Background
Outer House case concerning a ground lease of a 4 acre site in Houstoun Industrial Estate in Livingston. There was a building on the site which had been there since the lease was granted in 1977. The tenant wished to demolish the building (which it argued was past its economic lifespan, and obsolete) and re-develop the site but the landlord argued that the tenant did not have the right to demolish the building in terms of the lease. At the centre of the argument was the tenant’s obligation “to maintain in good order and when necessary to re-erect” the buildings on the site.

Arguments
The landlord argued that the tenant’s obligation was to maintain the building in good order and that re-erection would only become necessary where the building was destroyed (for example by fire or in an explosion).

The tenant argued (1) that the building could be demolished and re-erected where it was necessary for the tenant’s (or a sub-tenant/assignee’s) use of the site. If that were  not the case, then (2)  development was permitted when circumstances rendered re-erection necessary such as in the circumstances existing here, where the present building was obsolete and could only be repaired by expenditure of unreasonable sums of money. Demolition as a precursor to re-erection was, the tenant argued, therefore “necessary”.

Decision
Lord Tyre, giving the lease an interpretation consistent with that which would have been understood by a reasonable person with background knowledge reasonably available to the parties at the time of the contract, accepted the tenant’s second argument.

“I accept the tenant’s alternative submission that there may be circumstances where re-erection of a building is “necessary” even though an existing building is still standing on the site.  These might include (i) where the existing building is obsolete and unsuitable for any reasonable use, regardless of cost of repair; or (ii) where the cost of repair is excessive in relation to what it would cost to demolish and rebuild premises similar to the existing building.  In each of these cases (and I note that the tenant offers to prove in the present case that both of those descriptions apply), I consider that it is in accordance with commercial common sense to describe re-erection as “necessary”.  It must follow, as a matter of practicality, that demolition of the existing obsolete and/or uneconomic building is also “necessary” in order to allow re-erection to proceed.”

However, Lord Tyre also noted that the Landlord would be able to withhold consent not only to the detailed plans for re-development but also to the demolition preceding re-erection if (acting reasonably) it was not satisfied that the re-development was necessary (in terms of (i) and (ii) above).

The full judgement is available here.

Outer House case considering the lease of an office building in South Gyle Business Park in Edinburgh. The lease was one of 15 years in duration and was supplemented with two licence agreements authorising tenant’s alterations to the premises.

Background
Two weeks before the end of the lease the landlord (PDPF) served a lengthy schedule of dilapidations on the tenant (Santander) which sought removal of the tenant’s alterations and replacement of the floor coverings. The tenant refused to carry out the works as it said that it had not received enough notice. The landlord raised an action to recover the cost relating to the necessary works and preparation of the schedule of dilapidations (amounting to a total of over £755k).

The lease contained a clause obliging the tenant to keep the premises in good and substantial repair during the currency of the lease (paragraph 3), a clause obliging the tenant to leave the premises in good condition and to replace the floor coverings at the end of the lease (paragraph 28) and also a clause obliging the tenant to carry out any works contained in a notice served on it by the landlord within 3 months (paragraph 8).

There were 3 questions for the court to decide:

1. whether the lease stipulated that the landlord had to provide at least 3 months’ notice prior to its expiry;
2. whether a term of reasonable notice should be implied into the two licence agreements; and
3. whether the schedule of dilapidations constituted a valid notice.

Decision
3 months’ notice?
After considering the relevant terms of the lease, Lord Woolman (approaching the question by considering the view of a reasonable person with all the relevant background knowledge) found that the obligations contained in paragraphs 3 and 28 were independent of the obligation requiring notice contained in paragraph 8 (the fact that only one of the clauses contained a time limit suggested that the others should not be qualified in the same way). As such, the landlord did not have to provide at least 3 months’ notice to carry out the works.

Reasonable notice implied into licence agreements
Lord Woolman also rejected the fall back argument that a reasonable notice period of 10 weeks should be implied into the licences finding that the introduction of implied terms would be warranted where such a term was required to spell out what a reasonable person would understand the licence agreements to mean. That was not the case here where the implied term would be inconsistent with the parties express stipulation that the landlord could issue its requirement on the termination of the lease.

