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.

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.

Inner House case concerning the construction of an asset sale agreement.

Background
Forest were tenants under a lease. When Forest went into administration the lease was one of the assets for realisation by the administrators. Forest (through its administrators) signed an asset sale agreement with Forever Fuels which related to the sale of property including the lease. In terms of the agreement, £100k became payable to Forest upon delivery of an assignation of the lease and landlord’s consent to the assignation.

Landlords Consent was defined in the asset sale agreement as follows:

 “’Landlord’s Consent’ means the unconditional written consent of the Landlord (and any other relevant party) to the grant of the Assignation of the Seller’s interest in the lease to the Buyer on terms acceptable to the Buyer acting reasonably;”

When it signed the assignation the landlord wrote to Forest’s solicitors consenting to the assignation “only on the basis that” arrears of rent were paid.

Sheriff court decision
In the sheriff court the sheriff came to the conclusion that the £100k was due. The words “on terms acceptable to the Buyer acting reasonably” were indicative of the only circumstances in which a condition of consent would not be regarded as unconditional (i.e. the consent would only be held to be conditional if the buyer (Forever Fuels) was required to do something which was unacceptable to it).

Sheriff principal and Inner House decisions
The sheriff principal disagreed with that interpretation and found that the parties had intended that (for payment to be triggered) the landlord’s consent would have to be free of any condition. As settlement of the rent arrears was not beyond dispute, the landlord’s consent had been conditional. As such the sum of £100k was not payable. The Inner House agreed with the sheriff principal’s reasoning finding that (despite shortcomings and deficiencies in the drafting elsewhere in the agreement) the definition of the term “Landlord’s Consent” was not ambiguous.

The phrase “on terms acceptable to the Buyer acting reasonably” did not qualify “unconditional written consent” but instead qualified “the Assignation of the Seller’s interest” (i.e. to trigger payment, the terms of the assignation document would have to be acceptable to the hypothetical reasonable buyer.)

 “..it is clear that so long as the landlord’s consent is conditional, the buyer’s right to the lease will be incomplete; there will be no consent upon which the buyer can rely in any question with the landlord until the condition is purified. The buyer’s position, in that respect, is the same whether the condition requires action on his part or on that of the seller. It is inconceivable that parties could have intended that the buyer’s position would be protected if the condition was one which he could purify himself but not if it was a condition the purification of which was outwith his power. There is nothing in the agreement which indicates that such absurdity could have been intended. As the March Hare might have observed, “unconditional” simply means what it says.”

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 in which commercial estate agents sought payment of fees under a sole selling agreement they entered with Mr and Mrs Ferguson in respect of the sale of licensed premises (known as “the Lounge”) in Bathgate. In terms of the agreement the estate agents were entitled to payment “upon conclusion of a contract for the sale of or other disposal of the business and premises…”.

The estate agents were initially instructed (in October 2010) to sell the premises at offers over £300k with sitting tenants. However no offers were received and the tenant of the downstairs bar area gave up his tenancy. The Fergusons decided to refurbish the whole premises and the tenant of the upstairs music venue (a Mr Ward, who had continued to trade for a short time after the bar stopped trading) relocated to other premises owned by the Fergusons. The premises were then remarketed without a sitting tenant at offers over £200k.

Discussions took place between the Fergusons and the estate agents to the effect that it was preferable to sell the premises with a sitting tenant which led to a belief, on the part of the estate agents, that the Fergusons wished to dispose of the premises by lease rather than sale. A former barman also intimated interest in the premises. The estate agents prepared further sales particulars (which were not approved by the Fergusons) advertising the premises for let.

The estate agents then (in July 2011), in the mistaken belief[1] that the former barman had, or was to, acquire an interest in the premises stopped marketing the property and invoiced the Fergusons for fee of £5k plus VAT. The Fergusons then entered missives for a 5 year lease of the premises with Mr Ward in August 2011.

The sheriff found that the estate agents were not entitled to payment in terms of the sole selling agreement finding that the existence of missives of let between the Fergusons and Mr Ward was not an event which gave rise to the estate agent being entitled to remuneration in terms of the agreement.  In particular the word “disposal” in the agreement related to the disposal of the sellers’ interest in land and that the missives entered into between the Fergusons and Mr Ward did not constitute a disposal of an interest in land nor was it a long lease and therefore did not trigger any entitlement to payment under the contract.

Appealing that decision, the estate agents argued (amongst other things) that the sheriff had been wrong to read the words “interest in land” into the agreement after the word disposal and that the word “disposal” should be given it’s plain and ordinary meaning which was the “rearranging of affairs”. The estate agents also contended that the missives of let were not simply a renewal of the existing lease: the missives referred to both parts of the property (upstairs and downstairs); there was a change in rent and a new date of entry. In coming to his conclusions the sheriff, it was argued, had placed an interpretation on the contract which was contrary to commercial sense or reality.

