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Cite as: [2005] CSOH 75, [2005] ScotCS CSOH_75

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Dean (t/a Abbey Mill Business Centre) v. Freeman [2005] ScotCS CSOH_75 (10 June 2005)

OUTER HOUSE, COURT OF SESSION

[2005] CSOH 75

CA111/03

OPINION (NO. 2) OF LORD EASSIE

in the cause

MARCUS DEAN trading as ABBEY MILL BUSINESS CENTRE

Pursuer;

against

TONY RUSSELL FREEMAN

Defender:

________________

Pursuer: Stephenson; Henderson Boyd Jackson, W.S.

Defender: Cowan, Solicitor-Advocate; Simpson & Marwick, W.S.

10 June 2005

[1] As set out in the earlier opinion, [2005] CSOH3, which I issued in this action, the pursuer is the owner of commercial premises in Paisley known as the Abbey Mill Business Centre. He granted a number of leases of various parts of the Centre to a company named Solutions Recruitment and Management Consultants Limited - "SRMC" - and to certain other companies associated with SRMC. The interests of those associated companies under the leases granted to them were subsequently acquired by SRMC, the details of the respective transmissions of those interests to SRMC being immaterial for the purposes of the current litigation. Each of the leases contained the same standard terms, one of which (Clause 12) provided for a personal guarantee by the "Authorised Representative" of the tenant. In the case of each of the leases with which this action is concerned the "Authorised Representative" is the defender, Mr Freeman, and he is sued in his capacity as cautioner for the original or succeeding tenant, SRMC.

[2] As narrated in the earlier Opinion, all of the leases contained in Clause 9 an irritancy clause entitling the landlord to terminate the lease in the event of the tenant being in breach of the terms of the lease or on the occurrence of what might shortly be described as an insolvency related event. In particular in the case of a company, the insolvency related events include the presentation of a petition for the winding up of the company or the appointment of a receiver over all or part of its assets. The clause provides inter alia that on the occurrence of such an event the landlord (defined in the lease as "the Owner") shall be entitled at any time thereafter

".... to terminate this Lease and to re-enter the Premises, the same reverting to the Owner as though this Lease had never been entered into, and all that forthwith by written notice to that effect served upon the Occupant but without prejudice to and reserving to the Owner the Owner's right of action and remedy in respect of or arising from any antecedent breach by the Occupant of the provisions of this Lease."

[3] On 5 June 2003 a petition for the winding up of SRMC was presented and Mr Duncan McGruther CA, of Grant Thornton CA, was appointed as provisional liquidator of SRMC (he was subsequently appointed as official liquidator). By a letter dated 9 June 2003 sent by fax to the pursuer the provisional liquidator informed the pursuer of his appointment as provisional liquidator; intimated that he did not intend to adopt the leases personally; and requested a copy of the leases and details of the rent position. The provisional liquidator's letter was sent under cover of a further fax message both of which are in No 7/3 of process (and in No.40/2 - the joint bundle) from Mr Donald McNaught, of Grant Thornton, which referred to an earlier telephone conversation and raised other practical issues, to which there is to be found a response in No 7/4 (No.40/4) of process sent by fax on 9 June 2003. By a separate letter dated and faxed on 9 June 2003 the pursuer, for his part, intimated to Mr McGruther that under Clause 9 of the leases the tenancies were terminated. The full text of that letter (No 7/5 and 40/5 of process) is as follows:-

"Please take notice that under the terms of the leases entered into by Solutions RMC under Clause 9 of the said leases, I Marcus Dean hereby give notice that the leases are terminated. Termination is given for the following reasons:

1. The company Solutions RMC has been placed into receivership.

2. The sum of £2909.14 for electricity charges has remained unpaid for over 14 days.

3. The rents for 23-25a of £9756.04 have not been paid.

The studios therefore will be re-entered and revert to myself, and the sums owing will be recovered by any means necessary.

Yours sincerely."

[4] As is also noted in the earlier Opinion, the parties are in dispute as to whether the leases terminated on the pursuer's invoking the irritancy (which is the position maintained by the defender, as cautioner) or whether, as is averred by the pursuer, the correspondence ensuing after service of the notice of the irritancy produced an agreement that the leases continued, the pursuer having accepted a contention from the liquidator that the leases had not been validly terminated. The issue whether the date of termination was on 9 June 2003 (the date of the notice of irritancy) has consequences for the total amount of the pursuer's claims for rent and dilapidations - cf. paragraph [4] of the earlier Opinion.

