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Allan & Ors v. Armstrong & Ors [2004] ScotCS 92 (07 April 2004)

OUTER HOUSE, COURT OF SESSION

A3523/01

OPINION OF T G COUTTS, QC

Sitting as a Temporary Judge

in the cause

ALISTAIR GRAHAM ALLAN and OTHERS

Pursuers;

against

DAVID J ARMSTRONG and OTHERS

Defenders:

________________

Pursuers: Creally; Balfour & Manson

Defenders: MacColl; Simpson & Marwick, W.S.

7 April 2004

INTRODUCTORY
[1] This action concerns the omission in a lease of the break clause stipulated for in missives. The pursuers are the surviving partners of the former firm of Baxter Clark & Paul, Architects (hereafter referred to as BCP). The defenders are the surviving partners of the former firm of Alex Morison & Co, WS and their successor firm, Morison Bishop, WS (hereafter referred to as AM). The dispute concerns a lease which BCP entered into with Dunedin Property Investment Company Limited (hereafter referred to as Dunedin) of certain premises in Edinburgh. BCP instructed AM who acted on BCP's behalf. The lease was to have a duration of 25 years with an option to terminate after ten. When the lease was completed it contained no such option to terminate. The missive letters of lease provided that either party would be entitled to terminate at the tenth anniversary of the date of entry but further, that the missives would remain in full force and effect notwithstanding the execution of the lease, for a period of two years. In a letter dated 30 November 1990 the solicitors acting for Dunedin stated that they "accept and confirm that the missives will remain in full force and effect until the date immediately following the tenth anniversary of the date of entry". By letter dated 22 February 1993 AM confirmed "that the terms of Clause Sixth (the Break Clause) would remain in full force and effect until the day immediately following the tenth anniversary of the date of entry". In 1997 Dunedin sold the subject to Midland Bank Pension Fund. They have declined to accept that the pursuers are entitled to enforce a break and the action sues for the losses suffered by BCP being unable to terminate their obligations to the landlords in respect of rent.

The Pleadings
[2] The pursuers' pleadings after narrating the facts above assert that BCP were unable to terminate the lease, the option being unenforceable. The pursuers also aver that they were not advised that on sale of the landlord's property to a third party, BCP would be unable to enforce any option to terminate against that third party.

[3] In Answer 6 the defenders aver that before the final version of the lease was agreed, BCP were told by AM that the break option was contained in a personal contract and "the implications of that" were explained. AM it is averred, were instructed to go ahead and conclude the lease in the terms in which it is expressed.

[4] In response to the averment that the option to terminate is unenforceable against the Midland Bank Pension Fund, the defenders aver that that fund was aware of the terms of the lease and the missives containing the break option and were accordingly bound to accept ownership of the property subject to the lease and that break option. The pursuers deny that averment.

The Argument at Procedure Roll
[5] Arguments were deployed on behalf of both pursuers and defenders. The defenders founded upon the fact that the break option was contained in the missives between BCP and Dunedin. If they were so aware, it was argued, BCP would have been able to force a break option against Midland Bank. Reference was made to Stodart v Dalziel 1836 4 R 236 and to the Sheriff Court case of Davidson v Zani 1992 SCLR 1001. In Davidson the particular obligation in that lease was held to be capable of being converted into a real right.

[6] The defenders, alternatively, argued that if BCP were unable to exercise the break option in the missives, they would have been unable to do so even if the clause had been incorporated in the lease itself. A break option is not inter naturalia of a lease. This such an option, even if contained in the lease, will not be enforceable by a tenant against singular successors of the initial landlord. The authorities cited were Bisset v Magistrates of Aberdeen (1898) 1 F 87, and Optical Express (Gyle) Limited v Marks & Spencer Plc & Others 2000 SLT 644. So, ran either argument, on the approach the pursuers have failed to aver any proper grounds that would enable them to establish causative links between the alleged failure and the losses suffered as a result of the lease not being terminated after ten years.

