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OUTER HOUSE, COURT OF SESSION
[2006] CSOH 58
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CA162/04
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OPINION OF
LORD DRUMMOND YOUNG
in the cause
THE ADVICE CENTRE
FOR MORTGAGES LIMITED
Pursuers;
against
FRANCES McNICOLL
Defender:
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Pursuers: Wallace; McKay Norwell W.S.
Defenders: Barne; Warners
6 April 2006
[1] The
present action relates to heritable subjects consisting of a shop situated at
4/5 Crighton Place, Edinburgh. The
defender is the heritable proprietor of those subjects; her title to the
subjects was registered in the Land Register on 25 March 2004. The previous proprietor of the subjects was a
company called Thomas H. Peck Limited.
[2] The
pursuers contend that they are the tenants of the subjects, and further that
they have an option to purchase the subjects, which they have validly
exercised. Their claim to be tenants
proceeds on two alternative bases.
First, they seek a declarator that the terms of a valid contract of
lease are set out in a formal offer dated 29 November 1999 from agents
acting on behalf of Thomas H. Peck Limited to the pursuers' agents and a formal
letter dated 22 May 2000 from the pursuers' agents to Thomas H. Peck
Limited's agents (the offer and letter being together referred to as "the
Missives"). Secondly, they seek a
declarator that a valid contract of lease, containing an option to purchase the
subjects, is found in an unsigned lease together with schedules and a draft offer
to purchase (referred to collectively as "the Lease"), those documents having
been agreed, it is said, between the pursuers and Thomas H. Peck Limited on
13 October 2000. On the basis of
either of the first two declarators, the pursuers further seek declarator that
they are tenants of the subjects in terms of the Missives or alternatively the
Lease. Thereafter, they seek declarator
that they have an option to purchase the subjects at the price of г145,000
adjusted according to the published retail price index, and decree ordaining
the defender to implement that option.
[3] The
pursuers' claims are based on the terms of the Missives or alternatively the
Lease. The Missives are averred to be as
follows. On 29 November 1999 the
Lints Partnership, acting on behalf of Thomas H. Peck Limited, sent an offer to
Golds, who acted for the pursuers, in the following terms:
"On behalf of our client,
Thomas H Peck Limited ('the Landlords') we hereby offer to lease to your
client, The Advice Centre for Mortgages Limited ('the Tenants') ALL and WHOLE
the subjects comprising 4 & 5 Crighton Place, Edinburgh ('the Subjects')
and that on the following terms and conditions.
1. The Lease will commence on the date of
entry which shall be on 1 December 1999 ('the date of entry').
2. The Lease of the subjects will be for a
period of 10 years from the date of entry.
3. The initial rent payable by the Tenants
to the Landlords will be г12,000 (г12,000) STERLING together with Value Added
Tax thereon (if requested by the Landlords) per annum payable quarterly in
advance as specified in the said Lease.
4. The Tenants shall have the option to
purchase the subjects at the end of five years from said date of entry upon the
basis figure of ONE HUNDRED AND FORTY FIVE THOUSAND (г145,000) STERLING
together with appropriate percentage increase at the relevant period of time in
the retail price index, from date of entry hereunder until payment of the
purchase price in terms of this Condition.
5. The rent will be reviewed every five
years on an upward basis only and in terms of the rent review provisions
contained in the Lease aftermentioned.
6. The Lease being granted by the
Landlords to the Tenants of the subjects (said Lease being referred to in the
missives as 'the Lease') will be on the terms, conditions and others and
subject to the restrictions and provisions of the draft Lease annexed and
signed as relative hereto subject to the completion by reference to the
missives of the parts left blank.
...
9. From and after the date of entry until
the Lease has been executed by the parties, the terms of the draft Lease will,
subject to the other terms of the missives of which this offer is part,
regulate the terms of the Lease of the subjects
...".
The draft lease referred to in that letter was not
produced. I was informed that it had
proved impossible to find either the principal or any copy of it.
[4] The
reply to the foregoing letter, written by Golds on behalf of the pursuers on 22 May
2000, was in the following terms:
"On behalf of and as instructed
by our clients The Advice Centre for Mortgages Limited we hereby accept the
offer dated 29th November 1999 made by you on behalf of your
client Thomas H Peck Limited to lease to our clients ALL and WHOLE the subjects
comprising 4 and 5 Crighton Place, Edinburgh and that on the terms and
conditions as stated in your said offer but subject to the following
qualifications:-
1. With regard to Condition 4 of your
said offer the option to purchase will be exercised by the tenants submitting
to the Landlords on or within four weeks prior to the fifth anniversary of the
date of entry an offer in self proving manner in terms of the draft offer
forming Part IV of the Schedule to the Lease with any blanks therein completed
as appropriate and the Landlords shall be bound to accept in self proving
manner an offer in the foregoing terms within seven days of receipt of same.
2. With regard to Condition 6 of your said
offer the Lease to be granted will be on the terms and conditions and others of
the draft Lease annexed and docquetted as relative hereto with revisals thereon
in red, blue and green ink and with the draft option offer inserted as Part IV
of the Schedule to the Lease.
...".
The letter is a qualified acceptance and therefore
constitutes, according to the standard legal analysis of such documents, a
counter offer which is itself open for acceptance. Condition 2 of the qualified acceptance
refers to a draft lease with revisals in red, blue and green ink. That document was not produced.
[5] The
pursuers aver that on 13 October 2000 the Lints Partnership sent Golds an
engrossed lease for execution; the lease is said to have included three
schedules and a draft offer to purchase as a fourth schedule. Those documents as a whole are referred to in
the pleadings as "the Lease". A copy of
the Lease was produced; the pursuers aver that they have been unable to locate
the principal lease that was sent to their agents for execution. It was not averred that that lease had ever
been executed, and the pursuers appeared to accept that it had not in fact been
executed. The pursuers further aver
that, notwithstanding any informality in the constitution of the Lease, Thomas
H. Peck Limited gave them entry and occupation of the subjects on 1 December
1999 on payment by the pursuers to Thomas H. Peck Limited of the sum of г3,000,
that being the first quarter's rental payment in advance. The pursuers assert that on taking entry and
actual occupation of the subjects on 1 December 1999 they acquired a real
right of lease in terms of the Leases Act 1449.
The result, it is said, was that the Missives or alternatively the Lease
became binding on singular successors of Thomas H. Peck Limited.
[6] If the
Leases Act 1449 is to apply, the relevant lease must be in writing. The writing founded on by the pursuers is the
Missives or alternatively the Lease. At
this point the pursuers confront two obvious problems. First, the Missives were not in fact concluded
by an unqualified acceptance; they remained in the form of an offer and counter-offer. Secondly, the Lease was not subscribed by the
granters in terms of section 2(1) of the Requirements of Writing
(Scotland) Act 1995. The pursuers deal
with the first of these problems by claiming that the essentials of a lease
were agreed in the two letters that comprise the Missives; I discuss this
argument below at paragraphs [9]-[14].
In relation to the second problem, they aver that, notwithstanding that
the Missives were never concluded and the Lease was never subscribed by the
granters in terms of section 2(1), there was nevertheless a valid contract
of lease in terms of section 1(3) and (4) of the 1995 Act. Subsections (3) and (4) of section 1
require that a party in the position of the pursuers should have acted or
refrained from acting in reliance on the document founded upon. To that end, the pursuers aver that on taking
entry, in reliance on the Missives or alternatively the Lease, and with the
knowledge and acquiescence of Thomas H. Peck Limited, they carried out
improvements to the subjects. Those
improvements included shop front decoration and signs and internal fixtures,
fittings, furnishing and decoration. The
pursuers further aver that they started trading as a mortgage advisory service
and began to build up a business connection at Crighton Place. They invested in the goodwill of their
business at Crighton Place and paid rent in terms of the Missives or
alternatively the Lease. They aver that
if the defender, who is of course a singular successor of Thomas H. Peck
Limited, withdraws from her obligations under the terms of the Lease they will
lose the goodwill that they have built up at Crighton Place and will lose the
opportunity to purchase the subjects in terms of the option.
[7] For
the defender it is averred that the option to purchase the subjects only
involved a personal right that the pursuers had against Thomas H. Peck Limited;
such a right would obviously not be effective against a singular successor of
that company. In response to that
contention the pursuers make the following averments:
"Explained and averred that
even if the option to purchase was only a personal right between the pursuers
and THP Ltd... it is nevertheless binding upon the defender as a result of her
bad faith. ... [T]he defender's husband
was a director of the pursuers. He dealt
with the matter of the Missives and the Lease while purportedly discharging his
duties as a director of the pursuers.
The defender was an employee of the pursuers and working at the
Subjects. As disclosed by the defender's
averments in answer she has a detailed knowledge of the Lease and in particular
the said option to purchase. The initial
approach to THP Ltd was made to Mr Lints of the Lints Partnership by the
defender's husband. The defender's
husband initially attempted to negotiate a sale of the Subjects at the Option
price. At the time of her purchase of
the Subjects the defender would have been well aware of the existence of the
said option to purchase".
