Lord Hodge was satisfied that it was likely that that purpose would be achieved.

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 interpretation of conditional missives and a purification letter relating to the sale of property at Great Junction Street in Leith.

The missives were conditional on the results of ground and site examinations and environmental audits.  Clause 3.2 allowed for the purchasers to waive the conditions by giving a notice of deemed purification:

 “This Condition 3 shall be construed solely for the benefit of the Purchasers and it shall be in the sole option of the Purchasers at any time to intimate to the Sellers in writing that any or all of the suspensive conditions contained in Condition 3.1 is/are waived, in which case the Missives shall be deemed purified to that extent. This condition shall however only be purified or deemed to be purified by the Purchasers giving written notice to the Sellers to that effect.”

Condition 3.3 provided that if the conditions hadn’t been purified by 30 July 2011 then either party could resile from the missives without penalty.

On 22 July the Housing Association’s solicitors, TC Young sent Mr and Mrs Akram’s solicitors, Somerville & Russell a letter advising that the conditions could be regarded as purified in terms of clause 3.2.

Mr and Mrs Akram argued that service of the notice was invalid as, in terms of clause 3.2 of the missives, it required to be served on them and not their solicitors.  They also contended that the notice was invalid as it referred to an incorrect date of entry.

Lord Hodge did not accept either of these arguments.  With regard to service of the notice on the solicitors, the authorities on which Mr and Mrs Akram sought to rely were concerned with more precise provisions on the service of notices than those contained in the missives between the Akrams and the Housing Association.  The missives in this case had contained no precise requirements relating to the service of notices and no indication that the parties had intended that service of the purification letter on the sellers’ solicitors would not be valid.  Moreover, the other provisions of the contract did not suggest that the parties intended to draw a clear distinction between themselves and their agents. Lord Hodge said:

“I have formed the view that the very simplicity of the contractual provisions firmly points against a construction which would allow such a distinction to be drawn. Further, I do not see the practical advantage or business rationale of serving the notice on the sellers rather than on their solicitors; I would have expected the sellers immediately to take the notice to their solicitors to ascertain its validity”.

 With regard to the reference to the date of entry in the purification letter, Lord Hodge found that, assuming (there was dispute between the parties as to the correct date of entry which could not be determined at that stage) the date was erroneous; the mistaken statement did not invalidate the letter:

“In my view, the function of the purification letter was simply to intimate that the purchasers had waived the suspensive conditions …. That had the effect of deeming the conditions to be purified, as clause 3.2 provides. The contract fixed the date of entry in the definition section of the missives…. Accordingly, there was no need to specify the date of entry in the purification letter. Either the missives ruled or the parties had agreed to alter the date of entry.”

A separate question as to whether Somerville & Russell had actual or apparent authority to receive the purification letter required to be dealt with by proof.

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.