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“In this edition there are articles on the Scottish Government’s proposal to reform our law of succession and an update and hopefully some closure on the validity or otherwise of continuing Powers of Attorney made in the standard form recommended by OPG (Scotland). Included in ‘Case reviews’ is the decision of Sheriff Hammond that a relationship of approximately 13 months qualifies as ‘cohabitation’ for the purposes of section 25 of the Family Law (Scotland) Act 2006. ‘Professional updates’ include a link to HMRC’s December ‘Trusts and Estates newsletter’ and confirmation of a new and designated guardianship court sitting in Edinburgh. Lastly the ‘News items’ section includes stories that range from a new Cabinet Secretary for Justice to an unexpected tax bill for Boris Johnson.”
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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.
This new Practice Note can be found in the ‘Know How’ section of the website.
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.
This new Practice Note can be found in the ‘Know How’ section of the website.
This can be found in the ‘Styles’ section of our website.
The following Practice Notes have been updated:
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.