Valid notice constituted by schedule of dilapidations
The tenant sought to argue that the service of the schedule of dilapidations was simply an assertion of the tenant’s existing repairing obligations under the lease and did not provide adequate notice in terms of removal of the works carried out under the licence agreements. This argument was also rejected by Lord Woolman who noted that the removal of licensed works requires no formality and that, at the time the notice to quit is served, the tenant can ask whether the Landlord insists on removal of the tenant’s alterations.

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 nature and extent of tenants’ obligations under a lease of office premises at Chesser House on Gorgie Road in Edinburgh. Mapeley were the landlords and the City of  Edinburgh Council, the tenants.

At the expiry of the lease Mapeley served a schedule of dilapidations on the Council and sought payment of just over £8m.The interpretation of the tenant’s repairing obligations under the lease were at the centre of the dispute. There were two issues of interpretation for the court:

1. whether, in terms of the lease, the landlord was entitled to receive a sum equivalent to the cost of repairing the premises even if it had no intention of carrying out the required repairs; and
2. whether, in terms of the lease, the tenant was obliged to replace the plant and equipment on the premises at the end of the lease whatever the condition of those items (i.e. even if not missing, broken, worn, damaged or destroyed.)

In essence, the Council argued that, in terms of the lease, (a) the landlord was not entitled to recover the costs of putting the property into the standard of repair contained in the lease where the landlord did not intend to undertake the work and (b) the tenant did not require to replace or renew items of plant and equipment where the items were not missing, broken, worn, damaged or destroyed.

Lord Doherty found that the precise wording contained in lease was capable of bearing both that interpretation and the interpretation argued for by the landlord (per 1. and 2. above). However, where such wording is capable of bearing more than one meaning, the court requires to adopt the interpretation which best accords with business common sense. As such Lord Doherty preferred the interpretation contended for by the Council noting that, to adopt Mapeley’s approach, would have involved a radical departure from the common law which would have resulted in excessive and disproportionate consequences and, as a result, would have required to have been clearly indicated in the lease (which it had not been in the lease in question).

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.

Background
Outer House case relating to the lease of commercial premises in Port Glasgow. @SIPP were the landlords and Insight, the tenants. @SIPP argued that, when the lease came to an end, the premises were not in good and substantial condition and a dispute arose as to the extent of the tenants repairing obligations under the lease.

There were two issues for the court to decide.

• Whether the tenants’ obligation on termination of the lease was limited to putting the premises into the condition in which they were accepted by it at the commencement of the lease.
• Whether the landlord was entitled to payment of a sum equal to the cost of putting the premises into the relevant state of repair, regardless of whether it actually intended to carry out any such work.

Decision
Putting and keeping
Lord Tyre began by rejecting @SIPP’s contention[1] that an obligation to keep the premises in good and substantial repair necessarily imports an obligation to put the premises in that condition regardless of its condition at the commencement of the lease. Then, taking a modern approach (which requires the court to consider what a reasonable person would have understood the parties to have meant by the language they used, rather than necessarily imposing interpretation which is grammatical result of the language used) to construction of the relevant clause, Lord Tyre found that the tenant’s obligation was referable to the condition in which they were accepted at the commencement of the lease (and not the condition in which they were deemed to have been accepted).

Remedy for breach of the repairing obligation
Where a tenant breaches its obligation to return the premises to the condition specified in the lease at the end of the term, the landlord is entitled to common law damages for the loss sustained. The landlord will normally argue that that loss amounts to the cost required to put the premises into the specified condition. However, that will not be the measure of the loss in all cases. In some cases the proper measure of loss may be the diminution in the capital value of the subjects[2] and in some cases, for example where the building is to be demolished (for reasons unconnected with the tenant’s breach), the landlord may be unable to show any loss at all.

In this case @SIPP argued that the relevant clause in the lease provided an express right to payment of a sum equivalent to the cost required to put the premises into good and substantial repair and that in exercising that contractual right it was not making a claim for damages for its loss.