Thus the pursuers contend that the option to purchase,
even if it is wholly personal in nature, not involving a real right, is binding
on the defender because of her bad faith in the manner particularized in these
averments.
[8] The
defender has tabled pleas to the relevancy of the pursuers' averments. The action was appointed to debate, and at
the debate the defender's counsel moved me to sustain the first of those pleas
and to dismiss the action. His arguments
were presented under a number of heads, which I will consider individually.
Validity of
the Missives
[9] The
Missives consist of an offer and counter-offer only; there is no unconditional
acceptance. Counsel for the pursuers
submitted that the pleadings disclosed sufficient consensus as to the terms of
the lease between the pursuers and Thomas H. Peck Limited; while such consensus
did not appear on the face of the Missives it could be inferred from facts and
circumstances that there had been acceptance of the terms contained in the two
letters. In my opinion it is impossible
to infer consensus on this basis. It is
true that the essentials of a lease can be discovered in the terms of the
Missives. The date of entry, the period
of the lease and the initial rent are all specified in clauses 1-3 of the
offer of 29 November 1999, and clearly the parties and subjects were
agreed. Where agreement has been reached on the essentials of a lease it may be
possible to infer that consensus has been reached. Where, however, it is apparent that the
parties have been in discussion as to other possible terms of the lease but no
agreement can be discovered on those terms, it will normally be impossible to
infer that the parties have reached consensus, at least if those other terms
were treated by one or both of the parties as significant. In such a case, when the totality of the
parties' dealings is considered, it cannot be inferred that they have reached
consensus on every significant matter that was the subject of negotiation
between them. Indeed, terms other than the essentials may themselves have a
bearing on the essential terms. Where,
for example, a rent review clause is inserted, that may have an effect on the
level of rent that is initially agreed.
[10] The
present case falls into the latter category.
In the first place, it is clear from clause 5 of the offer of 29
November 1999 that the rent was to be subject to review after five years, in
terms of rent review provisions contained in the form of lease specified in
clause 6 of the offer. Clause 6 provides
that the lease to be granted by the landlords to the tenants would be on the
terms and conditions of a draft annexed and docqueted as relative to the letter
of offer. That document has not been
produced, and it is accordingly impossible to know what was said in it about
rent review, or indeed any other matter.
Rent review provisions are important in modern economic conditions, and
doubt as to what was being proposed about the matter is, I think, a serious
objection to the argument that consensus was reached.
[11] In the
second place, the two letters that constitute the Missives do not themselves
disclose any agreement as to the terms of any option to purchase. This point is highly significant because the
option to purchase was clearly regarded as important by the pursuers. An option to purchase is mentioned in clause 4
of the offer, whose terms are quoted in paragraph [3] above; under that
provision the pursuers are given an option to purchase after four years at a
price of г145,000 with an adjustment for inflation. The qualified acceptance of 22 May 2000
makes specific reference to clause 4 of the offer. In clause 1 of the qualified acceptance it is
stated that the option should be exercised by an offer in a specified form
submitted on or within four weeks prior to the fifth anniversary of the date of
entry. The relevant form is contained in
Part IV of the schedule to a draft lease, but that form of the lease has
not been produced. Without it, it is
impossible to know what the parties' final position was as to the exercise of
the option.
[12] In the
third place, clause 2 of the qualified acceptance makes further reference
to the draft lease that was annexed; it is there stated that the lease to be
granted would be on the terms and conditions of a draft lease annexed and
docqueted as relative to the qualified acceptance with revisals in red, blue
and green ink, and with a draft option offer.
It is obvious that that draft lease is a different document from the
draft referred to in the original offer, if only because revivals had been made
during the intervening period. The
revised draft lease has not been produced.
The fact that a number of revisals had been made suggests that reaching
agreement on the terms of the lease had not been wholly straightforward. Without the revised draft in its final form,
however, it is simply impossible to discover what terms the parties might have
agreed. That relates to the rent review
provisions, and also to the terms of the option to purchase. It may relate to other matters. In these circumstances I am of opinion that
it is impossible to spell out consensus in idem from the terms of the Missives.
[13] That is
so even if the surrounding circumstances are taken into account. Entry was taken on 1 December 1999, but
that was well before the qualified acceptance was sent. Consequently the giving of entry cannot have
been referable to any concluded agreement as to the terms of the lease. Eventually, on 13 October 2000, it is
averred that an engrossed lease was sent by the agents acting for the then
proprietors to the pursuers' agents, for execution by the pursuers. That fact suggests that consensus had been
reached by that time, but it is now quite impossible to know whether that was
on the terms contained in any part of the Missives. In other words, any consensus as to the terms
of a lease and option to purchase cannot be referable to the terms of the
Missives. Such consensus can only be
referable to the terms of the Lease, but that document, of course, was not
executed.
[14] I
accordingly conclude that the pursuers fail in their averments to demonstrate
that any consensus as to the terms of a lease and option to purchase was
reached in the Missives. In the absence
of consensus, the Missives are in my opinion irrelevant to the pursuers' case.
Personal bar
provisions of the Requirements of Writing (Scotland) Act 1995
[15] The
pursuers' alternative case is based on the terms of the Lease. The Lease, of course, was not executed. In order to deal with this problem, the
pursuers found on subsections (3) and (4) of section 1 of the Requirements
of Writing (Scotland) Act 1995 in the manner described in paragraph [6]
above. Counsel for the defender
contended that the pursuers were not entitled to found on those
provisions. So far as material, section
1 of the 1995 Act provides as follows:
"(1) Subject to subsection (2) below and any other enactment,
writing shall not be required for the constitution of a contract, unilateral
obligation or trust.
(2) Subject to subsection (3) below, a written document complying
with section 2 of this Act shall be required for --
(a) the constitution of --
(i) a contract
or unilateral obligation for the creation, transfer, variation or extinction of
an interest in land;
...
(b) the creation, transfer, variation or
extinction of an interest in land otherwise than by the operation of a court
decree, enactment or rule of law;....
(3) Where a contract, obligation or trust mentioned in subsection (2)(a)
above is not constituted in a written document complying with section 2 of
this Act, but one of the parties to the contract, a creditor in the obligation
or a beneficiary under the trust ('the first person') has acted or refrained
from acting in reliance on the contract, obligation or trust with the knowledge
and acquiescence of the other party to the contract, the debtor in the
obligation or the truster ('the second person') --
(a) the second person shall not be entitled
to withdraw from the contract, obligation or trust; and
(b) the contract, obligation or trust shall
not be regarded as invalid,
on the ground that it is not
so constituted, if the condition set out in subsection (4) below is
satisfied.
(4) The condition referred to in subsection (3) above is
that the position of the first person --
(a) as a result of acting or refrained from
acting as mentioned in that subsection has been affected to a material extent;
and
(b) as a result of such a withdrawal as is
mentioned in that subsection would be adversely affected to a material extent.
(5) In relation to the constitution of any contract, obligation
or trust mentioned in subsection (2)(a) above, subsections (3) and
(4) above replace the rules of law known as rei
interventus and homologation.
...
(7) In this section 'interest in land' means any estate, interest
or right in or overland, including any right to occupy or to use land or to
restrict the occupation or use of land, but does not include --
(a) a tenancy;
(b) a right to occupy or use land; or
(c) a right to restrict the occupation or use of land,
if the tenancy or right is
not granted for more than one year, unless the tenancy or right is for a
recurring period or recurring periods and there is a gap of more than one year
between the beginning of the first, and the end of the last, such period".
Section 2 of the Act specifies the type of writing
that is required for the formal validity of documents of the categories
described in section 1(2). The
requirements are very simple; only a signature is necessary for the document to
be valid.
[16] These
sections call for certain comments.
First, it is obvious that they deal with the formal requirements of
certain categories of legal act, including contracts relating to land. They are not concerned with the substance of
the legal act concerned. Secondly, the
formal requirements for contracts and other deeds falling within the specified
categories are extremely simple and rational.
It is not difficult to satisfy those requirements. In those circumstances, I am of opinion that
there is no need to give the personal bar provisions in subsections (3) and
(4) of section 1 a liberal interpretation.
The legal acts specified in subsection (2) are either matters of
obvious importance, as with contracts relating to land, the creation or
transfer of an interest in land and the making of a testamentary instrument, or
relatively unusual acts that are likely to be undertaken with due
consideration. The need for a particular
legal form should accordingly be obvious.
If parties do not adhere to the very simple requirements that are now
prescribed, they have only themselves to blame.
That is especially so when they are legally advised.
