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Warren James (Jewellers) Ltd v. Overgate GP Ltd [2005] ScotCS CSOH_142 (09 November 2005)

OUTER HOUSE, COURT OF SESSION

[2005] CSOH 142

OPINION OF

LORD DRUMMOND YOUNG

in the cause

WARREN JAMES (JEWELLERS) LIMITED

Pursuers;

against

OVERGATE GP LIMITED

Defenders:

________________

Act: MacColl; Archibald Campbell & Harley, W.S.

Alt: Mackenzie, Solicitor; Pinsent Masons

9 November 2005

[1] The defenders are the general partner of and trustee for Lend Lease Overgate Partnership, a limited partnership. As such they are the heritable proprietors of the Overgate Shopping Centre in Dundee. The pursuers are the tenants of Unit L31 in the Centre by virtue of a lease between the parties dated 25 November and 18 December 2000 and registered in the Books of Council and Session on 17 January 2001. The pursuers trade as retailers of jewellery, giftware and accessories as defined in clause 3.13.1 of the Lease. The Lease is for 15 years from 29 September 2000.

[2] The pursuers have raised proceedings for declarator that the defenders are in breach of one of the terms of the Lease, clause 4.3, and for damages for the alleged breach of that clause. Clause 4.3 forms part of the Landlord's obligations under the Lease. The relevant provision is as follows:

"4.1 The Landlord binds and obliges itself as follows:-

...

4.3 Exclusivity - For so long as the said Warren James (Jewellers) Ltd. is the Tenant under this Lease, not in respect of any first letting (which means the first time the Landlord lets the Lettable Unit in question and not in respect of any subsequent lettings) of any Lettable Unit to lease any such Lettable Unit (other than the Premises and two other Lettable Units only) with its Permitted Use having specified as its principal trade or business the retail sale of jewellery".

The definitions clause in the Lease, clause 1.1, defines "Landlord" as including assignees and other successors in title, and defines "Lettable Unit" as any separate unit of accommodation within the Centre which is let or intended by the Landlord to be let.

[3] It was a matter of agreement between the parties that two other units within the Overgate Centre had been leased to other jewellery retailers, who continued to trade from the premises let to them. The pursuers aver that the reference in clause 4.3 to two other Lettable Units reflected the parties' discussions at about the date of the Lease that two other jewellery retailers would be permitted to trade from units within the Centre.

[4] The pursuers' averments relating to the circumstances giving rise to the present action are as follows. They began to trade at the premises let to them on 10 November 2000, and from November 2000 until approximately January 2002 they traded successfully from those premises. The pursuers operate a chain of 122 jewellery retail stores throughout the United Kingdom, and are the country's largest independent retail jeweller. One of their direct competitors is a company known as HPJ UK Ltd., who operate in the same segment of the retail jewellery market. On 9 January 2002 the pursuers' agents received confirmation from the defenders' agents that the defenders had leased a unit at the Overgate Centre to HPJ. That let, it is said, was contrary to the defenders' obligations under clause 4.3 of the Lease. HPJ began trading in about January 2002, and since then the pursuers had suffered loss and damage in consequence. There had been a downturn in turnover at the pursuers' premises in the Centre which, the pursuers claim, was caused solely by competition from HPJ.

[5] On the basis of the foregoing averments, the pursuers conclude for declarator that the defenders are in breach of the terms of clause 4.3 of the Lease. The terms of the declarator are not clearly expressed, largely because they largely follow the wording of clause 4.3, which is itself badly expressed. Nevertheless, the essence of the pursuers' contention is that in about January 2002 the defenders leased a Lettable Unit to a third party, that being a first letting in terms of clause 4.3 that was not permitted by the clause, where the permitted use under the new lease specified that the tenant's principal trade or business was the retail sale of jewellery. The pursuers further conclude for damages amounting to £400,000 in respect of the defenders' breach of contract, but the present opinion is not concerned with that part of their claim.