Those arguments were rejected by the sheriff principal who refused the appeal finding that, against the factual and statutory background[2], the sheriff had not erred in coming to his conclusions. The Sheriff Principal also took the view that the ordinary meaning of the word “disposal” was “alienation” and, with regard to the commercial purpose of the agreement, said the following:

“The suggestion that the commercial purpose of the agreement is to ensure the [the estate agent’s] remuneration in circumstances which include the other party entering into missives of let with the sitting tenant is, in my view, absurd. That contention disregards completely the fact that there are two parties to the contract and in respect that the purpose of the contract is to achieve either a sale of the premises or, as contended for by [the estate agents], a lease of the premises. The commercial reality or purpose of the contract is for both parties to achieve such a result. Without achieving the sellers’ purposes the estate agent will not receive remuneration. The commercial purpose contended for on behalf of [the estate agents] would be to have the other party as a “hostage” for the duration of the contract. It would mean that the seller would be unable to conduct and regulate their business affairs by renewing a lease or renegotiating a lease with an existing trading tenant without triggering liability to pay a fee to the estate agent”.

 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 (for appeal to Supreme Court, see here) 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.

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 plot 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 the development”.

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.

“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.”

The full judgement is available from Scottish Courts here.

(NB: See Supreme Court decision here.)

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

Outer House case relating to a development at Rubislaw Quarry in Aberdeen. The developers sought the co-operation of those with interests (proprietors/tenants) in nearby office blocks (who were concerned that the new development would have a detrimental effect on the value of their properties) with respect to[1] access to the development site. An agreement was entered into between the developers and the proprietors/tenants which included a restriction on the office space available for rent within the new development in the following terms:

“The northern quarry proprietors undertake (to the relevant parties) that the maximum net lettable floor area of Office Space which may be provided within the northern quarry subjects at any given time shall not exceed 2,025.29 sq. m. (in total)”.

The court action involved successors to the original parties to the agreement. The developers sought declarator that the clause:

1. allowed the amount of office space in the development to exceed 2,025.29 sq. m but restricted the space actually available for let to 2,025.29 sq. m (i.e. they argued the figure did not include owner occupied or vacant office space); and
2. was not a real burden and, as such, bound only the original parties to the agreement and not their successors.

 Lord Malcolm rejected both of those arguments.

Meaning of the clause
After considering the whole terms of the contract “in the light of the general setting and purpose of the agreement”, Lord Malcolm found that the overall intention was to provide for a maximum floor area which was capable of being let for office use. In coming to this conclusion, account was taken of the preamble to the agreement, which required the developer “to accept certain restrictions with regard to office space within any development of the northern quarry subjects…”, and a further clause containing a requirement that developers exhibit floor plans and internal layout, which would have been irrelevant had the only restriction been on letting floor of space with no limit on the amount constructed.

Whether binding on successors
Whether the burden was real (i.e. binding on successors) depended on whether the restriction on office space was:

1. purely a trading condition, designed solely to protect the personal commercial interests of those  interested in the offices; or
2. whether it, in addition to any personal benefit, also conveyed a material benefit on the properties themselves.

The proximity of the development to the offices was an important consideration. The existing office blocks and the new development site presented a “distinct neighbourhood”. The proprietors/tenants were seeking protection against reductions in rental values arising from the introduction of additional competition within that neighbourhood. The restriction therefore benefited the offices as commercial properties by protecting their rental value. Also of relevance in coming to the judge’s conclusion that the burden was binding on successors, was the fact that the offices were specifically adapted for office use meaning future owners would be likely to use them for the same purpose and, consequently, the burden on the new development would be reflected in the value of the existing properties.

Title and Interest of the developers
Lord Malcolm also rejected an argument made on behalf of the proprietors/tenants to the effect that the developers did not have title and interest to bring the action as, although they had entered missives for the purchase of the site, they had not yet recorded title to it. The court would refuse to entertain declarators concerning purely academic, speculative or hypothetical issues, or where the pursuer has no practical interest in the outcome. However, in this case the developers had a good reason for discovering the correct legal position at the time they raised the action: they had entered into missives (with a view to developing the site) with the current owners who, as a result, had no interest in the matter.

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.

Outer House case in which HFD sought to challenge Aberdeen City Council’s decision to appoint Muse Development Limited as preferred bidders for the development of a site (the former Council headquarters) at Broad Street in Aberdeen.

HFD argued that:

1. there had been various quantitative errors in the scoring matrix used to assess the bids;
2. what had been advertised had been a sale of the site but the successful bid was made on the basis of a sale and leaseback; and
3. a revised version of the HFD bid (based on a sale and leaseback) submitted after the closing date should, if the Council considered themselves precluded from accepting it, have given rise to recommencement of the bidding procedure.

Lord Brailsford refused HFD’s petition.

Errors in the scoring matrix
The alleged errors in the scoring matrix were not sufficient to impugn the bidding process and did not affect the overall ranking of the bids.

Sale and leaseback
The language used in guidance documents (issued for potential bidders by the Council), which indicated that the Council would accept joint venture and partnership agreements, made it “tolerably clear” (having regard to the importance/value of the subjects and the fact that the bidders were commercial bodies with expertise in the property market and with access to skilled professional advice) that the Council were actively seeking and encouraging innovative proposals for what was a major commercial development. As such, the language of the documents was sufficiently wide to encompass a sale and leaseback arrangement.

