Scottish Court of Session Decisions

EXTRA DIVISION, INNER HOUSE, COURT OF SESSION

[2014] CSIH 105

CA139/12

 

Lady Smith

Lord Drummond Young

Lord McGhie

OPINION OF THE COURT

delivered by LORD DRUMMOND YOUNG

in the cause

by

HILL OF RUBISLAW (Q SEVEN) LIMITED

Pursuers and Reclaimers;

against

RUBISLAW QUARRY ABERDEEN LIMITED &c

Defenders and Respondents:

Act:  Lake QC;  Burness Paull

Alt:  Ellis QC;  Ennova Law

28 November 2014

[1]        The eighth defenders, Scotia Homes Ltd, are the proprietors of an area of land on Hill of Rubislaw Road, at Rubislaw Quarry in Aberdeen, known as the Northern Quarry Subjects.  The Northern Quarry Subjects originally formed part of a larger area of ground at Rubislaw Quarry.  The remaining part of that area is owned by the first defenders, Rubislaw Quarry Aberdeen Ltd.  The sixth defenders, Aberdeen Construction Group Ltd, are the owners of a further area of land located generally to the north north-east of the Northern Quarry Subjects.  That property includes office developments known as Rubislaw House, Marathon House and Seafield House.  The seventh defenders, Hill of Rubislaw (Land Holdings) Limited, are the owners of further subjects to the north north-east of the Northern Quarry Subjects, which include an office development known as Chevron House.  The second, third, fourth and fifth defenders are the tenants of those office developments, under long leases.

[2]        In 2005 the then owners of the Northern Quarry Subjects proposed to develop the land.  They sought the co-operation of those who had an interest in the neighbouring office blocks, in particular to permit access to the development site.  To that end the developers and those with an interest in the office blocks entered into a minute of agreement, which was ultimately concluded in August 2005 and registered in the General Register of Sasines on 17 November in the same year.  The preamble to the minute of agreement narrated that the owners of the Northern Quarry Subjects intended to proceed with the development there, and that the head landlords of the office blocks and Aberdeen Construction Group as proprietors of the neighbouring subjects to the north north-east had agreed to grant the owners of the Northern Quarry Subjects the right to connect with and use the common access road that serves those blocks.  The preamble then continued:

“(iii)  In consideration of the rights granted by [the head landlords of the office blocks and Aberdeen Construction Group] and in recognition of the fact that the development of the Northern Quarry Subjects might otherwise inhibit the ability of [the head landlords] to let vacant space within the respective office buildings in which they hold a long leasehold interest (and/or might otherwise adversely affect the rate fixed at rent reviews under the occupational leases of premises within those buildings), [the owners of the Northern Quarry Subjects have] agreed (a) to accept certain restrictions with regard to office space within any development of the Northern Quarry Subjects, and on the basis that the restrictions (or, as the case may be, the benefit of the restrictions) should transmit to the respective successors in right of the property interests held by the parties to this Minute of Agreement…

The parties agree as follows”.

[3]        Clause 2 of the minute of agreement sets out the restrictions that were to apply to the Northern Quarry Subjects.  The critical restriction is found in clause 2.1, in the following terms:

“The Northern Quarry Proprietors undertake to [the relevant parties] that the maximum net lettable floor area of Office Space which may be provided within the Northern Quarry Subjects at any given time shall not exceed 2025.29 sq. m. (in total).”

 

[4]        The pursuers have entered into an agreement to acquire the Northern Quarry Subjects from the present proprietors.  If they do so they will be singular successors to the proprietors of those subjects who entered into the minute of agreement.  They are in dispute with the third, fourth and fifth defenders, who are respectively the tenants and mid-landlords of Rubislaw House, Marathon House and Seafield House.  The third, fourth and fifth defenders are singular successors of the original parties to the minute of agreement.  The pursuers now wish to construct an office development on the Northern Quarry subjects, and have sought planning permission to that end.  They entered into correspondence with Fordgate Group, the company that controls the third, fourth and fifth defenders.  In that correspondence, Fordgate Group invoked the restriction in clause 2.1 of the minute of agreement in order to restrict the scale of the office development that might be constructed by the pursuers.  The pursuers consider that this would be detrimental to their commercial interests, and have raised proceedings in the Commercial Court in order to determine the scope of clause 2.1. 