However, Lord Tyre found that there was nothing in the relevant clause compelling the interpretation favoured by @SIPP. In the view of Lord Tyre, a lease would require very clear wording to allow a conclusion that the tenant had to pay a sum which bore no relation to that required to compensate the landlord for the loss actually sustained as a result of a breach of the repairing obligation.

As such, Insight were entitled to prove that @SIPP’s loss was equivalent something other than the cost of repair and the case was put out by order for discussion as to further procedure[3].

The full judgement is available from Scottish Courts here

(NB see appeal to Inner House appeal here)

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

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[1] This argument was based on the judgment of the Supreme Court in L Batley Pet Products Ltd v North Lanarkshire Council[2014] UKSC 27, however, Lord Tyre found that the reference to putting/keeping the property in good condition related to a commentary on the particular clause used in that case rather than making a general statement/change as to the law.

[2] In this case the estimated cost of the works required was over £1m whereas Insight argued that even if it had carried out all of the works in the schedule of dilapidations, the capital value of the premises would only have increased by £175k.

[3]The question of whether @SIPP would be entitled to recover the cost of the repairs if it could prove an intention to carry out the repairs regardless of the extent to which the cost of the repairs would exceed the increase in capital value of the subjects was left open.

Case from the Court of Appeal for England and Wales concerning a sale of freehold property in the West Midlands. The central issue for the court was whether VAT was payable on the purchase price.

The Purchase Price was defined in the contract as being £130k (no mention was made of VAT in the definition). However, the contract also incorporated the Standard Conditions of Sale[1] (4^th Edition) except where they were in conflict with the express terms of the contract.

Clause 1.4 of the Standard Conditions provides:

“1.4.1   An obligation to pay money includes an obligation to pay any value added tax chargeable in respect of that payment.

1.4.2     All sums made payable by the contract are exclusive of value added tax.”

Contracts were exchanged and the transaction completed in August 2006. CLP, the seller, opted to tax and became liable to pay VAT on the transaction. HMRC raised a notice of assessment in late 2007. In March 2008 CLP’s solicitors wrote to the purchasers’ solicitors indicating that the purchasers were liable to pay the VAT due (£22,750) to CLP. The purchasers failed to pay and CLP raised proceedings against them.

The court noted that the only reasonable interpretation of clause 1.4 was that the purchasers would have liability for any VAT. Also, previous case law provided powerful support for CLP’s argument that the purchase price of £130k was exclusive of VAT and that the purchasers were liable for any VAT due on the transaction.

However, the analysis did not end with the ascertainment of the meaning of clause 1.4; the contract had to be interpreted as a whole in the light of all the circumstances of the parties’ relationship and the relevant facts surrounding the transaction known to them. In that regard the following points were relevant.

It was never suggested that CLP ever communicated to the purchasers that it had exercised the option to tax.

1. The purchasers were individuals and, whilst the property was commercial, there had never been any suggestion that they were aware or had any reason to suppose that the transaction might be subject to a VAT charge.
2. The purchase price for the property had been agreed in principle a considerable time before completion and had been paid over by the purchasers to CLP by, at the latest, 2005. There was never any suggestion that VAT might be payable, still less that the purchasers would be liable for it. To the contrary, a letter from CLP’s solicitors in March 2006 contained an express acknowledgement that CLP had received “all of the sale monies of £130,000 on this matter, subject to contract”.
3. The standard requisitions had asked for details of the exact amount payable on completion and had elicited the response: “Balance of purchase monies”. No hint was given that VAT was or might be payable.
4. The contract provided that the “Purchase price” was £130k. It contained no indication that this price was exclusive of VAT. Indeed it was clear that this and no other sum was due upon completion because the contract included a table in which details of any “Other payments/ allowances” could have been (but were not) included. Moreover, and importantly, the contract provided that where there was any conflict between the express terms of the contract and the Standard Conditions, the express terms of the contract would prevail.

Taking all these matters into consideration the Court took the view that a reasonable person would have understood the parties to have intended that nothing was or could become payable by the purchasers over and above the specified purchase price of £130k.