[17] Thirdly,
subsections (3) and (4) of section 1 set up a form of personal bar. The requirements of those subsections
correspond closely to the classical requirements of personal bar in Scots law
as set out, for example, in the well-known statement of the doctrine by Lord
Birkenhead in Gatty v Maclaine, 1921 SC (HL) 1, at 7. In essence the second person, as defined in
subsection (3), has entered into a transaction with the first person that
lacks the prescribed formalities, and the first person has acted upon that
transaction to his prejudice, with the knowledge and acquiescence of the second
person. That by itself is a strong indication that the rights created by
subsections (3) and (4) are personal in nature. Furthermore, the rules in subsections (3)
and (4) are designed to supersede the common law rules of rei interventus and homologation, as subsection (5) makes
clear. Those common law rules have
always been classified as a form of personal bar. The fact that the provisions of subsections (3)
and (4) set up a form of personal bar has two important consequences. In the first place, where those provisions
apply they operate as a defence available to the first person; they prevent
withdrawal from the contract, obligation or trust in question, and the
contract, obligation or trust is not to be regarded as invalid. Those subsections do not, however, make any
claim or positive right available to the first person. According to the classic metaphor, they
operate as a shield rather than a sword. In the second place, because they set
up a form of personal bar, subsections (3) and (4) only operate between
the parties to the original transaction.
They have no effect in relation to third parties, including singular
successors. This is of importance in the
present case, because the defender is a singular successor of Thomas H. Peck
Limited. I deal with this matter at
paragraph [23] below.
[18] Fourthly,
the personal bar provisions of subsections (3) and (4) are confined to the
categories of contract, obligation and trust mentioned in subsection (2)(a);
they have no application to the types of transaction specified in subsection (2)(b). Subsection (2)(a)(i) refers to "the
constitution of... a contract... for the creation, transfer, variation or
extinction of an interest in land".
Subsection (2)(b), by contrast, refers to "the creation, transfer,
variation or extinction of an interest in land", subject to certain
exceptions. The intention is clearly to
separate contracts relating to land on one hand from dispositions and other
deeds that actually effect the creation or transfer of an interest in land on
the other hand. That is a distinction
between a transaction that gives rise to merely personal rights and a
transaction that gives rise to real rights, or at least rights that will be
made real when another legal step is taken, that step being registration or, in
the case of a lease, the taking of possession.
Counsel for the defender submitted that the personal bar provisions in
subsections (3) and (4) should be confined to transactions that create
rights that are purely personal. If, by
contrast, a transaction creates rights that can be made real by registration or
taking possession, personal bar is not intended to operate. I agree with this submission. In the first place, section 1(2) draws a
clear distinction between contracts and unilateral obligations for the
creation, transfer, variation or extinction of an interest in land on one hand
(subsection (2)(a)(i)) and the actual creation, transfer, variation or
extinction of such an interest on the other hand (subsection (2)(b)). That distinction is between personal rights
on one hand and real rights on the other.
Subsection (3) is confined to the former category of transactions,
namely those that create personal rights.
In the second place, the wording of subsection (3) refers to the
creditor and debtor in the obligation, who are referred to as "the first person"
and "the second person". That wording is
plainly habile to deal with personal contractual obligations, but it does not
fit well with the creation of real rights, which of course affect the whole
world, not merely a particular debtor and creditor. In the third place, at a purely conceptual
level, the notion of personal bar does not fit comfortably into a system of
real rights. It is true that under the
pre-1995 law the concepts of rei
interventus and homologation were applied to real rights; an example of
this is found in Clark's Executor v Cameron, 1982 SLT 68. Nevertheless, the critical feature of a real
right is that it is a good against the whole world, and it is clearly desirable
that exceptions to this norm should be narrowly confined. In this connection, it is significant that
the Scottish Law Commission, in their Report on Requirements of Writing (Scots
Law Com No. 112), which led to the 1995 Act, recommended at paragraph 2.50
that there should be a general statutory requirement of writing for the
voluntary creation, transfer, variation or extinction of an interest in
land. They commented on this
recommendation as follows:
"We do not think that there
should be any provision for actings in relation to the matters covered by [the
foregoing recommendation]. There is a
distinction in this respect between the underlying contract or obligation for,
say, the creation or transfer of an interest in land and the actual creation or
transfer of it. The distinction is
clearest in the case of missives for the sale of land and the disposition of
the land, but exists in other cases too, although it becomes very blurred in
the case of leases. It is reasonable to
say that a person cannot back out of an obligation if the requisite actings
have followed on it. It also seems
reasonable to say that an actual conveyance is either valid or invalid whether
or not actings have followed on it".
The commentary goes on to point out that that in cases
where actings have followed missives they can be used to set up the missives,
which can then be subject to an action for implement or damages for breach of
contract. In any event, it is pointed
out that the whole question of rei
interventus will become much less important if the sole requirement for
formal validity is subscription. In my
opinion the foregoing commentary discloses a clear intention in the legislation
to distinguish obligations that create purely personal rights from those that
create real rights, and to confine the personal bar provisions to the former.
[19] As is
pointed out in the passage quoted from the Scottish Law Commission's report,
the distinction between a contract for the creation of legal rights and the
actual creation of those rights can become blurred in the case of leases. On one hand, a lease is itself a contract for
the creation of an interest in land. On
the other hand, it creates an interest in land, which will give rise to real
rights when possession is taken or the lease is registered. For present purposes it is not necessary to
determine any general criteria for allocating leases to one or other of the two
categories. It is sufficient to hold
that, where it can be inferred that the intention of the parties to a lease is
that possession should be taken by the tenant on the faith of the lease
document, or the lease document should be registered, thus creating real rights
in the tenant, that document will create an interest in land and will accordingly
fall within subsection (2)(c) of section 1. In that event the personal bar provisions
contained in subsections (3) and (4) will not apply. In my view that is the clear intention of
subsection (2). That subsection
draws a fundamental distinction between documents that create property rights
on one hand and mere contracts on the other hand. That distinction must be given effect in the
case of leases. While that task may in
some cases be difficult, if the document in question is one that is clearly
intended, objectively speaking, to create a right of property in the tenant, it
must be treated as falling within paragraph (b) of the subsection and not
paragraph (a)(i).
[20] In the
present case the Lease is a formal document.
Moreover, it was clearly designed to follow antecedent missives. In the circumstances I am of opinion that it
must be inferred that the parties' intention was that possession should be
taken on the faith of the Lease. It
follows that the Lease is a document intended to create an interest in land,
falling within section 1(2)(b), and not a mere contract for the creation
of an interest in land, which would fall within section 1(2)(a)(ii). The consequence is that the personal bar
provisions contained in subsections (3) and (4) do not apply. That is sufficient for me to hold that the
pursuers' averments are irrelevant to the extent that they seek to apply those
two subsections to the Lease. The
personal bar provisions would be potentially applicable to the Missives, but
for the reasons stated above at paragraphs [9]-[14] I am of opinion that
no consensus can be discovered in the Missives.
[21] In the
course of the argument I was referred by counsel to A. McAllister, Scottish Law of Leases, 3rd ed, at
paragraph 2.5. In that paragraph
the author discusses the possibility that missives of let might not be
described as a contract for the creation of a tenant's right, since they
actually create the right. He states
that this would have the "unfortunate consequence" of excluding leases from the
application of subsection (2)(a)(i), thereby preventing informal leases
from being validated by the actings of the parties; that is described as a "disastrous
interpretation". For present purposes it
is not necessary for me to hold that missives of let should not be described as
a contract for the creation of a tenant's right. Even if that is correct, however, I do not
share the author's misgivings about such a result. In the first place, the 1995 Act has been in
force for nearly ten years, and this is so far as I am aware the first case
where the question of the application of subsections (3) and (4) to leases
has been raised. In the second place,
and more importantly, leases for one year or less are excluded from
sections 1 and 2 of the 1995 Act by section 1(7). Consequently, if parties enter into a lease
of subjects, entry is taken and rent is paid, but no document conforming to the
requirements of section 2 is executed, the lease will be construed as an
annual lease, renewable by tacit relocation.
That appears to me to be a sensible result. A lease for a period in excess of a year is
clearly an important transaction, and if parties choose not to put it in a
document that conforms to the very simple requirements of section 2 I
cannot see that the law should be assiduous to help them. Moreover, the law prior to 1995 was in
practice even less helpful to those who sought to set up an informal
lease. Under the common law, it was
notoriously difficult to apply the principle of rei interventus to leases of more than one year, because the acts
constituting rei interventus were
equally consistent with an annual lease: see Gloag, Contract, 2nd ed, 173-174.
Before 1995, therefore, if parties had entered into a lease for more
than one year that was not in probative form, the result would commonly,
perhaps usually, be a lease for one year, renewable by tacit relocation. Under the post 1995 law, this problem will
only arise if a lease for more than one year is concluded either verbally or in
a document that is not signed on behalf of both parties.
[22] As
mentioned above, the common law doctrines of rei interventus and homologation were available in respect of
transactions designed to give rise to real rights as well as those that created
purely personal rights. The new
statutory personal bar does not in my opinion extend to transactions that our
intended, by themselves, to create real rights.
It could be argued that the common law rules remain applicable to
transactions intended to create real rights, especially as the abolition of the
common law rules effected by subsection (5) is confined to the
transactions referred to in subsection (2)(a), which of course involve
personal rights only. In my opinion this
argument is not correct. I agree with
the view expressed by Professor K.G.C. Reid in his annotations to the Current
Law Statutes version of the 1995 Act, where he states
"The alternative and, it is
submitted, the better view is that the bald and unqualified statement in
subs. (2) that writing is required for
para. (b) rights has the effect of excluding the common law of personal
bar".