[5]        The pursuers seek declarator that clause 2.1 does not constitute a real burden over the heritable property comprising the Northern Quarry Subjects.  Alternatively, the pursuers seek declarator that clause 2.1 places a restriction solely on the total floor area of office space within the Northern Quarry Subjects that may be let and places no restriction on the floor area of office space that may be constructed on that ground.  Those claims are disputed by the third, fourth and fifth defenders.  In summary, the pursuers contend that the restrictions in clause 2.1 do not constitute an enforceable real burden in terms of the Title Conditions (Scotland) Act 2003 because their purpose was to impose a restraint of trade; the clause was not intended to confer a benefit on the properties owned or leased by the proprietors or tenants of Rubislaw House, Marathon House and Seafield House.  Instead it was intended to confer a commercial advantage on the parties to the minute of the agreement who then owned those three properties, namely Gibraltar-registered companies known as Rubislaw House Ltd, Marathon House Ltd, and Seafield House Ltd.  Because the proprietors at the time rather than the properties were benefited by the restrictions in clause 2.1, it is said that those restrictions are not a real burden and hence do not transmit in favour of or against singular successors.

[6]        The action proceeded to debate before the Lord Ordinary.  He repelled a plea of no title to sue, a matter which has not been challenged on appeal, and held that clause 2.1 did constitute a real burden.  The result was that it was enforceable against the pursuers according to its terms.  He accordingly refused both declaratory conclusions.  It had been agreed between the parties that the action should be disposed of in its entirety at debate; consequently the Lord Ordinary assoilzied the defenders from the conclusions of the summons.  The pursuers have reclaimed against that decision.

 

The law governing real burdens

[7]        Real burdens are now governed by the Title Conditions (Scotland) Act 2003.  Section (1) of that Act defines the expression “real burden”:

“A real burden is an encumbrance on land constituted in favour of the owner of other land in that person’s capacity as owner of that other land.”

 

Section 3(3) imposes an important restriction on real burdens:

“In a case in which there is a benefited property, a real burden must, unless it is a community burden, be for the benefit of that property”.

 

This subsection enacts the fundamental rule of the common law, discussed subsequently at paragraphs [10]-[19], that in order to be valid are real burden must have praedial effect, that is to say, it must benefit property as such rather than the owner of that property as a person.  Section 3(6) imposes a further important restriction:

“A real burden must not be contrary to public policy as for example an unreasonable restraint of trade and must not be repugnant with ownership (nor must it be illegal)”.

 

This subsection enacts a further rule of the common law; for present purposes the important question is whether burden is properly to be considered in restraint of trade.  This issue is discussed subsequently at paragraphs [20]-[22].

[8]        Section 8 of the 2003 Act defines the person who has right to enforce a real burden.  Under subsection (1), title and interest are required.  Subsection (2) provides that an owner of the benefited property has title to enforce it, as does a person who has a real right of lease in the property.  Subsection (3) provides as follows:

“A person has such interest [to enforce a real burden] if –

 

(a) in the circumstances of any case, failure to comply with the real burden is resulting in, or will result in, material detriment to the value or enjoyment of the person’s ownership of, or right in, the benefited property;…”

 

[9]        We will first consider the requirement that a real burden should have a praedial elements, and thereafter the question of restraint of trade.

Praedial element

[10]      The 2003 Act was enacted to implement a report of the Scottish Law Commission, Report on Real Burdens, Scot Law Com No 181 (2000).  That report provides valuable explanations of the policy underlying the Act.  The praedial rule is discussed at paragraphs 2.9-2.18.  The starting point is that real burdens must concern land; that is their essential justification.  Restrictions on land can be imposed by personal contract, but such restrictions would be entirely personal in nature and would not be binding on singular successors.  A real burden is accorded the privilege of running with the land, but in exchange for that privilege it must concern the land; obligations unconnected with land cannot be real burdens, and that is the point of the praedial rule (paragraph 2.9). 

[11]      The Commission suggests that, on the basis of the reported case law, there has been little reliance on the praedial rule in Scotland, and the law is rather underdeveloped.  The purpose of the rule is to exclude restrictions that are obviously personal, and “it is not seen as the main filter for real burdens”; that is rather the function of public policy, including the law of restraint of trade (paragraph 2.10).  This produced a flexible approach to real burdens, and it had not been suggested to the Commission that that flexible approach ought to be changed.  For that reason the Commission sought to restate the praedial rule in broad terms.