[5] Having reached the conclusion that for the reasons given in the earlier Opinion the resolution of this issue should be preceded by a proof before answer, an interlocutor was pronounced on 18 January 2005 allowing a proof before answer restricted to two matters namely:-

"(a) the state of possession as referred to in paragraph [7] of the Opinion and (b) whether following service of the pursuer's letter of termination (No. 7/5 of process) agreement was concluded between the liquidator of the tenant and the pursuer that the leases were continuing".

[6] That preliminary restricted proof has now taken place. At the outset of the diet Mr Stephenson for the pursuer intimated that the first point of inquiry envisaged in the interlocutor of 18 January 2005 was no longer in contention. What had previously been stated at the Bar by counsel who had been instructed for the debate to the effect that prior to 9 June 2003 the tenants had, at least de facto, vacated the premises was accepted by the pursuer as being incorrect. There had - it was believed - been some diminution in the business activity of SRMC but it was not now suggested that the company had ceased to occupy the various premises prior to the date upon which the provisional liquidator was appointed. It was thus accepted by the pursuer that SRMC continued in occupation until the date of its liquidation. The proof was accordingly confined to the second issue - head (b) of the interlocutor of 18 January 2005. Two witnesses were adduced, namely the pursuer, Mr Dean, and Mrs Maureen Roxburgh who at the relevant time was employed by the liquidator's firm, Grant Thornton, CA, as a manager in their recovery and restructuring department with overall control (subject of course to the ultimate instruction of the liquidator) of the running of the liquidation of SRMC. Copies of the correspondence previously lodged in the process had been helpfully collected in a chronologically arranged joint bundle of productions, No 40 of process, and I shall accordingly refer to the documents by their number within that joint bundle.

[7] With many of the communings having taken place by means of letters faxed or posted it is understandable that a substantial part of the history was not in real dispute. Mr Dean, the pursuer, confirmed that he was not aware of the appointment of the liquidator prior to 9 June 2003 when he was informed of that appointment by Grant Thornton. The fax accompanying the letter in which the liquidator gave notice of his appointment and his intention not to adopt the leases contained queries regarding the electricity account and amounts deposited by SRMC with the pursuer. An initial response to these inquiries was sent, with his approval, on 9 June by one of his employees (cf. No. 40/3 of process). Mr Dean wrote further on the following day (No.40/4) respecting those matters. The arrangement regarding the electricity was that he, as landlord, paid the utility company and thereafter recovered from SRMC the cost of the electricity which had been consumed by that company. At the time of the liquidator's appointment there were substantial arrears in the payment by SRMC of its electricity charges. On the same day he also arranged for the sending, by fax and post, of the notice of irritancy (No.40/5). The reference to receivership rather than liquidation was simply a slip on his part. The pursuer indicated that since he understood from a telephone conversation with Mr McNaught that the liquidator would not be settling the company's outstanding obligations in full he saw service of the notice of irritancy as a means of exercising pressure on the liquidator.

[8] Mr Dean agreed in his evidence that following the sending of the notice of irritancy he received Mr McNaught's fax (No.40/8) enclosing the advice given to Grant Thornton by their solicitors, Boyds, on 11 June 2003. As respects the reference in the covering fax message to "various conversations", Mr Dean explained that he did indeed have various telephone conversations with Donald McNaught, the broad import of which was that Grant Thornton wished access to the premises to obtain the company's records and other moveable assets in the premises such as the computers upon which the records were held. Mr Dean's position had been that, because the outstanding electricity costs had not been paid, he was entitled to cut off the electricity and with the electricity disconnected entry to the premises could not be effected since entry to the leased premises was controlled by electronic locks. On reading Boyds' letter, which contained a reference to a judicial decision - Aubrey Investments Limited - Mr Dean, who is a practising architect, consulted what he described in his evidence as a book on case law which he, or his firm, had in their office. Having done so, he dispatched the letter (No.40/7) which, as I put it in my earlier opinion, robustly rejected any suggestion that the irritancy notice might be ineffective. Although undated the letter would have been sent within a day or so, during which interval, so far as Mr Dean could recollect, there had been no further communication between him and Grant Thornton. At all events, the letter must have been sent prior to Thursday, 12 June 2003 since on that date Mr Jones of Boyds sent his response to the views expressed in Mr Dean's letter, that response (within No.40/8) being couched in equally robust terms.