[6] The defenders admit, in effect, that a unit in the Overgate Centre has been leased to HPJ. They do not admit that that company is a direct competitor of the defenders, but it was made clear in the course of the debate that it was not disputed that, on the pursuers' construction of clause 4.3, the lease to HPJ was in contravention of that clause. The defenders do, however, dispute the pursuers' construction of the clause. I accordingly allowed parties a debate on the issues raised in their written notes of argument; those issues related to the construction of clause 4.3. The defenders have taken steps to convene their former agents as third parties, but it was a matter of agreement that the debate should proceed despite the existence of the third party proceedings

Arguments
[7] The argument for the defenders was that clause 4.3 was a form of clause typically found in a commercial lease of a unit in a modern shopping centre. It must accordingly be regarded as inter naturalia of such a lease, and thus was a real condition binding on singular successors of the landlord. Reference was made to the Stair Memorial Encyclopaedia, volume 13, paragraphs 239 and 240, Rankine on Leases, page 478, Davie v Stark, 1876, 3 R 1114, Optical Express (Gyle) Ltd v Marks & Spencer PLC, 2000 SLT 644, and Bisset v Magistrates of Aberdeen, 1898, 1 F 87. This had two consequences. First, because it was binding on singular successors, such a real condition required to be clear and unambiguous in order to be enforceable. If, therefore, two alternative interpretations of the clause could be advanced, it was invalid and unenforceable. Secondly, in construing a real condition affecting the use of land it was impermissible to have regard to extrinsic evidence. As authority for both of those propositions reliance was placed on the well-known decision of the House of Lords in Anderson v Dickie, 1915 SC (HL) 79, in particular statements of the law by Earl Loreburn at 80, Lord Kinnear at 82-83 and Lord Dunedin at 89. Clause 4.3 was open to two interpretations. The pursuers contended that it prohibited any first letting of a Lettable Unit to a person whose principal trade was the retail sale of jewellery other than the pursuers and two other, existing, lets. Nevertheless the critical part of the wording, "other than the Premises and two other Lettable Units only", could also mean that all that was prohibited was two further first lettings following the lease to the pursuers; thus five lets to jewellers were permitted, not three. The latter interpretation, it was submitted, was more probable, in that clause 4.3 formed part of the landlord's obligations, which looked to the future rather than the past, and its own wording also looked towards the future. Consequently only future lettings were affected, not lettings that had been granted in the past. On that basis that had been no breach of clause 4.3 as a result of the lease in favour of HPJ. At the very least, the meaning of the clause was ambiguous, and it was therefore unenforceable. Finally, the pursuers sought to rely on discussions at about the time when the Lease was granted, but reliance on such evidence was impermissible because clause 4.3 imposed a real condition that restricted the use of land. The pursuers' case was accordingly irrelevant, and the action should be dismissed.

[8] For the pursuers, it was argued that the meaning of clause 4.3 was clear on the ordinary construction of its terms. Its obvious meaning was that the landlord obliged itself not to let any units in the Centre as jewellery outlets other than the premises let to the pursuers and two other units. The present tense was used in the clause; the landlord's obligations under the Lease were introduced with the expression "The Landlord binds and obliges itself as follows". The natural meaning was accordingly to comprehend both past and future lettings. The court should not be assiduous to search for ambiguities: Melanesian Mission Trust Board v Australian Mutual Provident Society, [1997] 2 EGLR 128, per Lord Hope of Craighead at 129. It should rather than look at the wording used, according to its ordinary meaning, and consider whether that was sufficiently clear. If it was, that was an end of the matter, and it was not necessary to have regard to extrinsic evidence as an aid to construction: City Wall Properties (Scotland) Ltd v Pearl Assurance PLC, 2004 SC 214, at paragraphs [22]-[23]. If there were such an ambiguity, however, it was permissible to look to extrinsic evidence. That was so even though the clause formed part of a lease and restricted the use of property. The defenders' argument conflated the rules relating to real burdens in dispositions, feu contracts and other titles to land with those relating to real conditions in leases. In the latter case, it was permissible to have regard to extrinsic evidence if that were necessary to explain an ambiguity in the wording of the condition: Rankine, Leases, pages 98 and 109; Paton & Cameron, Landlord and Tenant, page 90; McBryde, Contract, 2nd ed., paragraphs 8-05-8-07; Howgate Shopping Centre Ltd v Catercraft Services Ltd., 2004 SLT 231, at paragraphs [35]-[36]. The rules laid down by the House of Lords in Anderson v Dickie were only applicable to real burdens or real conditions contained in titles to land; they had no relevance to leases, where the ordinary contractual rules applied and extrinsic evidence was admissible. The critical difference was that, in a lease, a live contractual relationship could be said to exist; this was largely absent, however, from titles to land. The rules relating to real burdens in titles to land were in any event anomalous, and should not be extended: Scottish Law Commission, Report on Interpretation in Private Law (Scot Law Com No 160), paragraphs 7.4-7.6. If there was an ambiguity in clause 4.3, accordingly, evidence should be led as to the circumstances at the date when the Lease was granted. On the foregoing basis, counsel submitted that I should hold the defence on the merits to be irrelevant and appoint the case to a proof before answer on damages. Alternatively, if there were an ambiguity in clause 4.3, I should allow a proof before answer to permit the surrounding circumstances to be explored.