[12]      The Commission discusses the two crucial aspects of the praedial rule, a relationship to the burdened property and a benefit to the benefited property (paragraphs 2.12 and 2.13-2.14).  It is the latter feature that is important in the present case.  There must be benefit to the benefited property as against the person who is owner for the time being; nevertheless, most obligations will benefit the owner, and the existence of substantial personal benefit does not mean that there is no praedial benefit (paragraph 2.13).  In practice, the Commission suggests, the main role of requiring praedial benefit is to emphasize the importance of proximity (paragraph 2.14).  The recommendation (at paragraph 2.18) makes it apparent that the Commission considered that they were restating the praedial rule at common law.

[13]      It is apparent from the Scottish Law Commission’s report that the 2003 Act is intended to re-enact the rules of the common law and to continue the same general policy.  At common law the purpose of the praedial rule, highlighted by the Commission, was to exclude obligations of a purely personal nature; some material connection with the land was required.  This purpose was achieved in large measure by requiring physical proximity, and it can be said with some confidence that without physical proximity there can be no real burden.  For this purpose, of course, physical proximity is not the same as immediate contiguity; for example, in some rural properties rights of access or water supply may extend for a considerable distance from the benefited property but there is still the critical element of physical proximity with the access road and water supply. 

[14]      The praedial rule further requires that there should be a benefit to the property rather than the particular proprietor.  Nevertheless, property is not recognized by the law of and for itself; it is recognized because of the benefits that it confers on proprietors, tenants and other occupiers.  Thus the expression that a real burden must confer a benefit on a property is essentially shorthand for saying that it must confer a benefit on the owners, tenants or occupiers of the property from time to time, whoever they may be.  A benefit that is conferred only on the existing owner is personal, and cannot be the subject of a real burden.  At one time such restrictions were commonplace: see Tailors of Aberdeen v Coutts, 1840, 1 Rob 296, at 317-320, where examples are given, including having corn ground at the benefited proprietor’s mill or bringing malt to his brewery.  Early discussions of the praedial rule were concerned to exclude cases of that nature, and on occasion this may have given rise to formulations that were wider than can be justified by modern economic and social conditions.  Under modern conditions, we are of opinion that it is enough to say that a real burden must benefit the owner, tenant or occupier of property in such a way that the value of the property itself is enhanced or at least protected.  That value will obviously pass on to later proprietors, and through them to tenants or occupiers.  This requirement, of an effect on the value of the property, appears to us to be the critical feature that should permit a condition to have effect as a real burden, benefiting and binding singular successors as well as the original parties.

[15]      In residential developments real burdens are commonplace, regulating such matters as the use to which property is put, the design and construction of the buildings and the use of garden ground.  In such cases it is clear that it is the use and enjoyment by the owners or occupiers of the benefited properties that are enhanced or protected.  This will in turn protect or increase the value of those properties, thus satisfying the essential criterion for the existence of a real burden.  The present case concerns a commercial development, but similar considerations apply: the praedial rule requires that a real burden should confer a benefit on the owners, tenants or occupiers of the property from time to time in such a way that the value of the property itself is increased.  In some cases the benefit might relate to the physical enjoyment and use of the property: examples canvassed in argument included protecting the view from a hotel or preventing polluting activity in a technology park.  Nevertheless, we do not consider that the validity of real burdens can be confined to those that are purely physical in their effect; in our opinion anything that can be said to protect or enhance the value of the property itself will be sufficient.  For this purpose, it is important to recall that commercial property is used to carry on some form of business and thus to generate profits.  In our opinion the law must recognize this feature.  That means that a real burden must be regarded as benefiting a property if it enables the commercial activity in that property to be carried on more effectively, that is to say, in a more profitable manner.  In so far as the activity is the holding and letting of commercial property, the beneficial effect will normally be the protection or enhancement of the rents that are obtained from the property.  In turn, that is likely to have a beneficial effect on the capital value of the property.  Thus a real burden will benefit commercial property if it protects or enhances rental and capital values.