Professor Reid points out that that was the intention
of the Scottish Law Commission in their Report on Requirements of Writing of
July 1988 (Scottish Law Commission No. 112), as stated at paragraph 2.50. Moreover, I am of opinion that the plain
meaning of subsection (5) is that the previous law of rei interventus and homologation is superseded in its
entirety. That subsection states that
subsections (3) and (4) replace the rules of law known as rei interventus and homologation, and
the ordinary significance of the verb "replace" is that one thing is wholly
superseded by another.
[23] I
accordingly conclude that the personal bar provisions contained in subsections (3)
and (4) of section 1 of the 1995 Act cannot be used to set up the Lease,
because it is not a document falling within subsection (2)(a)(i). In addition, because subsections (3) and
(4) operate as a form of personal bar, as discussed at paragraph [17]
above, I am of opinion that they cannot be used against the present defender,
who is, of course, a singular successor of Thomas H. Peck Limited. The pursuers' averments amount in essence to
the following. They entered into the
Lease with Thomas H. Peck Limited. The
Lease did not satisfy the requirements of sections 1 and 2 of the 1995
Act; nevertheless, the pursuers' subsequent actings brought subsections (3)
and (4) of section 1 into operation.
Consequently, in terms of subsection (3), Thomas H. Peck Limited
was not entitled to withdraw from the Lease, and the Lease was not to be
regarded as invalid. The pursuers now
claim that the Lease is binding as against the defender as a singular
successor. The difficulty with that line
of reasoning is twofold. First, because
the Lease was unsigned, there is no writing binding on both parties, with the
result that the Leases Act 1449 does not apply.
This means that the arrangements between the pursuers and Thomas H. Peck
Limited are purely personal in nature, and will not bind singular successors of
the landlord. Secondly, because
subsections (3) and (4) set up a form of personal bar, they do not bind
third parties, including singular successors.
Thus all of the rights that the pursuers enjoy, according to their
averments, are personal as between then and Thomas H. Peck Limited. It is obvious that one personal right, in the
form of personal bar, cannot convert another personal right, under a lease that
does not satisfy the requirements of the Leases Act 1449, into a real
right. Personal bar only operates as a
defence; it does not create any claim or positive right, and thus cannot create
a real right. The result is that such
rights as the pursuers had under the Lease are only good against Thomas H. Peck
Limited, and are not effective against the defender.
[24] The
pursuer's response to this was that the defender, when she acquired the property,
was aware of the Lease. The result was
that, in refusing to give effect to the terms of the Lease, she was in bad
faith. Consequently the principle in Rodger (Builders) Ltd v Fawdry, 1950 SC 483, came into
operation, and the defender could not now deny the validity of the Lease. The pursuers' averments of bad faith are
those set out in paragraph [7] above.
Those averments are directed to the separate question of whether the
option to purchase was binding on the defender because of her bad faith and,
perhaps for this reason, most of the argument on the question of bad faith was
directed towards the option rather than the Lease itself. Nevertheless, if I understood his argument
correctly counsel for the pursuers also founded on those averments in relation
to the Lease. I discuss the question of
bad faith below at paragraphs [41]-[51].
For present purposes, it is sufficient to say that I have concluded that
the defender's knowledge of the Lease is immaterial. The rights that the pursuers enjoyed as
against Thomas H. Peck Limited prior to the sale to the defender were purely
personal in nature, and came to an end as soon as that company disponed the
property to a third party. That was the
inherent nature of those rights; consequently, the sale of the property by Thomas
H. Peck Limited did not give rise to any breach of an existing legal
obligation. Without the breach of an
existing obligation, however, the principle that a purchaser in bad faith
cannot defeat existing personal rights does not operate. The result is that the pursuers' argument
that the Lease is set up by their actings, in accordance with section 1(3)
and (4), is ill-founded, and the averments to that effect are irrelevant.
[25] In
addition, I am of opinion that the pursuers' averments on subsections (3)
and (4) of section 1 are open to a further criticism. The provisions of the 1995 Act are, generally
speaking, concerned with the form of documents rather than their
substance. The pursuers, however, appear
to rely on subsections (3) and (4) to deal with the problem that they face
regarding consensus as to the terms of any lease. They make the following averment:
"Notwithstanding that the
Missives were never concluded or the Lease was never subscribed by the granter
is in terms of section 2(1) of the Requirements of Writing (Scotland) Act
1995, there is nevertheless a valid contract of lease in terms of section 1(3)
and (4) of the said Act".
That averment is followed by the averments of actings
that are summarized at paragraph [6] above. This appears to involve an attempt to deal
with the failure to conclude the Missives by making use of subsections (3)
and (4). In my opinion that is not
legitimate. Those subsections are
concerned with deficiencies in the form of documents. They cannot deal with any deficiencies in
substance, and a lack of consensus falls into the latter category. It may still be possible to rely on actings
to infer consensus; I deal with this aspect of the case at paragraph [31]
below. Nevertheless, any such argument
must be based on the common law, not on the 1995 Act.
Rei interventus and
completion of contract
[26] In the
law as it existed prior to the Requirements of Writing (Scotland) Act 1995, the
concept of rei interventus was used
in two different senses. These are
explained by Gloag (Contract, 2nd ed,
p. 46) as follows:
"The normal application of
the plea of rei interventus is in
cases where it is not disputed that an agreement has been made, but where the
mere agreement is not binding, because the contract in question is one of the
class in which writing is necessary to constitute a binding obligation....But
the term rei interventus is also
applied, though not so frequently, to the case where parties have been in
negotiation for a contract, and one of them has acted, and been known and
allowed to act, on the mistaken assumption that the negotiations had reached
the point of a completed contract".
The first of these senses is that discussed above,
where the principle of rei interventus
was used to perfect an agreement that did not satisfy the formal requirement
that it should be in writing. The second
sense is not concerned with failure to satisfy formal requirements; it is
rather concerned with the manner in which the parties' agreement is
established. Gloag goes on to point out
that, although the result in both cases is that a contract is completed, the
theory underlying that result is different.
He states
"In the case of an agreement
which is not binding unless it is entered into in writing..., the rule that a
merely verbal agreement becomes binding when followed by rei interventus is simply an exception to the primary and more
general rule that contracts of the class require writing. But when rei
interventus is relied upon in cases where parties have not arrived at any
agreement, verbal or in writing, the rule that actings may bind them to a
contract is not an exception to the general rule that contract requires
agreement. What is really meant is that
the actings in question are evidence that agreement has been actually reached,
though it has not been indicated in words or in other way than by the
actings. In the former case the actings
render an agreement binding; in the latter they prove that an agreement was
reached".
[27] The
pursuers' averments of actings following their taking entry to the subjects are
summarized at paragraph [6] above.
These might be construed as inferring rei interventus in the second sense, completing the parties'
agreement, and the pursuers' counsel advanced an argument to that effect; in
doing so he referred to Errol v Walker, 1966 SC 93, a case where such
an argument was successful. For the
defenders it was argued that the effect of section 1(5) of the 1995 Act
was to replace the law of rei interventus
in its entirety, in both of the senses discussed in the last paragraph. It is accordingly necessary to decide whether
the principle of rei interventus in
its second sense has survived the 1995 Act.
In my opinion the answer to this question must depend upon the proper
analysis of that principle as explained in the decided cases.
[28] Perhaps
the definitive expression of the principle of rei interventus in its second sense is the decision of the Second
Division in Errol v Walker.
In that case the defender had been the tenant of property. The pursuer, who had been his landlord,
brought an action of declarator and removing, and the defender pled that he had
purchased the property from the pursuer.
He averred that he had delivered a probative offer to purchase of
property to the pursuer's agent, and paid instalments to account of the price
in terms of that offer. He had never, however, received a formal
acceptance. He further averred that he
had to the pursuer's knowledge carried out substantial improvements on the
property. It was held that the defender's
averments, if established at proof, might be sufficient to infer acceptance of
the offer by the pursuer, and that those averments might be proved by parole
evidence. Lord Strachan, who
delivered the first of the opinions, referred (at page 99) to the rule
that a contract relating to heritage could be proved only by writ or oath, but
that an informal obligation could be binding if followed by rei interventus. He then pointed out that rei interventus could be proved by parole evidence, and continued
"In the present case there
is a probative writing by the defender, and the contention is that the contract
was completed by rei interventus,
that the actings of the parties are evidence that agreement has been
reached. If that be sound law, it seems
to follow that proof of rei interventus
will be proof of the completion of the contract, and in that event there
would... be no reason to restrict the normal method by which rei interventus can competently be
proved. Apart from that possible ground
I see no warrant for relaxing the rule requiring proof by writ or oath of a
contract relating to heritage".
Lord Walker stated (at page 103) that the
averments of actings might all competently be proved prout de jure, and
identified the critical question as being whether those averments if proved
would infer acceptance of the written offer.