Submission after the closing date
Lord Brailsford agreed with reasoning in a prior case[1] to the effect that, although a seller can accept higher bids after a closing date, the practice is not well regarded and would involve the seller departing from the competitive tendering process which may be seen as an act of bad faith by the bidders. It would put into question the reliability of any future tendering process and, if it were to be routinely sanctioned by the courts,  the degree of certainty which a bidding process is designed to achieve would be lost. That reasoning also applied to HFD’s suggestion that the bidding process should have been started afresh after receipt of the Muse’s offer.

The full judgement is available from Scottish Courts here.

Inner House case concerning 3 actions by AMA in which they sought payment of the purchase price under concluded missives for the sale of properties after the purchasers had failed to pay and advised AMA that they were unable to proceed with the purchases.

The purchasers argued that the contract was incomplete and that a seller can only sue for payment of the purchase price where no action is required by the purchaser to complete the contract. In this case, as the purchasers still had to make payment of the price and to accept the dispositions, they contended that the only option open to AMA was to accept their repudiation of the contract and sue for damages.

That argument was rejected by the court. It is a well-established rule of Scots law that if one party to a contract repudiates it, the innocent party has an option to accept the repudiation and sue for damages for breach of contract, or[1] to seek enforcement of the contract. If the purchasers’ arguments were accepted, the innocent party’s option could be negated simply by the repudiating party declining to pay the sum due in terms of the contract. Here, the purchasers were required to pay the purchase price on the date of entry. The date of entry was not dependent on anything being done by either of the parties and was not a matter within the control of the purchasers. There was no contractual obligation on the purchasers to accept a disposition and no other contractual obligations incumbent on them which had to be completed in order to render the contract complete. All they required to do was to pay the price. Their refusal to do that could not deprive the sellers of their option to seek enforcement of the contract.

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.

“As a case study of the causes and consequences of the property crash in 2008, this litigation is probably as good as any.”  Lord Malcolm

Outer House case in which RBS sought payment of sums due under a personal guarantee granted by Mr O’Donnell and Mr MacDonald, the directors of Whinhill Developments Ltd which had been formed to purchase a potential development site at Stone Farm in Greenock. The directors argued that the guarantee had been induced by negligent misrepresentations made on behalf of RBS.

RBS and Whinhill entered a one year loan agreement in September 2007 whereby RBS would provide a loan of £1.65m to fund the purchase. Whinhill bought the site for about £1.5m and planned to obtain planning permission then sell the site to a builder or developer. Whinhill granted a standard security and floating charge in favour of RBS (the site being Whinhill’s only asset).  Whinhill were unable to repay the loan at its expiry in September 2008. The parties then agreed to refinance the loan facility with a new loan of £1.695m to be repaid by March 2011; the Whinhill directors providing a personal guarantee for the company’s liabilities to a maximum aggregate value of £300k.

Whinhill failed to repay the sums due after a default event occurred and RBS sought payment of the sums due under the guarantee in February 2011. Central to the case was the property crash in 2008 and the falling value of the property. The loan was originally advanced in mid-2007 on the strength of a market valuation of £3m. When the facility was refinanced in 2008, property values had “fallen off a cliff” and the credit division of RBS was enforcing a 70% loan to value ratio. However, Whinhill’s relationship director in RBS’s commercial banking division was keen to avoid the crystallisation of what may have been by then a worthless security. He received word from Ryden that the property could be valued at £2m which, with a personal guarantee from Whinhill’s directors, would allow the 70% loan to value ratio to be met.

On three separate occasions RBS told the directors that Ryden would or had re-valued the subjects at £2m. The directors had understood the revaluation could be relied on for lending and guarantee purposes and Lord Malcolm took the view that it was reasonable for them to do so. Shortly after the first occasion (but before the second), RBS’s relationship director received the updated valuation from Ryden by letter. However, the letter made it clear that the report was not suitable for, nor to be relied on by the bank, for lending purposes (it was also based on an assumption of increased development density which had not been discussed with the Whinhill directors). There was no evidence that the report had been sent to the Whinhill directors.

Lord Malcolm found that the RBS statements were material factors in the directors’ decision to grant the guarantee and that the guarantee would not have been granted if they had been aware of the true position. As a result, a reduction of the guarantee was granted.

Whether the Whinhill directors were also entitled to damages for their losses depended on whether the misrepresentations amounted to a breach of a duty of care owed to them. Lord Malcolm found that, in using the assurance given by Ryden before receipt of the report to help persuade the Whinhill directors to agree to the guarantee, the relationship director had to be taken as having assumed responsibility for its accuracy. He then came under an obligation of enquiry or disclosure if he subsequently received material which cast doubt on the information given to the directors. And thereafter, he had a duty not to repeat the misrepresentation. The relationship director had breached that duty and the Whinhill directors were entitled to damages for loss sustained as a consequence.

The full judgement is available from Scottish Courts here.

(See also Inner House decision here)

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