Scottish Court of Session Decisions

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URL: http://www.bailii.org/scot/cases/ScotCS/2008/CSIH_56.html
Cite as: [2008] CSIH 56, 2009 SCLR 58, [2008] ScotCS CSIH_56, 2009 SC 100, 2008 SLT 1065, 2008 GWD 35-529, 2008 Hous LR 62

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FIRST DIVISION, INNER HOUSE, COURT OF SESSION

Lord President

Lord Kingarth

Lord Mackay of Drumadoon

[2008] CSIH 56

XA215/06

OPINION OF THE COURT

delivered by LORD KINGARTH

Appeal from the Sheriffdom of Glasgow and Strathkelvin at Glasgow

in the cause

TRYGORT (NUMBER 2) LIMITED

Pursuers and Appellants;

against

UK HOME FINANCE LIMITED AND ANOTHER

Defenders and Respondents:

_______

Act: Dean of Faculty; Brodies LLP

Alt: Crawford; Archibald Campbell & Harley, WS

29 October 2008

[1] By lease dated 12 July and 27 October 2004 the appellants let to the first respondents commercial subjects at 110 West George Street, Glasgow, for a period of three years from 28 May 2004. The second respondents were guarantors of the tenant's obligations. In this action, raised by them in the Sheriff Court in Glasgow, the appellants seek inter alia declarator that the first respondents were contractually bound to use and occupy the subjects until 27 May 2007 and to pay the rent until that date.

[2] It is a matter of agreement that the first respondents vacated the subjects on or about 24 December 2005. The appellants aver that this was in breach of the provisions of the lease. The respondents' position is that the first respondents were entitled to vacate the premises by virtue of a notice which they gave to the appellants. The purpose of the notice was to exercise a break option in terms of Clause 2 of the lease. The appellants do not dispute that the first respondents gave notice of exercise of the break option, their contention being that they were not entitled to do so. They argue that the notice was not valid and that accordingly the lease was not lawfully terminated.

[3] The relevant part of Clause 2 of the lease, dealing with break options, is in the following terms:

"Declaring however that (One) without prejudice to the rights and remedies of the respective parties hereto in respect of any antecedent breach of These Presents it shall be competent to determine These Presents as follows, namely (i) at the sole option of the Tenant on 31^st March 2005 upon the Tenant providing not less than 3 months prior written notice to that effect to the Landlord time being of the essence and (ii) at the option of either or both of the Landlord or the Tenant at any date subsequent to 31^st March 2005 on the party so determining providing the other party with not less than six months prior written notice to that effect to be issued on or any date subsequent to 1^st October 2004 time being of the essence and (Two) the Tenant shall not be entitled to issue any notice determining These Presents in terms of this Clause 2 if the Tenant has been in breach of its obligations to the Landlord in terms of These Presents."

[4] It was expressly provided in clause 8 of the lease that it was to be interpreted in accordance with the law of Scotland.

[5] In Condescendence 5 of the initial writ the appellants aver that the first respondents failed to comply with various obligations under the lease. In particular it is said:

"The first defender has been in breach of its obligations to the Landlord pursuers in terms of the missives concluded between the solicitors acting for the Landlord pursuers and the solicitors acting for the defender dated 4^th June 2004 and 28^th May 2004 respectively and in terms of the lease in furtherance of the missives during the currency of the lease. On 4^th June 2004 the first defenders failed to meet the requirements of clause 5 of the formal letter comprised in the missives dated 28^th May 2004 ... requiring it to settle the Landlords' expenses of £5000 plus VAT thereon and stamp duty land tax on the lease together with the dues of registering the Lease in the Books of Council and Session and obtaining three extracts thereof within a contractually agreed period of five days. The said sum of £5000 plus VAT was finally paid on 22^nd September 2004. The stamp duty land tax form SDLT 1 and the stamp duty land tax was not received by the pursuer landlord from the defender until 27^th April 2005. In addition the first defender has persistently been late in the payment of the contractually agreed rent as hereinafter condescended upon."

[6] It was accepted in submission before the sheriff (and before this court) that as at the date when the relevant break notice was issued, there were no subsisting breaches of contract by the first respondents, any such earlier breaches having been remedied. It was nevertheless the appellants' position that it was enough for them to prove that the first respondents had been in breach of contract at some stage. In such circumstances they were not entitled to issue the notice. This was disputed by the respondents, who maintained that the clause related to subsisting breaches only. After debate (in which both parties agreed that the matter could be resolved without the need for proof) the sheriff dismissed the action, holding that there were no relevant averments to indicate that the first respondents were not entitled to exercise the option. In brief, the sheriff was of the view that although the ordinary meaning of the language of the clause favoured the contentions of the appellants (which, it seems, was not disputed before him by the respondents) nevertheless, and following the language of Lord Hope in Melanesian Mission Trust Board v Australian Mutual Provident Society [1997] 2 EGLR 128 at page 129, this was a case where the ordinary meaning could not be given to the words used.