On the basis of the authorities he concluded that it would. Lord Justice-Clerk Grant stated (at page 105)
that
"[T]he giving of possession
may be treated as an implied acceptance and one then has a completed (though
informal) contract to which the 'actings' may be unequivocally referable and to
which they may give binding force".
I note, however, that at page 107 the Lord
Justice-Clerk stated that he did not find the case easy and had found the
authorities at times both confused and confusing.
[29] The
statements of the law in Errol v Walker are based on earlier decisions
such as Stewart v Countess of Moray, 2 Pat. App.
317, Keir v Duke of Atholl, 6 Pat. App. 130, and,
most importantly, Colquhoun v Wilson's Trustees, 22 D. 1035. It seems to me that two distinct approaches
can be discerned in the court's opinions.
Lord Strachan and Lord Walker appear to assume that the two
senses of rei interventus are both to
the regarded as manifestations of a single principle. That appears in
particular from the opinion of Lord Strachan at page 99, where a
single principle, rei interventus, is
regarded as both completing the contract and overcoming its informality. The same is true of the discussion by Lord Walker
at page 104. The Lord Justice-Clerk
takes a noticeably different approach.
He distinguishes the question of implied acceptance on one hand from the
curing of informality in the constitution of the contract on the other
hand. He treats the giving of possession
as amounting to implied acceptance, and the subsequent actings on the faith of
the contract as curing the informality in expression. I am bound to say that I find this approach
more coherent intellectually; nevertheless, it seems clear that the approach of
the majority represents the ratio of the case.
Moreover, the approach of the majority appears to accord with the
discussion of the law in Colquhoun v Wilson's Trustees.
[30] On the
basis that the majority approach represents the ratio of Errol v Walker, I am of
opinion that the decision no longer represents the law following the enactment
of section 1(5) is of the 1995 Act.
That subsection provides that, in relation to the constitution of any
contract as mentioned in subsection (2)(a), subsections (3) and (4) "replace
the rules of law known as rei interventus
and homologation". In my view that must
apply to rei interventus in both
senses. At the level of the language
used in subsection (5), the expression "rei
interventus" applies to the rule in
Errol v Walker as formulated by
the majority just as much as it does to the rule that informal writings can be
set up by subsequent actings of one party with acquiescence of the other. It can be said that the two senses of the
expression fulfil different functions.
Moreover, the 1995 Act is concerned with the formal requirements of
documents rather than the substance of the underlying transaction. Nevertheless, as the rule is formulated by
the majority in Errol, no clear
distinction is drawn between the two functions of the concept. On the facts of the case, it was held that
the defender's payment of instalments of the price and carrying out of
improvements, to the pursuer's knowledge, were capable of both evidencing
completion of the contract and perfecting the contract's informality. That is clear, for example, from Lord Strachan's
statement of the defender's argument (at page 97):
"[R]ei interventus normally
follows on a contract which has been completed, although informally, and its
effect is to prevent a party from resiling during the locus poenitentiae which is consequent upon the informality of the
contract. In this case the argument is
that the rei interventus completed
the contract where no previous contract existed".
Throughout the remainder of the opinion, and in the
opinion of Lord Walker, it seems to me that the two manifestations of rei interventus are regarded as
essentially a single principle applicable to the same facts. If that is so, there does not appear to be
any good reason for failing to give the wording of subsection (5) its full
import. While the 1995 Act is concerned
with form rather than substance, rei
interventus was a unitary principle that covered both form and
substance. In the circumstances I
consider that the legislative intention behind subsection (5) was to
abolish the principle in its entirety.
If that is so, the approach of the majority in Errol v Walker no longer
represents the law. I do not regret this
result; as the Lord Justice-Clerk points out in that case, the law in this area
was confused, and the legal theory underlying the cases was far from clear.
Completion of
contract by parties' actings
[31] It does
not follow, however, that a case such as
Errol v Walker should now be
decided any differently. It is possible
for parties to demonstrate consensus through actings as well as words, and that
is not affected in any way by the 1995 Act.
Consequently, on the facts of Errol,
it would now be possible to hold that the parties entered into a contract for
the sale of the property on the terms of the defender's offer to purchase
it. Consensus could be inferred from the
defender's being permitted to retain possession after the offer was submitted
and, even more importantly, from the pursuer's acceptance of payment of
instalments of the price specified in the offer rather than the rent that was
previously due. Such a contract would
clearly not be in the form prescribed by section 1(2) of the Act. Nevertheless, it could be set up under
subsections (3) and (4) as a result of the defender's payment of
instalments of the price and, in particular, making improvements to the
property in reliance on the contract for sale of the property. That analysis is essentially in accordance
with the approach taken by the Lord Justice-Clerk in Errol. It has the advantage
of drawing a clear distinction between the inference that the parties have
reached consensus in idem and the
actings necessary to set up the contract.
It also recognizes the abolition of the rule that a contract for the
sale of heritage could only be proved by writ or oath. A major source of the defender's difficulties
in Errol was the fact that the only
writing evidencing a contract was his own offer to purchase; there was nothing
in writing from the pursuer. The court
dealt with this problem by holding that the pursuer's consent was established
by his actings in giving possession, accepting instalments of the price and
permitting improvements to be made, and that those actings could be proved
prout de jure: see Lord Strachan at 99 and the Lord Justice-Clerk at
105. The rule that the terms of a
contract for the sale of heritage must be proved by writ or oath has been
abolished by section 11(1) of the 1995 Act. The result is that there is nothing to
prevent a court from drawing the inference that a contract for the sale of
heritage has been completed by the parties' conduct alone, or by conduct
following the tendering of a document by the party who seeks to set up the contract. Thereafter, all that the court requires to
consider is whether the personal bar requirements of section 1(3) and (4)
are satisfied. This perhaps illustrates
very clearly why it is undesirable that the majority approach in Errol should remain law; the 1995 Act
involves a new start, on a comprehensive basis, and it is better that that
should be recognized fully.
Whether
pursuers' actings referable to Missives and Lease
[32] The
argument for the present pursuers was presented on the basis of Lord Strachan's
opinion in Errol. As I have indicated, I am of opinion that
that view of rei interventus has been
abolished by section 1(5) of the 1995 Act.
For that reason the pursuers' argument must fail, at least in the terms
in which it was presented. Even if the
argument is reformulated in the manner suggested in the last paragraph,
however, I am of opinion that it must fail.
[33] When
actings are relied upon as completing an agreement, it is important that the
particular agreement should be identified and that the actings should be
referable to that agreement. The same point applies where actings are relied
upon to set up an informal agreement under provisions such as section 1(3)
and (4) of the 1995 Act. That is clear
from the decision of Lord Hamilton in Tom
Super Printing Supplies Ltd v South
Lanarkshire Council, 28 September 1999 and 19 November 1999,
unreported. In that case it was claimed
by the pursuers that a contract had been varied, and that the varied form of
the contract had been set up by actings under section 1(3) and (4). It was held that most of the acts relied on
by the pursuers predated the variation, and that the subsequent acts that were
averred were no more referable to the contract as varied than to the contract prior
to variation. Lord Hamilton held that
acts sufficient for the purposes of section 1(3) must be "clearly
referable to the terms of the contract as varied; acts equally consistent with
the contract prior to variation do not... suffice". That illustrates very clearly the requirement
that actings, if they are to be relevant, must be referable to a particular
agreement. That in turn means that the
actings must follow the date when the material contract or other document came
into existence. This point is explained
by Professors Robert Rennie and D.J.Cusine in their work on the 1995 Act, "The
Requirements of Writing", at paragraph 2.10. It is there stated
"The contract must also
precede any of the actings otherwise they can hardly be said to be in reliance
on the agreement".
[34] The
pursuers' averments relating to their actings in reliance on their alleged
agreements with Thomas H. Peck Limited are summarized at paragraph [6]
above. The critical passage is as
follows:
"On taking entry, the
pursuers, in reliance on the terms of the Missives or alternatively the Lease
agreed between themselves and [Thomas H. Peck Limited] and with the knowledge
and acquiescence of [Thomas H. Peck Limited], carried out improvements to the
Subjects which included shop front decoration and signs and internal fixtures,
fittings, furnishing and decoration.
They commenced trading as a mortgage advisory service. They began to build up business connection at
Crighton Place... They have paid rent in
terms of the Missives or alternatively the Lease".
It is a reasonable inference most of the matters that
are relied on in this passage occurred very soon after entry was taken; that is
the obvious time for installing a new shop front and refurnishing and
redecorating the premises. It is also
the obvious time when the pursuers would start to trade from the premises. At the very least, no indication is given in
the pursuers' pleadings that these actings occurred any significant time after
entry. The pursuers aver that entry was
taken on 1 December 1999. The
actings founded on appear, therefore, to have occurred shortly after that date,
or in the case of trading and the payment of rent to have started shortly after
that date. The two letters that are said
to constitute the Missives are dated respectively 29 November 1999 and 22 May
2000. Thus the "Missives", as that expression is used by the pursuers, did not
come into existence until more than five months after entry. The document described by the pursuers as the
"Lease" was sent to the pursuers on 13 October 2000, more than ten months
after entry. It follows that the
pursuers' actings immediately following entry cannot have proceeded in reliance
on either the Missives, as that expression is used in the pleadings, or the
Lease.