Construction of clause 4.3
[9] The proper approach to the construction of any contractual term is to start with the words used by the parties. If those are ordinary words, they should be given their ordinary meaning, and if that meaning is sufficiently clear it must be given effect. That meaning must obviously be determined in the context of the contract as a whole. Sometimes, of course, the words used are ambiguous, either in themselves or when considered in the contractual context. In that event a number of rules of contractual interpretation may help in resolving the ambiguity. These include the use of extrinsic evidence regarding the circumstances in which the contract came to be concluded and its commercial objectives. Nevertheless, the court should not seek out ambiguities; nor should it use the rules that exist to resolve ambiguities in such a way as to create an ambiguity: Melanesian Mission Trust Board v Australian Mutual Provident Society, supra, at [1997] 2 EGLR 129, per Lord Hope of Craighead. Those principles apply in my opinion to leases in exactly the same way as other categories of contract. I must now consider their application to clause 4.3.

[10] Clause 4.3 is written in extremely poor English. Nevertheless I am of opinion that when it is broken down into its constituent parts its meaning is reasonably clear. In effect it contains a condition, a definition, an obligation and a proviso. The condition is that the pursuers should remain the Tenant under the Lease. The definition relates to the expression "first letting". This is defined as meaning "the first time the Landlord let (sic) the Lettable Unit in question and not in respect of (sic) any subsequent lettings". In spite of the faulty syntax, it is fairly clear that the intended meaning is the first occasion when any Lettable Unit in the Centre is let, as against any letting following the first. The obligation on the Landlord (including successors and assignees) is as follows: the Landlord is not to grant a first letting of any Lettable Unit where the Permitted Use in the lease of that Unit specifies the tenant's principal trade or business as the retail sale of jewellery. The proviso is that the obligation does not apply to the pursuers' premises "and two other Lettable Units only"; the Landlord's obligation is restricted to that extent.

[11] When clause 4.3 is analyzed in this way, it is clear in my opinion that the proviso is designed to state comprehensively the restriction on the Landlord's obligation. That appears to me to be the obvious meaning of the wording used, "other than the Premises and two other Lettable Units only". That wording is not qualified, and appears comprehensive in its import. Moreover, the wording used in the clause, and indeed in clause 4.1, which introduces the Landlord's obligations, is not in terms restricted to the future; in the absence of such a qualification it is difficult to see why it should apply only to future lettings rather than all lettings. The argument for the defenders proceeded in large part on the proposition that the wording of clause 4.3 looked forward, towards the future, in that it contained an obligation not to grant leases. Moreover, it formed part of the Landlord's obligations, and those too looked forward. In my opinion that is not a natural reading of the actual wording used in clause 4.3. Neither in clause 4.1 nor in clause 4.3 can it be said that a future tense is used. No doubt the obligation itself, like nearly all contractual obligations, is directed to the future conduct of the party who is bound, but the primary verb (found in clause 4.1) is in the present tense, and the provision taken as a whole does not appear to have any definite time reference. Perhaps most importantly, the wording of the proviso contains no time reference, and is accordingly equally capable of applying to past lettings and future lettings. I accordingly conclude that the pursuers' construction of clause 4.3 is correct, and that the prohibition in the clause extends to any first letting of a Lettable Unit for, broadly speaking, the retail sale of jewellery other than the Lease to the pursuers and two other lets, whenever granted. On that basis I am of opinion that the pursuers are entitled to declarator that the defenders are in breach of the terms of clause 4.3 of the Lease.

[12] The foregoing analysis proceeds entirely on the wording of clauses 4.1 and 4.3 of the Lease. When those provisions are considered in the context of a lease of a retail unit within a shopping centre, however, I am of opinion that further support can be found for the same result. The essential purpose that underlies clause 4.3 is the number of jewellers' shops that are to be permitted in the Centre during the period when the pursuers are the Tenant. The time when the lease of any such shop is granted is not obviously important to that issue. It is accordingly hardly surprising that clause 4.3 as a whole, and the proviso in particular, do not contain any time reference.