[7] For the pursuers, it was argued that the break option was a personal obligation only, not capable of being converted into a real right. Accordingly it could not be binding on the Bank even if the Bank had been aware of its terms. The right was personal and unless perhaps there was knowledge of a particular factual situation as in Davidson or Stodart, equivalent to bad faith enforcement against a single successor was impossible.

Decision
[8] It appeared to the Court that the procedure roll argument was premature given the plain issue of fact between the parties about the knowledge of Midland Bank Pensions Fund. I note that prior to the commencement of the procedure roll the averment in relation to that matter was narrowed to one of actual knowledge from one of imputed knowledge. That was of critical importance. There has to be an inquiry in the case and it cannot yet be determined whether the rights as conveyed in the lease or the right in the missives to a break option was capable of being transformed into a real right or if the Bank was not in bona fides. I think the matter of whether the idea of conversion into a real right can exist in this case might possibly be arguable as Lord Macfadyen thought in Optical Express but I note that in Davidson and in Stodart, the knowledge which the singular successor had was only of a right to purchase the leased subjects, not to resile from the lease. If a right to purchase is not exercised the relationship of landlord and tenant remained as before. A break ends any obligation of either landlord or tenant and one of them will suffer loss in the value of his property. The matter appeared in Davidson, to be regarded from the point of view of personal bar rather than of a real as opposed to a convertible personal right. The Sheriff Principal's Opinion as stated in the Rubric that the right given in the missives was capable of being converted into a real right by recording it in the Register, may not accurately reflect the ratio of that case. The decision was based on a collateral contract existing and there not being bona fides. In Stodart the bona fides of the singular successor was successfully challenged and he was held to be barred from founding on his completed title to the lands as excluding a personal right held by the occupier to the dominium utilie of the portion possessed by the occupier.

[9] In the subsequent case of Bisset v Magistrates of Aberdeen there was an obligation in a lease to grant a feu of subjects let by a lease for 999 years. The Court held that this was a personal obligation which did not transmit. The case was plainly different from Stodart, which indeed was not cited to the Court in Bisset. The Opinion of Lord Moncrieff, in Bisset was referred to by Lord Macfadyen in Optical Express (Gyle) Limited. Lord Moncrieff said:

"The lease is one for 999 years from 22d February 1768. 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. There is also some force in this consideration that it was not unreasonable that the original lessors should bind themselves if the demand were ever made in their lifetime to convert the lease into a feu right, and yet they might not wish or intend to impose that obligation on their successors. This may possibly account for their having obliged only themselves, and not their heirs and successors, to grant a charter."

It can be seen that there was left open at least in that judgment the opportunity to provide evidence that a personal right was intended or was customarily to be regarded as binding a singular successor.

[10] However, Bisset remains binding authority and without proof of knowledge it cannot be said as a matter of relevancy that even an obligation to grant a disposition can transmit against a singular successor.

[11] Rankin, on Leases, at p. 528 refers to an option to break being transmissible in favour of singular successors of the lessor and discusses two cases in which, he said even when the terms of the clause might fairly have been read as restricting a right to a personal faculty, that the option ran with the lands was given effect to. These cases however add nothing to the requirement of knowledge and were in any event part and parcel of the executed lease.

[12] Is an option to break different from an option to purchase? In both cases the lease comes to an end but in the first there is no transfer of heritable property. In other words, nothing is given by the lease which can be made into a real right in the way which would happen if a disposition were granted and recorded.

[13] The matter is not free of complexity. However, nothing can be decided until the Midland Bank's knowledge, or lack of it, of the terms of the missives is established. Then, perhaps, the matter might be looked at as in Stodart as one of personal bar, thereby evading questions of personal or real right. All these matters would be best resolved by way of a proof before answer which I shall allow, leaving all pleas standing.

[14] I would only add that the decision in Optical Express was in relation to the matter of interim interdict and there the obligation which it was sought to invoke was even further remote from the lands themselves having to do with use or restrictions on use rather than a cessation of rights as between landlord and tenant. In my opinion, Optical Express assists neither party in this case.