[35] It is
no doubt possible that at least some of the actings relied on might have
occurred following the sending of the qualified acceptance on 22 May 2000,
or even after the sending of the engrossed Lease on 13 October 2000, but
if that is so it should be made clear.
The pursuers' present averments relate expressly to the date of entry,
and the natural inference is accordingly that, for the most part, the actings
relied on occurred shortly after that date.
On that date the document governing the relationship between the pursuers
and Thomas H. Peck Limited was neither the Missives nor the Lease but the offer
of 29 November 1999 whose terms are set out in paragraph [3] above. Clause 9 of that letter states that from
the date of entry until a lease has been executed the terms of the lease will
be regulated by "the terms of the draft Lease"; that is obviously the draft
lease referred to in clause 6 of the letter.
That document was not produced, however, and without it is impossible to
discover whether it differed in any material respect from the engrossed Lease a
copy of which was produced. The pursuers'
actings, therefore, are likely to be referable to a document which is not now
available and which is not in any event relied upon by the pursuers in their
pleadings. In these circumstances I
conclude that the pursuers' averments of actings following the date of entry
are irrelevant, in that those actings are referable not to either the Missives
or the Lease but to another document that is not relied on.
[36] The
principles discussed above apply not only to the completion of the contract by
the parties' actings; they also apply to the use of the parties' actings to set
up an informal contract under section 1(3) and (4) of the 1995 Act. Once again, the actings appear to have been
referable to the draft lease sent with the offer of 29 November 1999. They do not appear to have been referable to
either the Missives, as that expression is used in the pursuers' pleadings, or
the Lease. For this reason I conclude
that the pursuers averments of actings to satisfy the personal bar requirements
of section 1(3) and (4) are irrelevant.
This reason is of course additional to those already discussed, namely
the lack of consensus disclosed in the Missives (paragraphs [9]-[14]
above) and the inability of subsections (3) and (4) to cure the lack of
formality in the Lease (paragraphs [15]-[25] above).
Status of
option to purchase
[37] Counsel
for the defender presented a further argument that the option to purchase was a
personal right between the original landlord, Thomas H. Peck Limited, and the
pursuers. As such, it was not binding on
the defender, who is of course a singular successor of Thomas H. Peck Limited.
This argument was based on the proposition that not all of the terms of a lease
are necessarily binding on singular successors.
If a term is to be binding on singular successors, it must be inter naturalia of the lease. Reference was made to a number of
authorities, notably Montgomerie v Carrick, 1848, 10 D 1387, Bisset v Magistrates of Aberdeen, 1898, 1 F 87, and Optical Express (Gyle) Ltd v
Marks & Spencer PLC, 2000 SLT.
Counsel submitted that an option to purchase was not normally inter naturalia of a lease. It might be rendered inter naturalia through custom and practice, but no averments of
that nature were made by the pursuers.
[38] In my
opinion this argument is clearly correct.
Indeed, the primary submission advanced by counsel for the pursuers did
not challenge it directly, but was rather that the option to purchase was
rendered binding on the defender because of her bad faith. I deal with this argument at paragraphs [41]-[51]
below. So far as the primary argument
for the defenders is concerned, it is clearly established that not all of the
terms of a lease will necessarily bind singular successors; only those that are
inter naturalia will do so. In Montgomerie
v Carrick, supra, a case
involving an arbitration clause in a mineral lease, the Lord President stated
(at 1395)
"It is no doubt most plain
and obvious... that there is a distinction between those stipulations which are
extrinsic to the lease, and do not transmit against singular successors, and
those other stipulations which are of the essence of the contract, and do
therefore of necessity transmit against them".
In Bisset v Magistrates of Aberdeen, supra, the
granters of a lease of heritable property for 999 years bound themselves
to deliver to the tenant and his heirs, executors and successors at any time
they should desire the same a feu charter of the subjects of let. It was held
that the option to purchase was not binding on singular successors. Lord Trayner stated (at 98)
"Here the obligation is to
put an end to the right created by the lease, and to substitute for it another
and different right -- to substitute a right of absolute property for a right
merely to use. I agree with the Lord
Ordinary in thinking that the obligation to grant a feu right was personal to
the granter of it, and that it did not transmit against singular successors".
Lord Moncreiff stated (at 90)
"The lease is one for 999
years... This is practically an
alienation of the ground, and the defenders have apparently little interest to
object to its being converted into a feu right in accordance with the obligation
undertaken by the original lessors. I
should therefore not have been surprised to find that an obligation of this
kind was customary and usual in leases of such duration. If this had been established it would have
materially aided the pursuer's contention.
But the pursuer is not prepared to aver that there is any such practice,
and therefore we must deal with the obligation as being an unusual condition in
a contract of lease. It is an obligation
to alter the tenure from one of lease to one of feu. This can scarcely be said to be inter
naturalia of a lease, and if it is not it will not affect singular successors".
In Optical
Express (Gyle) Ltd v Marks &
Spencer PLC, supra, Lord Macfadyen considered Bisset in the context of an exclusivity clause in a lease of a unit
in a shopping centre. He stated (at 650)
"It is clear from Bisset v Magistrates of Aberdeen that one factor relevant to determining
whether an obligation is inter naturalia
of the lease will be whether it is one of common occurrence in the particular
class of lease.... I infer from [the passage quoted above from Lord Moncreiff's
opinion] that the matter is primarily a question of the nature of the
obligation, although evidence of customary practice will assist in making out a
case that a particular obligation is inter
naturalia of a particular class of lease".
It was held that an exclusivity clause was prima facie
not inter naturalia of a lease.
[39] In my
opinion Bisset is clear authority
that an option to purchase is not normally inter
naturalia of a lease. No doubt the reason
is that identified in Bisset, namely
that it involves converting the rights of a tenant into a wholly different
relationship, one of feu or, today, outright ownership. That is the normal rule, and exceptions may
exist. One such exception has been identified;
that is where it is established by evidence that the custom and practice in
leases of a particular nature is to insert a particular form of clause. If that is relied on, however, the party who
asserts that a practice exists would require to make appropriate
averments. No such averments have been
made in the present case. Other
exceptions may exist, but none was suggested in relation to the present lease. I accordingly conclude that any option to
purchase would not be inter naturalia
of the lease, and would accordingly not be binding on singular successors.
[40] Counsel
for the pursuers submitted that options to purchase were common in leases, and
that that fact might be within judicial knowledge. In this respect he suggested that there was scope
for development of the law. In my
opinion this argument must be rejected. Bisset clearly establishes that a an
option to purchase is not normally to be regarded as inter naturalia of a lease.
If this is to be displaced by common practice, evidence that effect
would be required. I do not think that
judicial knowledge can be of any assistance in this connection; while options
to purchase are encountered, many leases do not contain such options. Indeed, in leases granted by investment
institutions, which are very common, it is difficult to imagine why an option
to purchase should be common practice.
Bad faith
[41] The
primary submission advanced by counsel for the pursuers in relation to the
option to purchase was that when the defender acquired the subjects she knew of
the option; consequently she was in bad faith, and could not now deny that the
pursuers had a valid right to purchase the subjects. In advancing this argument, counsel founded
on the well-known decisions in Rodger
(Builders) Ltd v Fawdry, 1950 SC 483, and Trade Development Bank v Crittall Windows Ltd, 1983 SLT 510. He submitted that these cases indicated a
general principle that the law should not extend protection to those in bad
faith, and for this purpose simple knowledge was sufficient to give rise to bad
faith. Counsel also founded on the
decision of Sheriff Principal Ireland in Davidson
v Zani, 1992 SCLR 1001, where the
circumstances were very similar to the present; the purchaser of property
subject to a lease was aware that the tenant had an option to purchase, and it
was held that because of that knowledge the landlord was obliged to recognize
the option.
[42] In my
opinion this argument is fundamentally wrong. It appears to me to be based on a
misunderstanding of the principle that underlies the cases relied on. Moreover, the argument ignores, and indeed
subverts, the distinction between real rights and personal rights. It is also wholly at variance with the rule
discussed in paragraph [38] above that in a lease only those clauses that
are inter naturalia of the type of
lease in question are binding on singular successors.
[43] The
leading authority in this area of the law is Rodger (Builders) Ltd v
Fawdry, supra. That case involved
two successive contracts to sell the same property. The purchaser under the second contract was
aware of the earlier contract. The
relevant principle was stated by Lord Jamieson in the following terms (at 1950
SC 499):
"If an intending purchaser
is aware of a prior contract for the sale of the subjects, he is bound to
inquire into the nature and results of that prior contract, and his duty of
inquiry is not satisfied by inquiry of the seller and an assurance by him that
the contract is no longer in existence".
That case involved a double grant of the same
property, but the principle has been extended more widely. In
Trade Development Bank v Crittall
Windows Ltd, supra, the defenders offered to purchase the tenant's interest
under a lease from the existing tenant.