[13] In the course of the argument reference was made to possible alternative forms of wording for clause 4.3 that would have put the matter beyond doubt, and it was suggested that the failure to use the alternative wording was an indication that the contrary construction was correct. In my opinion the possibility of an alternative form of wording is rarely helpful in interpreting a contractual provision. The court must construe the actual words that have been chosen by the parties. In almost every case a range of other formulations could have been used; some of these would make it clear that one party's construction was intended; others would make it clear that the other party's construction was correct. In these circumstances it is difficult to see why one alternative formulation should have precedence over another, except perhaps in the most obvious of cases. Moreover, it is particularly difficult to assess the significance of alternative forms of wording where the contractual provision adopted by the parties is framed in poor English. As I have indicated, clause 4.3 is such a provision. Consequently I do not find the possibility of alternative forms of wording of assistance in determining the meaning of that clause.

[14] I am satisfied that it is possible to reach a definite view on the meaning of clause 4.3 without the need for evidence as to the circumstances in which the Lease came to be concluded. In my opinion that is no ambiguity in the clause that prevents me from coming to a definite view on its construction. In this respect it is important to bear in mind that the court should not search deliberately for ambiguities. The court's initial task is rather to examine the wording used by the parties to discover whether it can be given a reasonably clear meaning. If it can, that is the end of the matter, and there is no ambiguity. In my view this is such a case.

Admissibility of extrinsic evidence
[15] That is sufficient for a decision on the issues that were debated. In view of the careful submissions that were made to me, however, I should deal with the remainder of the argument presented in the course of the debate. For the defenders, it was argued that, because clause 4.3 was a real condition inserted in a lease, it required to be clear and unambiguous to be enforceable; moreover, if the provision was not clear and unambiguous it was not permissible to lead extrinsic evidence to clarify its meaning. I have already held that clause 4.3 is sufficiently clear to be given effect. If, however, I had found that there was an ambiguity in the clause, I would have allowed a proof before answer in order that evidence might be led as to the circumstances in which the Lease came to be concluded.

[16] The starting point for the defenders' argument was the proposition that a provision such as clause 4.3 is inter naturalia of a lease, with the result that it is binding on singular successors of the landlord. That proposition was not disputed by the pursuers, and in my view it is clearly correct. The applicable legal principles are found in cases such as Davie v Stark, supra, Bisset v Magistrates of Aberdeen, supra, and Optical Express (Gyle) Ltd v Marks & Spencer PLC, supra. They are summarized in Rankine on Leases at page 478 and, more recently, in paragraphs 239 and 240 of volume 13 of the Stair Memorial Encyclopaedia. If a lease runs with the land, its conditions will be real in nature, and hence binding on singular successors, only if they are inter naturalia of the lease, that is to say, of a nature that commonly occurs in the type of lease concerned. The Lease is of a unit in a shopping centre. It was accepted by both parties that in such centres the mix of tenants is important, and that it is normal to find in the leases of individual units provisions such as clause 4.3. It follows that such clauses are binding on singular successors of the landlord. In the Lease, that is in fact made clear by the definition of Landlord in clause 1.1, which includes assignees and other successors.

[17] On the basis that clause 4.3 was a real condition binding on singular successors, the defenders argued that it could only be construed on the basis of its wording, which had to be clear and unambiguous. If it was not sufficiently clear, it was not competent to lead evidence as to the circumstances in which the lease came to be concluded. This part of the defenders' argument was firmly based on the decision of the House of Lords in Anderson v Dickie, supra. In that case, Lord Kinnear stated (at 1915 SC (HL) 82:

"I apprehend that no weight can be allowed to inferences of probability from the surrounding circumstances, or to any evidence of intention, even if it were more than conjectural. The document we are to construe is not a contract but a title to land, which is said to impose burdens upon stranger purchasers, who had no intention in the matter when the title was framed, and who know nothing about it except what they find published in a recorded deed".