[7] On behalf of the appellants the learned Dean of Faculty submitted that the plain ordinary meaning of the relevant part of Clause 2 applied to breaches occurring at any time. The parties could have used the present tense, (i.e. "... if the Tenant is in breach of the obligations ...) but did not. It could not be said that effect could not be given to that plain ordinary meaning. A high test required to be satisfied before that could be said in any case. Reference was made to the unreported decision of Lord Reed in Credential Bath Street Limited v Venture Investment Placement Limited [2007] CSOH 208, at paragraph 36. It was plain from the opinions delivered in the Court of Appeal in Bass Holdings Limited v Morton Music Limited [1988] 1 Ch. 493 that it was accepted that a clause having the meaning contended for by the appellants could feasibly be devised (reference in particular being made to Kerr L.J. at page 534 and Bingham L.J. at page 541). Nor could it be said that such a clause made no commercial sense. The apparently contrary rule of law which applied in England to conventional clauses relating to tenants' break or renewal options (referred to, and followed, in Bass Holdings Limited v Morton Music Limited) had no counterpart in Scotland.

[8] For the respondents Miss Crawford referred, in relation to the proper approach to the construction of commercial contracts, to Bank of Credit and Commerce International SA v Ali and Others [2002] 1 AC 251, Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896, Melanesian Mission Trust Board v Australian Mutual Provident Society and Charter Reinsurance Company Limited v Fagan [1997] AC 313. She contended that the plain ordinary meaning of the language favoured the respondents' construction. Stress was placed on the use of the present perfect tense. By contrast the relevant part of the clause did not say, as it could have, "... if the Tenant had been in breach of its obligations at any time ...". If that was not accepted, the language was at least ambiguous. In that event, having regard to the detailed and numerous obligations undertaken by the first respondents under the lease and to the line of authority summarised and followed in Bass Holdings Limited v Morton Music Limited, the respondents' construction was the one which made commercial sense, and should be preferred. If, contrary to these submissions, the court was to hold that the ordinary meaning of the words used favoured the appellants' construction, this was a case where that ordinary meaning could not be given to them. That could be said to lead to commercial absurdity or to the attribution to the parties of an intention which they plainly could not have had.

[9] It will be apparent from the foregoing rehearsal of the parties' positions before this court that both primarily contended that, looking at the language of the relevant clause, the words used were, in context, reasonably capable, as a matter of ordinary language, of only one meaning - although of course the parties differed as to what that was. We are not, however, persuaded by either of these primary contentions. Rather, we consider that it can reasonably be said that having regard to the words used, in the context in which they appear, there does exist a degree of uncertainty as to whether the words fall to be read as meaning, on the one hand, "... has at any time been in breach ..." (despite the absence of the underlined words) or "... has been and remains in breach ..." (again, despite the absence of the underlined words). In our view it can reasonably be said that both meanings are possible without doing any violence to the language used.

[10] That being so we have little doubt that the commercially sensible construction which falls to be preferred is that contended for by the respondents. In that connection we consider that much assistance can be gained from consideration of the long-standing line of authority in England which was referred to and followed in Bass Holdings Limited v Morton Music Limited. In that case it was noted that clauses in leases entitling the tenant at his option to determine the lease prematurely, or conversely to extend his interest in the let property by obtaining a further lease, frequently included a provision to the effect that the exercise by the tenant of his opinion was conditional upon his having paid his rent and performed and observed his covenants and agreements under the lease up to a specified date - typically the date on which notice was to be given of his intention to exercise the option. The question which such clauses gave rise to was whether a condition to the effect mentioned required, for its fulfilment, that throughout the whole term of the lease up to the specified date there should have been no breach of any of the tenant's covenants and agreements (described by Nicholls L.J. as the "never any breach" construction) or whether the condition was fulfilled if, at the specified date, there was no subsisting breach of any of the covenants or agreements (described by Nicholls L.J. as the "no subsisting breach" construction). Over many years, it appears, the latter interpretation has been favoured.

[11] It is true that Bingham L.J. referred to the line established in the cases as a rule of law (see page 541) and that no such rule of law may be said to have been established in Scotland. Nor do we consider, as was at one point argued on behalf of the respondents, that knowledge of the line of authority in England could be assumed to be part of the factual matrix surrounding the agreement of the lease in the current action - not least standing Clause 8. Nevertheless, it is made plain in Bass Holdings Limited v Morton Music Limited that strong commercial reasons have, over many years, been said to justify the approach of the courts in England to such clauses; reasons which, in our view, are just as relevant to the consideration of a commercial lease in this jurisdiction.