The offer was accepted. Subsequently,
the existing tenant obtained a fresh lease of the subjects from the landlord,
and shortly thereafter granted a standard security to the pursuers over its
interest in the lease and certain other leases.
The original tenant then granted an assignation in favour of the
defenders, and the assignation was recorded.
The original tenant subsequently went into liquidation, and the pursuers
sought to realise their standard security.
They raised an action against the defenders for declarator that they had
the right to enter into possession and for removing. It was held that, as a matter of relevancy,
the principle of good faith was capable of applying to those circumstances, if
it were proved that the pursuers had some knowledge of the contract to grant an
assignation to the defenders. In this
case there was no double grant of the same subjects. Nevertheless, the contract for the sale of
the tenant's interest contained an obligation of warrandice, in that it
provided for "a valid marketable and recordable assignation of the subjects of
sale". The grant of the standard security was in breach of that
obligation. Thus, on the defenders'
averments, the pursuers had taken their standard security in the knowledge that
its grant would involve a breach of contract by the granter.
[44] The
theoretical basis for the foregoing principle is not discussed in any detail in
the decided cases, perhaps because its practical application is very obvious,
at least in simpler cases. The origins
of the principle seem to lie in the concept of fraud in its older sense. This is not the modern sense, involving a
false representation made knowingly, but rather consists of actings designed to
defeat another person's legal right.
Nevertheless, the law has moved away from the concept of fraud. In Rodger
Lord Jamieson said (at 1950 SC 499):
"[F]raud in the sense of
moral delinquency does not enter into the matter. It is sufficient if the intending purchaser
fails to make the inquiry which he is bound to do. If he fails he is no longer in bona
fide but in mala fide".
Thus implied or constructive knowledge, just as much
as actual knowledge, will bring the principle into operation and render the
second purchaser in mala fide.
[45] Nevertheless,
however extended the concept of knowledge may have become, it is clear that a
purchaser of property must have some sort of knowledge of prior rights before
the principle can come into operation.
That leads on to the question: knowledge of what? The answer to this question must, I think,
depend upon the underlying rationale of the principle. In
Trade Development Bank v Crittall
Windows Ltd, the Lord President stated (at 1983 SLT 517)
"It is clear from the
opinion of Lord Jamieson in Rodger
(Builders) Ltd v Fawdry... that
the decision rested upon the broad principle in the field of contract of fair
dealing in good faith".
The Lord President went on to cite with approval
certain remarks of the Lord Ordinary, Lord McDonald, in the earlier case
of Trade Development Bank v Warriner & Mason (Scotland) Ltd,
1980 SC 74, at 82:
"The principle evolved in
these cases is subject to limitation. It
is founded on equity and can, on one view, be regarded as a development of the
doctrine of personal bar... It is an
exception to the general rule that the person who transacts with the proprietor
of lands need not look beyond the position revealed by the Register of
Sasines. Moreover it only operates where
the right asserted against such person is one which is capable of being made
into a real right".
These statements indicate that the principle is
equitable in nature. It operates as an
exception to general legal rules, and is based on the notion of fair dealing in
good faith in the field of contract. If
that is the underlying rationale of the principle, I am of opinion that what
the purchaser must know, actually or constructively, to bring it into operation
is that the implement of the contract in his favour will render the seller in
breach of a legal obligation that he has undertaken to a third party. If there is no breach of any existing
obligation, it is difficult to see that any question of dealing in good faith
arises, because the seller is merely doing what he has a legal right to
do. Nor is there any reason to bring
equity into play in such a case to disrupt the normal operation of legal rules;
all existing rights and obligations are respected. Where a contract of sale involves the seller
in the breach of an existing legal obligation, however, the justification for
applying principles of good faith is very obvious. It is the breach of an existing obligation
that justifies the intervention of equity.
The purchaser, of course, is not a party to that breach; accordingly, if
the consequences of the breach are to be visited on him, he must have actual or
constructive knowledge of the breach.
Once again, the justification for that requirement is obvious. It seems that the consequences of the breach
can also be visited on a person who acquires property gratuitously, or for a
manifestly inadequate consideration, although so far as I can discover this
situation has not been the subject of any decided cases outside the field of
trusts. Nevertheless, the justification
for equitable intervention in such a case is once again clear, subject to the
qualification that any consideration that has been paid by the purchaser will
normally be repayable as a condition of reduction. For present purposes, however, what matters
is that the intervention of equity on the ground of bad faith is only warranted
by the breach of an existing legal obligation.
[46] For the
foregoing reasons I am of opinion that the principle is accurately stated by
Professor KGC Reid in The Law of Property
in Scotland at paragraph 695:
"Any attempt to identify a
principle capable of explaining all the different manifestations of the rule is
to some degree hazardous, but it is thought that the original analysis based on
'fraud' remains correct, provided that 'fraud' is not confined to its narrow
modern meaning. In current legal
language the principle is expressed more accurately by saying that what is
required is the breach by the granter of an antecedent obligation which was
binding upon him. Thus the situation
envisaged is that a granter undertakes, expressly or by implication, that he
will not make a particular grant; nonetheless he makes the grant; and the
grantee, either knowing of the obligation or failing to take for value, is
affected by it".
Professor Reid continues:
"In order for the rule... to
operate it appears that all of the following must be shown, namely:
(1) that there was an antecedent contract or
other obligation affecting the granter;
(2) that the grant was in breach of a term,
express or implied, of that obligation; and
(3) either that the grantee knew of the
antecedent obligation prior to the completion of his own right or that the
grant was not for value".
I agree with that formulation of the law. I also agree with Professor Reid's comments
on Trade Development Bank v Crittall Windows Ltd; at
paragraph 697 of the same work he states:
"The decision in Crittall Windows reaffirms, if only by
implication, the primacy of the requirement that the grant which is being
challenged must breach an antecedent obligation, and this requirement seems the
key to the future development of the law".
[47] If that
is a correct view of the law, the result in the present case is very
clear. The sale of property by Thomas H.
Peck Limited to the defender did not involve the seller in any breach of its
existing obligations. No such breach is
averred, and it is difficult to see how any breach could be averred. The right to sell is one of the most normal
incidents of a right of property, and in my opinion clear wording or a clear
implication would be required to restrict or remove that right. Nothing in either the Missives or the Lease
comes close to achieving that result.
Indeed, in the Lease the expression "the Landlords" is defined as
including, where the context so admits, all persons deriving title from them.
Nor is there any breach of the right conferred by the option as a result of the
sale. For this purpose it does not
matter whether the option to purchase takes the form found in the Missives or
that found in the Lease. In either event
that option is not inter naturalia of
the lease, for the reasons stated above, and is accordingly personal to the
original landlord, Thomas H. Peck Limited.
Thus the option was always liable to be defeated when the property
passed to a singular successor. Because
there was no breach of any antecedent obligation by the seller, the rule in Rodger (Builders) Ltd v Fawdry has no application even in the
extended form adopted in Trade
Development Bank v Crittall Windows
Ltd.
[48] That
appears to me to be an entirely sensible result. If the pursuers' argument were correct, the
result would be that the personal right conferred in the option was converted
for practical purposes into a real right.
Any purchaser of the property would be likely to discover that a tenant
was in occupation, and would therefore be required to investigate the lease
under which the tenant held the property.
Thus the purchaser would almost inevitably discover the existence of the
option. That knowledge would make the
option binding on the purchaser, notwithstanding that the obligation imposed by
the option was personal to the original landlord. That cannot be correct. The same would be true in a number of other
cases involving personal rights conferred by the owner of property. An obvious example is a right of occupancy or
other form of contractual licence.
Another is a lease that does not satisfy the requirements of the Leases
Act 1449; I discuss this further in the next paragraph. In all these cases the rights conferred on
the occupier or tenant are purely personal, and do not survive a sale of the
property. If the parties to any such
transaction wish to avoid this result they can do so quite easily, by a number
of mechanisms. The simplest is to insert
a term in the lease obliging the landlord to bind any disponee of the property
to the terms of the option. In that
event, if the landlord sold the property without imposing such a term, he would
be in breach of the lease, and the rule in Rodger
(Builders) Ltd v Fawdry would
apply. Another possibility is to secure
the option by means of a standard security (which can secure an obligation ad factum
praestandum: Conveyancing and Feudal Reform (Scotland) Act 1970,
section 9(8)(c)). In that way the
option is made a real burden over the subjects.
[49] The
question of bad faith also arises in relation to the Lease itself. As indicated above at paragraph [23],
the Lease itself, because it was unsigned, does not satisfy the requirements of
the Leases Act 1449, and thus gives rise to personal rights only. The personal bar provisions of section 1(3)
and (4) of the 1995 Act only give rise to personal rights. Thus all of the rights that the pursuers
enjoyed against Thomas H. Peck Limited were purely personal in nature. If the defender's knowledge of the Lease, and
indeed the Missives, is to put her in bad faith, the sale of the property to
her must involve Thomas H. Peck Limited in the breach of an antecedent
obligation. No averment is made of any
such breach, and I find it impossible to see how such a breach could have
occurred in the circumstances. The right
to sell is a normal incident of property that can only be excluded by clear
wording or clear implication. Nothing in
the terms of the Lease or the Missives suggests that the right to sell was
restricted in any way. In particular,
the existence of the Lease could not do so, because it only gave rise to
personal rights that would necessarily terminate on a sale because they were
not valid against singular successors.