[9] On the following day, Friday 13 June 2003, Donald McNaught, on the instruction of Mrs Roxburgh, sent a fax (No.40/8) to the pursuer enclosing a copy of Boyds' advice. The fax continued:-

"In light of this advice it is our wish to gain entry on Monday 16 June 2003 at 9.30am and consequently my colleagues Maureen Roxburgh and Sharon Logan will attend the premises at that time along with the remaining employees.

Any resistance to this could clearly be founded upon in any subsequent court action as evidence of your obstruction of our absolute right of entry."

Mr Dean stated in his evidence-in-chief that having received that fax he sought advice from his solicitor. The timing of the seeking and receipt of that advice is a subject to which I shall return. At all events the liquidator's requirement to obtain access to the premises leased by the company was set to come to a head on the morning of Monday, 16 June 2003.

[10] On Monday 16 June the pursuer sent a fax to Grant Thornton. The fax (No.40/9) has a fax header indicating that it was transmitted at 0838 hours on 16 June 2003. In his evidence the pursuer agreed that the time so recorded made sense. The fax is in these terms:-

"As you are aware considerable sums remain outstanding for all units including the electricity. As you have refused to pay the electricity we have suspended electrical services to the entire first floor. This has the following effects, which you should consider very carefully before Grant Thornton requests staff to enter.

1. The fire alarm system to the first floor will not be operational, it is an offence to require staff to work without the system being operational.

2. There is no power for the emergency lighting within the areas.

3. There is no power for any equipment.

4. As a result of the above any occupation will have consequences for our insurance cover for the remainder of the building should a fire start."

I would add that the pursuer frankly stated that he could not remember the date upon which he had cut off the electricity. The inference from other parts of his evidence is that this had occurred earlier than 16 June, following service of the notice of irritancy, since the pursuer recollected that he had previously arranged for a fish tank within the SRMC premises to be removed and installed and connected to the electricity supply elsewhere in order that the water in the tank could continue to receive oxygen necessary for the survival of the fish.

[11] The receipt of that fax recorded as transmitted at 0838 hours on the Monday morning at Grant Thornton prompted telephone conversations between Mrs Roxburgh and the pursuer which resulted in an agreement between them. There was no significant difference between the evidence of Mr Dean and Mrs Roxburgh regarding the terms of what was agreed. The agreement was that the liquidator would pay £4,000 in satisfaction of the pursuer's (unsecured) claim for outstanding electricity and other service charges and would make payment for all electricity consumed during the period in which he had access to the premises to obtain the company's physical and electronic records and other miscellaneous items of moveable property. On that Monday, 16 June, the liquidator sent a letter (No.40/10) enclosing his cheque for £4,000 and briefly confirming that agreement. During those telephone conversations the question whether the notice of irritancy might be relied upon by the landlord was not a matter which arose for discussion according to the testimony of both the pursuer and Mrs Roxburgh. Once the liquidator's cheque for £4,000 had been cleared through the banking system the pursuer then allowed access by inter alia restoring the electricity supply and the liquidator's staff thereafter had access in order to do the necessary work of recovering the company's records. That having been done the liquidator returned the keys, together with meter readings and alarm codes, by a letter of 8 July 2003 (No.40/14). The pursuer's charges for electricity consumed were eventually paid, albeit some months later.

[12] A few days prior to that return of the keys, on 26 June 2003, the pursuer had written to the liquidator the letter (No.40/12) quoted in paragraph [8] of my earlier Opinion which, for convenience, I reproduce:

"Having considered your solicitors letters of 11 and 12 June we accept that the notice sent to you on 9 June terminating the leases did not give you the proper notice under the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985 and therefore can be considered void. We have not re-entered the premises and have allowed you to operate from all the offices in question.

We confirm that have (sic) received settlement for part of the outstanding electricity charges and have reinstated the power to the offices on 16/6/03.

However I would be grateful if you would confirm the position with ongoing rent for all the studios leased by Solutions in view of your fax of 9 June 2003 not to adopt the leases."