[16]      Furthermore, it must be recognized that a benefit of this nature will typically be specific to a particular form of commercial activity.  An example of this is found in Co‑operative Wholesale Society v Usher’s Brewery, 1975 SLT (Lands Tr) 9, where a small shopping development of three units included a retail shop and a public house.  The proprietors of the retail shop were prohibited from selling excisable liquor.  The Lands Tribunal discharged the burden, and on doing so held that it was a real burden for the benefit of the proprietors of the public house, who were accordingly entitled to compensation.  They held in particular (at page 13) that the restrictive conditions “were wholly connected with adjacent heritable properties which formed part of a distinct small neighbourhood.…[I]t was to protect the owner’s interest in [the public house] that the superiors first imposed these obligations”.  Consequently the obligations amounted to real burdens that ran with the land.  That burden was thus intended to protect a particular form of commercial activity.  While the benefited property was specifically adapted for use as a public house, it seems to us that the point is a more general one: the benefit to a commercial property may be specific to a particular trade carried on in that property.  What is important is that the benefit should be to the trade or other commercial activity carried on by any proprietor or occupier of the subjects.  In that way the value of the property will be enhanced or at least protected.  Any more restrictive rule would in our opinion impose an unwarranted restriction on the development of commercial land, and would moreover be contrary to the indications from the Scottish Law Commission that the existing flexible approach to the praedial rule should be maintained (paragraph 2.10).

[17]      In the present case the commercial activity that is benefited appears to us to be the ownership and letting of office property, the trade carried on by the third, fourth and fifth defenders and their predecessors as tenants and mid-landlords of Rubislaw House, Marathon House and Seafield House.  The profitability of that activity is clearly dependent on the amount of competition in the immediate neighbourhood; if more property becomes available to let that will tend to drive down rents, and restrictions on the supply of property available to let will have the opposite effect.  Clause 2.1 was intended to restrict the supply of property available to let in the Rubislaw area.  That would be likely to protect or improve all rents in that area, including the rents received by the owners or mid-landlords of Rubislaw House, Marathon House and Seafield House.  That benefit, however, is independent of the identity of the particular owner or mid-landlord.  It is rather a benefit that accrues to the property itself, and indeed it would have an impact on the value of that property.  Thus protecting rental values in the neighbourhood of a commercial property is likely to result in a benefit that satisfies the praedial rule.

[18]      At common law the leading authority on the praedial rule is Aberdeen Varieties Ltd v James F Donald (Aberdeen Cinemas) Ltd, 1939 SC 788, a case concerning two theatres situated half a mile apart.  The company that owned both disponed one to another company, and the disposition contained a clause that the subjects disponed should not be used for any stage play that required to be submitted to the Lord Chamberlain under the Theatres Act 1843, that restriction being declared a real burden in favour of the disponing company.  It was held that the restriction was not a valid real condition of the grant enforceable by the singular successors of the disponers.  It is apparent from the opinions that the fact that the subjects were substantial distance apart was of critical importance; on that basis it was held that the restriction was not for the protection of patrimonial interest in the property but was rather a provision for the illegal imposition of a perpetual commercial monopoly.  Thus Lord Wark stated (at page 796):  

“The whole basis of the recognition of the lawfulness of such restrictions upon the free use of property is the law of neighbourhood.  Their imposition upon lands is only justified and recognized in so far as they are made for the protection of the amenity or comfortable enjoyment of other lands.  The essential condition of the validity is that they are imposed with that purpose”.

 

That was absent in the case under consideration, and consequently what was involved was nothing more than a restraint of trade (page 797).  This formulation emphasizes the importance of benefit to land, but in our opinion it must be construed in the manner suggested above, so that a beneficial effect on the value of the land will suffice. In the same case the Lord Justice Clerk also emphasized the importance of neighbourhood (at page 800), and stated that such restrictions are allowed by the law “as being conducive to the full use and enjoyment of the dominant property”.  That in our opinion is the sort of benefit that will have an effect on the value of the dominant property, which we consider the essential criterion.  This was emphasized in a later passage (page 801):

“We were referred to no case… in which a purely commercial or trading interest of this kind, unconnected with the value, or amenity, or protection, or the comfortable enjoyment of real property as such, has ever been held in our Courts of law to be a sufficient interest to maintain a real condition so as to be binding upon single successors”.

 

The reference to “value” is in accordance with the approach that we have suggested. Finally, Lord Wark (at page 797), the Lord Justice Clerk (at pages 801-802) and Lord Jamieson (at pages 803-804) placed considerable emphasis on the fact that the burden under consideration was designed to create a commercial monopoly, unconnected with any benefit to the land. 