[12] In particular, Kerr L.J., under reference to numerous cases dating back to 1854, said (at page 518):

"The upshot of these authorities is that spent breaches will not destroy the tenant's right to exercise the option, but subsisting breaches will. As shown by the passages to which I refer below, the reasoning is in effect as follows. First, it must be accepted that absolute and precise compliance by the tenant with every single covenant throughout the period of the lease prior to the operative date is virtually impossible of attainment. If this were required as a condition precedent then the option would in practice be worthless or merely at the mercy of the landlord. Therefore the parties cannot have intended that the absence of spent breaches should be a condition precedent. Secondly, however, it is natural and sensible that the landlord should require the tenant not to be in breach of any covenant on the operative date and that all outstanding claims for breach of covenant should have been previously satisfied, so that the lease is then effectively clear. The proviso is therefore to be construed as intended to apply to subsisting breaches, with the result that the relevant condition precedent is the absence of any subsisting breach."

He emphasised later (at page 519) that the reasoning was "of course particularly cogent in relation to 'break options'. In such cases it will obviously be of great importance to the landlord that the demised land or premises should be surrendered to him free from any subsisting breaches of covenant".

"Where a tenant wished to take advantage of a break clause, the landlord was not greatly concerned with the history of the tenant's performance before the break. The worse the tenant's performance, the readier the landlord might reasonably be to get rid of him. But whatever the tenant's defaults in the past, the landlord will be very much concerned that at the time of the break the rent should be fully paid ... and the covenants fully observed (so that the property could be re-let or sold without delay or additional expenditure)."

[14] Further, Nicholls L.J., echoing much of what was said by Kerr L.J., not only observed, at page 528, that:

"The two alternative constructions have only to be stated for it to be apparent that the 'never any breach' construction would mean that in practice the condition would be impossible of fulfilment in almost all cases of leases of buildings containing a full range of repairing and other covenants by a tenant. However diligent or even punctilious a tenant may be in carrying out his obligations under his lease, in such cases there will in practice inevitably be occasions when there will be outstanding some dilapidations which would, strictly, constitute breaches of the repairing or redecorating covenants. Thus the practical consequence of the 'never any breach' construction in such cases would be that the break or renewal option would seldom, if ever, be exercisable by a tenant".

He went on to say in addition (of the "never any breach" construction):

"Even in the case of other leases, where the tenant's covenants might be less far reaching, this construction would lead to much uncertainty for tenants and their assigns. Break options and renewal options may be valuable but, on this construction, after a few years and particularly if there have been assignments or sub-lettings, the current tenant or a would-be assignee of a lease would be unable in many cases to discover whether or not a break option or a renewal option had already lapsed by reason of a breach of covenant. Indeed, short of a positive answer from a co-operative landlord, it is difficult to see how in this type of situation a tenant or would-be assignee could ever be sure that there had not been a breach, maybe trifling, of one covenant or another in the history of the lease".

[15] We have little doubt, in the present case, having regard to the numerous detailed obligations undertaken by the tenant, which we do not think it necessary to rehearse but which included repairing, maintenance and redecorating obligations of an absolute nature - all in a lease which, subject to clause 3.23, was assignable -, that the same commercial considerations (derived in large part from the apparent aim and object of such clauses objectively ascertained) could be said strongly to favour the construction contended for by the respondents.

[16] Against that, it was suggested in argument, in favour of the appellants' construction, that a landlord could readily insist on such a clause as a means of persuading the tenant to attend to his contractual obligations during the currency of the lease. Such a consideration does not, however, directly bear on the circumstances which could be expected to be relevant at the time of the exercise of the option in question. Further the means of persuasion referred to would, it seems, be lost by the occurrence of any breach, even if early in the lease, and it is difficult to conceive of tenants readily agreeing to be bound by a clause which would mean that the right to exercise the option would forever be lost on the occurrence of any breach whenever it occurred and whether or not it was immediately remedied. Indeed this, it appears, was effectively conceded on behalf of the appellants before the sheriff, when it was claimed, so the sheriff records, that the appellants' agents had been surprised that the clause had not been revised by those representing the tenant.

[17] In these circumstances, while no doubt as a matter of language a clause having the meaning contended for by the appellants could conceivably be drafted, it would, in our view, require to be clearly and precisely expressed. It is to be noted that Kerr L.J. observed in Bass Holdings Limited v Morton Music Limited (at page 518):

"While it would of course be possible to formulate a proviso which is sufficiently explicit to cause spent breaches to preclude the exercise of the option, there appears to be no reported case in which this was so."

Equally, while Scott J., at first instance, accepted that "It would be possible to formulate a condition precedent which did require that there should not at any time have been any breach of a tenant's covenant" (as recorded at page 540), it is perhaps not without significance that he used words (i.e. "at any time") which do not appear in the clause under consideration in this case.

[18] In these circumstances we reach, albeit for different reasons, the same result arrived at by the sheriff, and the appeal falls to be refused.