The evidence of both witnesses confirmed that Grant Thornton did not reply to that letter, nor to the reminder (No.40/12) sent by the pursuer on 4 July (which bears a "received 07 Jul 2003" stamp). Both letters were ignored in Mrs Roxburgh's letter of 8 July 2003 returning the keys except to the extent that she recorded that the liquidator had no further interest in the premises. That indeed was the explanation stated by Mrs Roxburgh in her evidence. Having negotiated on Monday 16 June 2003 the particular arrangements whereby the liquidator got the limited access which was sought in order to recover the company's records and miscellaneous moveable assets and having obtained that limited access, the liquidator had no interest whatever in the leases being continued. There is no material communication pertinent to the current issue after this exchange of correspondence.

[13] I revert to the pursuer's evidence of the seeking and receipt of advice from his solicitors. In his evidence-in-chief the pursuer indicated that on receipt on Friday 13 June 2003 of the Grant Thornton fax enclosing Boyds' letter of 12 June he had sought and had immediately received advice that the notice of irritancy would be likely to be ineffective. Mr Dean also volunteered that in a telephone conversation with Donald McNaught he had indicated that he accepted, albeit grudgingly, the contention that the leases should not have been purportedly terminated and that it was agreed that he should write confirming this. Hence, said the pursuer, his letter of 26 June 2003. However, in cross-examination the pursuer became much more indefinite about the obtaining of advice. Mr Dean accepted that he had not written to his solicitors but had simply spoken over the telephone. He was unsure whether he had supplied any documents, although he observed that it was possible that he had faxed the second Boyds' letter to his solicitors in Paisley. The pursuer then indicated that there had been delay in receiving advice from his solicitors and he agreed that it could well have been some days after Monday 16 June 2003 before he received any advice. In these circumstances I am unable to accept as reliable the evidence from the pursuer initially suggesting that in agreeing to accept the £4,000 as the counterpart for permitting access the pursuer had already been professionally advised that the notice of irritancy would be ineffective and that at that time in speaking to Donald McNaught he orally accepted that he should not have terminated the lease. In agreement with what was submitted by Mr Cowan for the defender, it is in my view significant that, as was put to Mr Dean in cross examination, the letter written 10 days later makes no reference to any telephone conversation nor has anything suggestive of its being confirmatory of an oral agreement that the leases should continue.

[14] In his submissions for the pursuer Mr Stephenson submitted, in what I understood to be a discrete submission, that simply by allowing the liquidator access to the premises following the 16 June agreement the pursuer, as landlord, had "affirmed the leases" and thereby waived his rights to insist on the irritancy and so, as I understood it, the landlord founding on his own act of waiver could insist on the tenant's performance in terms of the lease thereafter. I have to say that, in light of the evidence, I do not consider that the agreement reached between the pursuer and Mrs Roxburgh on the forenoon of Monday 16 June 2003 can properly be characterised as an affirmation of the leases or of waiver of the pursuer's right to insist on the irritancy of which he had given notice. It is, in my view, an independent agreement whereby the pursuer, still insisting on his termination of the leases, agreed to allow the liquidator access on separate, important conditions one of which was that an otherwise unsecured claim (for the outstanding electricity and service charges) should be given preferential treatment in the liquidation in the form of an immediate cash payment and the other of which was a limited form of personal liability on the part of the liquidator for the electricity consumed while having access for his limited purpose of recovering the company's electronic and hard copy records and other items of moveable property.

[15] The alternative approach advanced by counsel for the pursuer, being the one set out in the pleadings, proceeded upon the basis that agreement had been achieved that the notice of irritancy was ineffective and that the leases should continue in force. Counsel founded upon the pursuer's evidence that he had indicated such an acceptance in a telephone conversation with Mr McNaught and the letter of 26 June 2003 was said, by the pursuer, to be confirmatory of that telephone conversation. Mr Cowan, for the defender, submitted in response inter alia that such an oral arrangement was without significance unless the crucial telephone conversation and agreement had taken place prior to the agreement reached with Mrs Roxburgh on Monday 16 June 2003. Prefacing the submission with the observation that what was contained in Boyds' letters was not an offer in any proper contractual sense but was simply a communication of the advice received with a view to obtaining the necessary access to recover the physical and electronic records and other property from the premises, Mr Cowan went on to say that, insofar as the Boyds' letters might be seen as a continuing "challenge" to the notice, that continuance ceased when the agreement of Monday 16 June 2003 was achieved. So the "challenge" then having ceased it could no longer be agreed. Employing the terminology of "offer" and "acceptance", the offer was effectively superseded by the agreement of Monday 16 June and thereafter ceased to be available for acceptance.