[19]      The opinions in Aberdeen Varieties were analyzed in some detail by counsel, but we think that the importance of the decision should not be exaggerated.  The opinions dealt with the particular facts of the case, where there was a total absence of physical proximity.  That factor was critical by itself.  In addition it is clear that the restriction under consideration was regarded as designed to confer a commercial monopoly rather than improving the enjoyment or value of the land retained by the disponing company.  Overall, we consider that the case emphasizes the importance of an element of physical proximity, but is no more restrictive than that.

 

Restraint of trade

[20]      As we have noted, section 3(6) of the 2003 Act provides that a real burden must not be contrary to public policy, and gives as an example of such a burden one that is in unreasonable restraint of trade.  Restraint of trade is important in other areas of the law, notably the sale of a business and the termination of employment.  In their Report on Real Burdens, the Scottish Law Commission noted that the idea of unreasonable restraint of trade came into the law of real burdens from the law of contract, and that it might be assumed that the basic rules were the same (paragraph 2.24). The Commission further observed (paragraph 2.25) that often restraints on trade are unobjectionable; a common example was the prohibition on trade that is routinely found in the titles in housing developments.  The sale of a business might present greater difficulties, and Aberdeen Varieties and Co-operative Wholesale Society v Ushers Brewery were discussed as practical examples.  No definitive view was expressed as to how the doctrine of restraint of trade should apply; it was thought that this was a matter best left to the courts, which would be able to develop the law in such a way as to take account of changing social and economic circumstances.

[21]      In the general common law of restraint of trade, it is recognized that reasonable restraints are justified.  In Vancouver Malt and Sake Brewing Co Ltd v Vancouver Breweries Ltd, [1934] AC 181, Lord Macmillan stated (at 189):

“The law does not condemn every covenant which is in restraint of trade, for it recognizes that in certain cases it may be legitimate, and indeed beneficial, that a person should limit his future commercial activities, as, for example, where he would be unable to obtain a good price on the sale of his business unless he came under an obligation not to compete with the purchaser.  But when a covenant in restraint of trade is called in question the burden of justifying it is laid on the party seeking to uphold it.  The tests of justification have been authoritatively defined…: ‘A contract which is in restraint of trade cannot be enforced unless (a) it is reasonable as between the parties; (b) it is consistent with the interests of the public’”.

 

In our opinion that is the fundamental test that should be applied in testing the validity of real burdens.  Restraints on the use of land have been considered in a considerable number of cases in a range of different contexts.  We were referred to observations made, in the context of tied garages, in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd, [1968] AC 269, and it is clear from the speeches in that case, notably those of Lord Reid at pages 297-299 and Lord Wilberforce at page 335, that what is required is that the reasonableness of any restriction must be assessed in the commercial context in which it is designed to operate.

[22]      In this connection, a restriction that prevents a person from trading in a particular line of business will be regarded as more significant than a restriction that merely regulates the manner in which that trade may be carried on.  Likewise the duration of a restriction may be significant.  In this connection, we should note that the Part 9 of the Title Conditions (Scotland) Act 2003 confers power on the Lands Tribunal, on the application of an interested party, to discharge or vary land conditions.  Thus it is unnecessary to consider the potential duration of any restriction.  If circumstances change in such a way that a restriction becomes unreasonable, the burdened proprietor may always applied to the Lands Tribunals for its variation or discharge.  Finally, the commercial context in which a restriction operates may be important in judging whether it is reasonable.  For this purpose, it is relevant to consider the particular trade or profession or business that is affected by the restriction, and also the overall economic context in which it operates.

 

Whether clause 2.1 creates an enforceable real burden

[23]      In considering whether an enforceable real burden is created by clause 2.1 two features of the minute of agreement may be noted: first, it was concluded between commercial parties with the benefit of legal advice, and secondly, it was intended to enable the development of the Northern Quarry Subjects to take place in an effective manner.  The owners of the Northern Quarry Subjects accepted certain restrictions on office development there, but in exchange for those restrictions they were empowered to connect their development to the access roads that served the neighbouring office blocks, and in addition were assured that the other parties would not challenge their title to a particular strip of land.  Such access and freedom from challenge were clearly considered important for the development of the Northern Quarry Subjects.