It is significant, however, that that case involved a disposition, not a lease. Dispositions, and also feu charters and other feudal grants, have generally been regarded as titles to land. It is true that feudal grants contain an element of contract, and may confer a jus quaesitum tertio on third parties; dispositions, too, may contain a contractual element. Nevertheless, the primary function of such deeds is to serve as titles. A lease, by contrast, typically functions in practice both as a form of title and as a contract. The contractual element in a lease is of primary importance. Counsel for the pursuer described the distinction by stating that a lease involves a "live" contractual relationship. That metaphor is perhaps an apt way of describing the critical distinction: a lease involves much greater commercial proximity between the parties than does a disposition or a feudal grant. Consequently the contractual aspect of the relationship is of much greater practical significance. This is recognized by Lord Kinnear in the passage quoted above, where he points out that the document under consideration was not a contract but a title to land. That accords with the commercial and legal reality of such a deed.

[18] There is, moreover, a clear policy reason for treating titles to land differently from contracts. The title to heritable property is based on a system of registration, originally of deeds and now of title. In any such system it must be necessary to know from the public register exactly what the state of the title is, including any restrictions that affect that title in perpetuity. This point is made in Anderson v Dickie by Earl Loreburn (at 1915 SC (HL) 80) in the following terms:

"It would be indeed disastrous if any system of registration, whether of titles or of deeds, allowed lands to be tied up in perpetuity by conditions the end of which is so uncertain that it could not be settled without a lawsuit, and, even so, probably could not be settled at all after the lapse of years".

Lord Kinnear, too, in the passage quoted above mentions that singular successors know nothing about any restriction in the title except what they find published in a recorded deed. The same consideration does not apply to leases, however, which need not be recorded. The existence of a lease will normally be clear from the tenant's possession, and it is that fact that puts a prospective purchaser on notice that he should examine the terms of the lease and make any necessary inquiries of the seller. In addition, except in leases of very long duration, there is a reasonable possibility that evidence of the circumstances in which the contract came to be concluded can be unearthed. In this respect a lease is no different from any other contract designed to operate over a period of years.

[19] If a lease is regarded as a contract, the ordinary rules that govern the construction of contracts should in my opinion apply. Support for that view is found in Rankine on Leases at page 98, where it is stated:

"A lease, being a mutual contract containing correlative rights and obligations, must be construed as a whole, each clause being taken in connection with all the others and with the common and statutory law of the land. Moreover, it must be read so as to bring out the intention of the parties so far as that appears on the face of the contract when thus interpreted, along with such extraneous evidence as may be competently adduced".

At page 109 of the same work, it is stated:

"As in the case of other written contracts, parole evidence will be admitted to clear up a latent ambiguity; to show that a term in the lease has a technical meaning, and that it was used in that sense; or to explain, if relevant, the state of the premises at the date of the lease".

That is in accordance with the general rules applicable to written contracts, which are conveniently summarized in Chapter 8 of McBryde on Contract, in particular at paragraph 8-07. Moreover, in Howgate Shopping Centre Ltd v Catercraft Services Ltd, supra, at paragraphs [35]-[36] of his opinion, Lord Macfadyen held that background circumstances might legitimately be taken into account in interpreting the rent review provisions of a lease. Although the point of principle argued by the defenders in the present case does not appear to have been taken in that case, this decision is clearly consistent with the view that I have formed about the admissibility of extrinsic evidence.

[20] The defenders further argued that the principle applied in Anderson v Dickie, supra, was applicable not because a title to land was involved but because the provision under consideration regulated the use of land. It is true that the provision in issue in that case did regulate the use of land. Nevertheless, the rationale that underlies the speeches in the House of Lords is clearly based on the system of registration of deeds relating to title to land rather than the subject matter of the clause under consideration. Consequently I do not agree with this part of the defenders' argument. While leases are often recorded or registered, that is not necessary, and the rules that apply to leases are therefore not dependent on any system of registration. In any event, clauses restricting the use of the subjects are very common in leases, and it would be unfortunate if such provisions were subject to different rules of interpretation from the remainder of a lease. In my opinion the same approach should govern all real conditions found in leases, including those that affect the use of land, and extrinsic evidence should be competent in all cases.

Conclusion
[21] In the event, however, it is not necessary to hear evidence. For the reasons stated previously, I will repel the defenders' plea to the relevancy of the pursuers' averments and sustain the pursuer's first plea-in-law to the extent of pronouncing decree of declarator that the defenders are in breach of the terms of clause 4.3 of the Lease. I have reservations about the wording of the remainder of the declarator, which largely repeats the wording of clause 4.3 and does not appear to me to be well expressed. The case will accordingly be put out by order for two purposes: first to enable the precise wording of the declarator to be discussed, and secondly to discuss further procedure.