[16] Approaching matters on that basis of "offer" and "acceptance" (the "offer" being the assertion that the notice of irritancy might not be relied upon by the landlord) I consider that there is force in Mr Cowan's argument. The "offer" was put forward in the context of the liquidator's wish to obtain access. Once agreement was reached on Monday 16 June on particular terms regulating that access the offer was impliedly withdrawn. It was effectively superseded by the agreement reached on Monday 16 June. It was therefore not available for "acceptance" ten days later. Insofar as it was suggested by the pursuer in his evidence that he reached some oral understanding with Donald McNaught, I have to say that I am not persuaded on the evidence that any agreement for the continuance of the leases was thereby concluded. As I have already remarked, the terms of the pursuer's letter of 26 June are not consistent with its being a confirmatory letter; and there is no suggestion in the pleadings of such a prior oral agreement. But in any event, it is at least plain that if such an accommodation was reached, in temporal terms it was not reached prior to the agreement concluded between the pursuer and Mrs Roxburgh on Monday 16 June 2003.

[17] There is however a further difficulty for the pursuer's contention which can now more readily be considered, the facts having been more clearly established. In my view the act of irritating a lease is at least closely equivalent to the act of rescinding a contract on the ground of the other party's breach of contract. Indeed, the ground for invoking an irritancy clause will often, but not exclusively, be the tenant's breach of the conditions of his lease. In the present case of course the ground of irritancy is the insolvency event, but the right to which that event gives rise is still a right in the landlord unilaterally to terminate the contract of lease. Although in the course of the debate reference was made to the notice of irritancy being invalid or ineffective (and the pursuer's letter of 26 June 2003 refers to the notice "being considered void"), it should be observed that section 5 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985 simply provides that a landlord may not rely upon the irritancy provision if, in all the circumstances, a fair and reasonable landlord would not seek so to rely. The section thus provides the tenant with a defence which the tenant may invoke, at his option, if the landlord takes proceedings to remove him (by action of declarator of irritancy and removing). In the ordinary case of rescission of contract on the ground of breach, or alleged breach of contract, the rescinder is not allowed second thoughts even if the other party alleged to be in breach protests that the rescission was unjustified. The mere existence of protest, or assertion of the absence of a breach of contract justifying rescission, does not enable the rescinding party to change his mind and compel the other party to further performance of the contract. Thus, taking by way of example another form of contract involving a continuing relationship, I do not see that an employer who has summarily dismissed an employee on the basis that the employee had materially breached the terms of his contract of employment can later unilaterally restore the contractual relationship and require the employee's return to work simply on the basis that he recognises and accepts the employee's protest that the grounds claimed for rescission of the contract were insufficient. The employer's offer of apology and restoration of the employee in his post would require to be followed by action by the dismissed employee whereby the employee then agreed to return. By analogy, in the present case the liquidator (whom for this purpose I am prepared to take to be the alter ego of the tenant) initially protested the rescission of the contract on the view that it was not fair and reasonable, that is to say in effect unjustified. The recognition by the landlord that his termination of the lease may not have been justifiable follows on 26 June 2003 (or at any event, even if orally communicated to Donald McNaught, after 16 June). But it is now plain that there was thereafter no act by the liquidator or the tenant which could be seen as an expression by or on behalf of the tenant of agreement to the restoration of the former contractual relationship. As with an employer who repents of his decision to dismiss his employee, the landlord who repents of his decision to irritate the lease when he comes to realise that it may have adverse consequences for him cannot found on his communicated acceptance of the tenant's protest that his action had not been fair or reasonable as a means whereby he can then restore the contractual relationship so as to enable him to compel the tenant's performance or seek damages in lieu. Much more is required to constitute an agreement with the tenant that the lease should continue. That is lacking in the present case.

[18] Accordingly, in these circumstances I hold that the leases in question were terminated on 9 June 2003 by virtue of the pursuer's invocation of the provisions of Clause 9 of the leases. I understood that the representatives for both parties were agreed that in such an event, or indeed on my reaching a contrary view, I should put the case out for By Order for discussion of arrangements for further procedure with a view to the final resolution of this dispute. I shall therefore do that.