[24]      If clause 2.1 is to impose a valid real burden, the first requirement is that the praedial test should be satisfied.  In our opinion it clearly is satisfied in the present case.  The requirement of neighbourhood is very obvious.  The benefited properties are the other office blocks that have been constructed on and around the site of the former Rubislaw Quarry, and the burdened property is part of the site of the Quarry.  Not only are the properties adjacent to one another; it is intended that they should in part share the same access road.  The second requirement imposed by the praedial test is that the value of the benefited subjects, namely the other office blocks, should be protected or enhanced.  At any given time there will obviously be a finite demand for office space in the Rubislaw area.  If the supply is substantially increased, in the absence of a corresponding increase in demand, the result is likely to be that rents will be driven downwards, which would obviously have an effect on the value of the neighbouring office blocks.  The restriction thus protects their value, and that is sufficient to satisfy the test, as discussed at paragraph [17] above.

[25]      The second requirement that must be satisfied is that there should be no unreasonable restraint of trade.  The restriction in clause 2.1 clearly imposes a restriction on the maximum net lettable floor area of office space provided within the Northern Quarry Subjects.  That does not prohibit the use of the property to provide office space; it assumes that the property will indeed be developed for that purpose, and merely restricts the amount of office space that may be constructed.  As already noted, the restriction was imposed as part of a commercial agreement to enable the effective development of the Northern Quarry Subjects by providing better access.  Legal advice was available, and there is no suggestion that there was any disparity in the parties’ bargaining power.  That is itself a clear indication that the restriction is reasonable as between the parties.  Furthermore, there was no suggestion that the extent of the actual restriction imposed was in any way unreasonable or disproportionate in the context of the whole of the Rubislaw developments.  We accordingly find it impossible to hold that the restriction in clause 2.1 is unreasonable as between the parties.

[26]      In considering restraint of trade the public interest may also be relevant, but in the present case we are not satisfied that the restriction that can be considered contrary to the public interest.  Indeed, to the extent that the minute of agreement enables the Northern Quarry Subjects to be effectively developed, we think that if anything it operates in the public interest by increasing the overall supply of office space in Aberdeen.  It also enables the development of an awkwardly sited area of land.  Counsel for the pursuers argued to the contrary: he suggested that the result was to reduce the supply of office space in the Rubislaw area, and that operated against the public interest.  We do not agree; while the amount of office space on the Northern Quarry Subjects is restricted, that only relates to one site, and in assessing the public effect of the restriction it is the overall market that must be considered.  In this case, we consider that that market can be defined as the market for office space in Aberdeen and the immediate area.  We think it unlikely that the restrictions imposed by clause 2.1 could have any material adverse impact on the overall supply of office space in that area.  We should add that reference was made to certain cases in the European Court of Justice dealing with the restriction of competition, but we do not consider these to be relevant; EU competition law is distinct from the common law on restraint of trade, applying different criteria in the light of different economic considerations.

[27]      For the foregoing reasons we are of opinion that clause 2.1 of the minute of agreement is a valid and enforceable real burden.  We find ourselves in complete agreement with the Lord Ordinary on this issue.  We will accordingly refuse the reclaiming motion so far as it relates to the validity of the clause and adhere to the interlocutor of the Lord Ordinary.

 

Construction of clause 2.1

[28]      The second issue raised by the present proceedings is the construction of clause 2.1 of the minute of agreement.  The pursuers contend that the clause places a restriction solely on the total floor area of office space within the Northern Quarry Subjects that may be let, but does not restrict the total floor area of office space that may be constructed there.  The third, fourth and fifth defenders, by contrast, submit that the restriction relates to construction, and not merely to letting. 