Thus the rule in Rodger (Builders)
Ltd v Fawdry does not apply to
the Lease, and the rights conferred on the pursuers by the Lease, being
personal in nature, do not affect the defender in any way.
[50] The
foregoing view of the law is consistent with all of the cases to which I was
referred in the course of the argument, with one exception. For the reasons stated in paragraph [45]
I am of opinion that that view follows from the rationale of the law as laid
down in Rodger (Builders) Ltd v Fawdry
and Trade Development Bank v Crittall Windows Ltd. I was also referred to two cases involving
rights of pre-emption. In Matheson v Tinney, 1989 SLT 535, land subject to a right of pre-emption in
favour of the original seller was sold to third parties without being offered
to the original seller. The clause of
pre-emption bore to impose the obligation on the "disponees" and not on their
assignees or successors. Lord Kirkwood
held that the obligation bound only the original purchasers, who had resold the
subjects. Nevertheless, the obligation
was declared a real burden. As such it
was capable of being enforced against singular successors of the disponees who
had acquired the subjects in circumstances in which the disponees failed to
implement the obligation first to offer the subjects to the original seller.
The principle applied in Rodger (Builders)
Ltd v Fawdry and Trade Development Bank v Crittall Windows
Ltd. was not referred to.
Nevertheless, there was a clear breach by the original purchasers of the
obligation contained in the clause of pre-emption. That was sufficient to bring the principle
into operation. In Roebuck v Edmunds, 1992
SCLR 74, it was accepted by parties that the last case should be followed, with
the result that the subjects that had been resold without regard to the clause
of pre-emption should be reconveyed to the original purchaser. I was also referred to Jacobs v Anderson, 1898,
6 SLT 234, where the tenant of commercial premises granted a sublease in favour
of the pursuer, the sublease and the head lease expiring together. The landlord, in consenting to the sublease,
granted an undertaking in favour of the pursuer that he would renew the
subtenant's lease for four years. On the
faith of that document the pursuer carried out considerable alterations to the
premises. Thereafter the landlord sold
the premises to the defender, who intimated to the pursuer that, as a singular
successor, he was not bound by the terms of the landlord's letter. The pursuer averred that, before the
purchase, the defender was made aware of the terms of the letter and of the
actings that had followed upon it. The
pursuer brought an action of declarator that the defender was a bound to grant
a new lease. Lord Kyllachy held
that the action was irrelevant. The two
principal grounds were that the pursuer's obligation had to be ascribed to his
sublease, not to the arrangement with the head landlord, and that the
arrangement with the head landlord did not constitute a lease at all in the
sense of the Leases Act 1449. The
significant part of the case for present purposes, however, is a subsidiary argument
that the letter granted by the head landlord constituted a good personal
obligation against the granter, and that it was therefore enough that the
pursuer offered to prove that its existence and terms were within the knowledge
of the defender, the granter's singular successor. That was said to constitute personal bar. The
authorities relied on were those cited in
Rodger (Builders) Ltd v Fawdry. That argument was rejected. Lord Kyllachy
stated that it might not be easy to fix the precise limits of the doctrine
established by those cases, but continued
"But it is certainly the
fact that that doctrine has never been applied to leases or similar contracts
affecting land which remain merely personal and on which possession has not
followed. The Act of 1449 supplies the
rule in such cases".
Although the report is brief, this decision seems
wholly in accordance with the view that I have adopted in the present case.
[51] The
only decision that is clearly inconsistent with that view is Davidson v Zani, 1992 SCLR 1001. In
that case the pursuer agreed to take a lease of shop premises for seven
years. The missives granted her an
option to purchase the subjects at the termination of the lease, but that
option was not incorporated into the lease.
The landlords subsequently concluded missives with the defender for the
sale of the subjects. At the time the defender was shown a copy of the original
missives. A dispute arose as to whether
the pursuer's option was binding on the defender as a singular successor of the
landlord. The sheriff held that it was
so binding, and his decision was upheld by the sheriff principal. Rodger (Builders) Ltd v Fawdry was followed. The principal argument for the defender was
that the rule in that case was inapplicable because the pursuer's right under
the option to purchase was not capable of being converted into a real
right. It had been established in Wallace v Simmers, 1960 SC 255, that a personal right that was not capable
of being made into a real right could not in any circumstances bind the
ultimate purchaser. Counsel argued that
the pursuer's option was in that category, because that the time of the sale to
the defender it could not be exercised; exercise was only possible within the
last three months of the lease. In addition,
it was not effective until the pursuer chose to exercise it. That argument was rejected, on the basis that
the obligation on the landlord was future and not conditional or contingent. As the sheriff principal succinctly put the
matter,
"The obligation is indeed solvendum in futuro, but it is still debitum in praesenti".
In my opinion that may well be correct. My hesitation is that an option may properly
be characterized as a power rather than a right, and what is made real is not
the entitlement in the option but the right that arises when it is exercised. Nevertheless, this sort of distinction does
not appear to have been taken in any of the cases in this area of the law. Counsel for the defender went on to refer to Bisset v Magistrates of Aberdeen, supra.
The sheriff principal held that that decision had no bearing on the case
before him, in that it was concerned solely with the construction of the terms
of the lease, under which the obligation in question was assumed only by the
original lessor without reference to successors. In my opinion the decision in Bisset goes significantly further than
that. Lord Moncreiff makes it clear
that the ground of decision was that an option to purchase, involving an
obligation to alter the tenure from one of lease to one of feu, was not inter naturalia of a lease. The result of that was that it would not
affect singular successors. The brief
opinion of the Lord Ordinary, Lord Kyllachy, is to the same
effect. Lord Trayner agreed with
the Lord Ordinary. He was the only judge
to refer to the feature of the clause relied on by the sheriff principal,
namely that it did not refer to the heirs and successors of the lessor. He only did so, however, in the course of
distinguishing an old case, and this feature was only one of the grounds for
distinguishing that case; indeed, he doubted whether the case would now be
followed. In my opinion the sheriff
principal did not give Bisset its
proper significance. Bisset is of course binding on me. I accordingly conclude that Davidson v Zani was wrongly decided. I
note that the decision is cogently criticized in an article by Mr Stewart
Brymer, Enforcing Commercial Lease Terms Against Successor Landlords, 2000 Prop
LB 49-4.
Conclusion
[52] I
accordingly conclude that the pursuers' case is irrelevant. First, the Missives do not disclose consensus
in idem between the parties. Secondly,
the Lease does not satisfy the formal requirements of sections 1 and 2 of the
Requirements of Writing (Scotland) Act 1995, and it cannot be set up using the
personal bar provisions found in subsections (3) and (4) of section 1
because they only apply to contracts intended to create purely personal
rights. Thirdly, the Lease, being
unsigned, falls outwith the Leases Act 1449, and thus creates rights that are
personal to the original parties; these do not bind the defender, who is a
singular successor. This result is not
affected by subsections (3) and (4) of section 1, as these provisions
create rights that are purely personal in nature and do not bind singular
successors. Fourthly, that result is not
affected by the defender's knowledge of the Lease or the Missives, because the
sale to her did not involve breach of any existing legal obligation imposed on
the seller, the original landlord of the property. Fifthly, the doctrine of rei interventus can no longer be used to infer that parties to a
contract have reached consensus, in consequence of section 1(5) of the
1995 Act. Sixthly, the pursuers' attempt
to infer consensus from the actings of the parties fails because the critical
actings occurred prior to the dates of both the Missives and the Lease, and
therefore could not be referable to either of those documents. Seventhly, the pursuers' reliance on those
actings for the purpose of subsections (3) and (4) of section 1 fails for
the same reason. Eighthly, the option to
purchase the property created purely personal rights in the pursuers, which are
not binding on the defender as a singular successor of the original
landlord. Ninthly, that result is not
affected by the defender's knowledge of the option, because the sale to her did
not involve any breach of any antecedent obligation imposed on the seller. For these reasons I will sustain the defender's
first plea in law and dismiss the action.
For the sake of completeness, I should mention that the defender has
made certain averments as to the application of section 320 of the
Companies Act 1985. It was ultimately
accepted by her counsel that those averments were not well founded. If I had not dismissed the action, I would
have excluded the averments from probation.
I should also mention that counsel for the pursuers stated that, if I
were against his primary arguments, he would like an opportunity to consider
whether consensus had been reached between the pursuers and Thomas H. Peck
Limited on the basis of the letter of offer of 29 November 1999. He did not put forward any specific proposals
for amendment. In the circumstances, I
consider that the action should be dismissed; if the pursuers wish to present
their case on a different basis they can raise a fresh action.