Notably, in the particular circumstances of the case, the court found that it was not possible to interpret “Purchase price” as the price exclusive of VAT. As such, it considered that a reasonable person would consider that the express terms of the contract were not reconcilable with clause 1.4 of the Standard Conditions. In those circumstances, the court held that the express terms of the contract had to prevail.

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.

Inner House case concerning a lease of a unit in a large (and mostly unoccupied) industrial complex in Shotts. Dem-Master were the landlords and Alba, the tenants.

Background
Dem-Master raised an action for payment in respect of electricity and outstanding rent. Alba disputed that the sums were due and a secondary issue arose regarding access to the property. Alba argued that Dem-Master had restricted vehicular access to the property by securing gates and locking loading bay doors which were used to allow heavy goods plants and equipment to be manoeuvred into the premises.

Alba sought an interim interdict to prevent Dem-Master restricting access to the premises in such a way as to prevent their rights under the lease. Dem-master granted an undertaking allowing access via a defined route and Alba dropped their motion for interim interdict but subsequently returned to court arguing that Dem-master had failed to comply with the undertaking.

Arguments
Alba argued that they were unable to carry on their business and that they wished to vacate their premises and move to other premises but that they were unable to remove their plant and machinery without access to the loading bay door. Dem-Master argued that Alba had no right to exercise access via the loading bay doors in terms of the lease and, in view of the fact that Alba’s published accounts showed them to be insolvent, they were concerned that removal of Alba’s plant and machinery would prevent use of the Landlord’s hypothec (i.e. the right to retain a tenant’s property as security).

Decision
In the Outer House the motion for interim interdict was granted so as to allow access via the loading bay doors. The Inner House found that, on a construction of the lease (under which the landlord, acting reasonably was entitled to designate the route of the rights of access), it could not be said that Alba had the right to use the loading bay doors. However, the court did find that the balance of convenience (required to allow an interim interdict) did favour access over another route which would allow Alba to operate their business from the premises (but which would not allow the removal of their heavy plant and machinery from the unit).

The case was put out by order to discuss the exact terms of the order for interim interdict.

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 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.

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.

Outer House case in which a tenant (Ralph Lauren) of premises on Ingram Street in Glasgow sought to prevent the landlord (the pension fund) from letting a neighbouring unit (Unit 6) to a hairdressing salon on the basis of an obligation contained in a back letter.

The back letter granted by the pension fund provided:

“We shall not grant first lettings of that one of the Commercial Units (as defined in the Lease) known as Unit 6, situated to the north of that one of the Commercial Units let as at the date hereof to All Saints Retail Ltd, to retailers other than high quality fashion retailers as are approved by you (such approval not to be unreasonably withheld or delayed).”

Ralph Lauren sought an interim interdict on the basis that the hairdressing salon was not a high quality fashion retailer. On the other hand, the pension fund argued that, in terms of the back letter, as the hairdressing salon was not a retailer, Ralph Lauren’s permission was not required.

Ralph Lauren contended that the pension fund’s interpretation would permit the landlord to let the premises to anyone who did not sell goods which they argued was an absurd consequence given the context in which the undertaking had been given. As a result, they urged that back letter should be construed in a commercially sensible, rather than a purely literal, way.

However, Lord Glennie agreed with the pension fund’s arguments and found that the letter did not restrict the pension fund with regard to lettings to non-retailers (noting that it was “nigh impossible” to describe a hairdresser as a retailer). Whilst it was “permissible to do some slight violence to the language of a clause in a contract where a literal construction would defeat what is objectively the intention of the parties to it”, there was no basis for applying that approach in this case. There was nothing to suggest that the parties had intended a restriction on all lettings other than high quality fashion retailers. There was no evidence to suggest that a high quality fashion retailer such as Ralph Lauren would consider themselves to be prejudiced by the letting of a neighbouring unit to, for example, a restaurant or a cafe. If they had wished to prevent such a letting it would have been easy to address it in the undertaking.

Lord Glennie came to the conclusion that Ralph Lauren had not shown that they had a prima face case and refused the motion for interim interdict although leave to reclaim was granted.

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.