[29]      The principles that govern the construction of commercial contracts are well established, and it is unnecessary to repeat them.  In short, a contractual provision must be construed according to its commercial purpose in the agreement of which it forms part and in the overall commercial context in which that agreement operates.  In the present case the overall context is an area of suburban office development.  The particular agreement is intended to facilitate the development of an area of land adjacent to other land containing office blocks, and to do so by permitting access to the area to be developed in consideration of the imposition of defined restrictions on what may happen in that area.  The purpose of those restrictions was to protect the level of rents and property values in neighbouring office blocks belonging to or tenanted by other parties to the minute of agreement.  If the pursuers are correct, a distinction must be drawn between the total area of office space constructed and the area of office space that is let to tenants at any given time.  The unlet area, if it is not retained by the pursuers and presumably occupied by them for their own purposes, must be sold to third parties.  It is obvious, however, that there is a degree of cross-elasticity of demand between the markets for owner-occupied office property and tenanted office property; a tenant may decide to buy an office, or an owner-occupier may enter into a sale and leaseback agreement, or a newcomer may be willing either to take a lease or to acquire an office outright.  If a substantial area of office space became available for outright sale, that would affect the property market in the surrounding area, including the rental market.  The critical point is that on the pursuers’ construction there could be a significantly adverse impact on rents in the Rubislaw area and on property values in that area.  At a general level it appears to us unlikely that commercial parties would have wished to produce such a result.  Rental levels and property values in the remainder of the Rubislaw area would not be protected by a mere prohibition on letting if substantial amounts of owner-occupied space were constructed.  In our opinion that strongly suggests that the prohibition is on construction rather than letting.

[30]      Such a construction is, moreover, supported by the wording that is used, both in clause 2.1 and in the overall context of the minute of agreement.  Clause 2.1 refers to “the maximum net lettable floor area of Office Space which may be provided within the Northern Quarry Subjects at any given time”.  At a purely linguistic level, the word “lettable” denotes something that is capable of being let rather than something that is actually let; if the latter were intended different wording could have been used.  When the remainder of the minute of agreement is considered, the third preamble, set out above at paragraph [2], provides that the pursuers’ predecessor had agreed “to accept certain restrictions with regard to office space within any development of the Northern Quarry Subjects”.  That tends to suggest that it is the office space that is restricted, rather than the space that is let at any given time. 

[31]      Further support is found in clause 2.4, which stipulates that the Northern Quarry Proprietors should, at the request of various other defined parties, who include the third, fourth and fifth defenders and their predecessors and successors, provide specified information and plans.  Clause 2.4.1 specifies that prior to the commencement of any works the information so provided should include copies of the relevant floor plans showing the proposed internal layouts, and further that, on completion of the relevant works, copy floor plans should be supplied showing the “as built” position.  In our view that clearly demonstrates a concern with the structure and layout of the building as constructed rather than the areas that may be let.  Clauses 2.4.2 and 2.4.3, by contrast, provide that the Northern Quarry Proprietors are to be entitled to information relating to the letting of office space.  The contrast, taken with the specific wording of clause 2.4.1, indicates that the parties to the contract were concerned with the construction of office space, and not merely with its letting.

[32]      The expression “Office Space” is defined in the Schedule to the minute of agreement in the following terms:

“the gross floor area let under a lease or leases in respect of which the user clause permits use as offices, and such that (for the avoidance of doubt) the whole of the floor area let under any such lease shall be deemed to be comprised within the definition of ‘Office Space’ notwithstanding that part of the premises let under that lease may be used for purposes ancillary to office use”.

 

The pursuer submitted that this denoted use as offices rather than the construction of floor area that might be used as offices.  In our opinion this involves an over-literal approach to the definition in the Schedule.  The purpose of that definition appears to us to be to define the area classified as “Office Space” in such a way as to include the parts of premises that are used for ancillary purposes, which would include reception areas, kitchens, lavatories, cupboards and the like.  The reference to the area “let under a lease or leases” might suggest that only areas actually let are contemplated, but that somewhat oblique inference seems to run counter to the fundamental commercial purpose of clause 2.1.

[33]      Furthermore, if the wording found in the Schedule, “the gross floor area let under a lease or leases in respect of which the user clause permits use as offices”, is read into clause 2.1, the reference to the area “let” under a lease tends to conflict with the words “the maximum net lettable floor area… which may be provided”; one expression refers to what is let and the other to what is provided, all within a single clause.  The result is at best inelegant.  In our opinion the pursuers’ reliance on the wording of the Schedule was misplaced, and it should rather be construed, as we have suggested, in defining what specific areas are to be considered “Office Space” within clause 2.1.

[34]      For the foregoing reasons we reject the pursuers’ construction of clause 2.1.  Once again, we agree with the Lord Ordinary on this issue.  We will accordingly refuse the reclaiming motion so far as it relates to the construction of the clause and adhere to the interlocutor of the Lord Ordinary.