Scottish Court of Session Decisions

Pursuer: Sandison QC; Pinsent Masons LLP

Defender: R Dunlop QC; Morton Fraser LLP

29 April 2014

[1] Office premises at 1 and 2 Broadway Park, Edinburgh are leased under separate agreements by Scottish & Newcastle Ltd (the tenants/defenders) from Arlington Business Parks GP Ltd (the landlords/pursuers). The leases expire in 2023, but could be broken as at 7 May 2013. To exercise that entitlement, the tenants required to give 12 months notice, and not be "in breach of any of their obligations (under the lease in question) at the date of service of such notice and/or the termination date" (clause SECOND). The tenants served timeous notices on 3 May 2012 in respect of both leases. The issue between the parties is whether those notices were valid and effective. This depends upon the proper construction of clause SECOND. The pursuers contend that the leases remain extant, and demand payment of rent from 7 May 2013. The defenders say that their obligations under the leases ended on that date.

[2] The defenders admit that, as at the date of the notices, they had not fully performed their repairing obligations, "under explanation that non-performance of those obligations does not equate to breach thereof." It is said that the non-performance at that date was remediable, thus did not amount to "breach" within the meaning of clause SECOND. After the notices the defenders spent over £1.3 million with a view to ensuring that the premises were in a proper condition as at 7 May 2013. On behalf of the defenders, Mr Dunlop QC submitted that the term "breach" means a material, non-remediable breach of contract. There was no default of any kind as at 7 May 2013, thus the leases were validly brought to an end. It was further submitted that even if that construction of the term "breach" is wrong, the clause allows the break option to be exercised so long as there is no breach at the termination date, which is the operative date for these purposes.

[3] Firstly I will address the argument as to the operative date or dates, in part because that will cast some light on the other line of defence. Clause SECOND provides that the tenants must not be in breach "at the date of service of (the) notice and/or the termination date." For the pursuers, Mr Sandison QC submitted that this means, in effect, no breach at either or both dates. The natural meaning of the words used is that a notice is invalid if the tenants are in breach at the date of the notice, or the date of termination, or both. Mr Dunlop submitted that the clause means that the tenants lose the right to break if they are in breach on both dates, or at the date of termination of the lease. Failing that, the tenants must be in breach on both dates.

[4] I prefer the interpretation put forward by Mr Sandison. It reflects the natural meaning of the words used. Mr Dunlop's primary submission renders the concept of breach at the date of the notice irrelevant. It adds nothing to the alternative of breach at the date of termination. His fall-back position gives no content to the word "or".

[5] The defenders accept that they were not in compliance with their repairing obligations under the leases as at the date of the notices. If, as I have held, they are wrong as to the construction of the phrase "and/or", they rely on their alternative defence to the action, namely that they could still break the leases so long as the premises were in proper order by the termination date. This is because "breach" is to be understood as meaning a material and irremediable breach. The defenders offer to prove that there was no such breach as at the date of the notices, and no default whatsoever by the termination date.

[6] Recognising that the term "breach" in clause SECOND is unqualified, Mr Dunlop relied upon inferences which he submitted can be drawn from other clauses. Particular reliance was placed upon clause SIXTH, which allows the landlord to irritate the lease if, amongst other things, "there shall be any... breach, non-observance or non‑performance by the tenants of any of their obligations under (the) lease...". It was suggested that this reveals an intention that a breach is something different from a mere failure to observe or perform a contractual obligation. To construe clause SECOND as referring to a material and irremediable breach would be consistent with the commercial purpose of the provision, which was said to be that there should be no default at the date when the property was returned to the landlords. In the context of repairing obligations, this would mean that the landlords would recover the premises in the same condition as at the outset, with no subsisting breaches of contract. According to Mr Dunlop, all is well if a remediable want of repair is dealt with during the notice period. Reference was made to West Middlesex Golf Club Ltd v London Borough of Ealing [1994] 68 P&CR 461 at pages 486/8, and to various passages in McBryde on Contract, 3^rd edn.

[7] I do not find Mr Dunlop's textual analysis convincing. I do not read the leases as demonstrating an intention to draw a distinction between, on the one hand, a breach of the tenants' obligations, and, on the other hand, non-observance or non‑performance of their obligations. It is true that clause SECOND mentions only the former, while clause SIXTH mentions all three. However I am not persuaded that non-observance and non-performance were intended to have a different meaning from breach of contract. They are all ways of describing much the same thing. If a tenant does not perform his obligations, he is in breach of contract, and likewise in respect of any non-observance. Breach of contract can be described as non-performance or non-observance of an obligation. Clause SIXTH itself, at the bottom of page 5 of the lease, indicates that any" breach, non-observance or non-performance by the tenants" may be remediable or non-remediable. There is nothing to suggest that "breach" means something different from the other phrases. A similar comment can be made in respect of the proviso to this clause. In clause SEVENTH, in the context of waiver, only non‑performance and non-observance are mentioned, when plainly the intention was to prevent an acceptance of rent releasing the tenants from the consequences of any breach of contract. This suggests that the lease uses these terms to mean much the same thing. This is hardly surprising since, in terms of ordinary usage, they do mean much the same thing. The terms of clause FOURTH provide further support for this approach to construction of the lease. It states that the tenants bind and oblige themselves "to observe and perform" the conditions and obligations specified in part III of the schedule to the lease. In my view, the absence of any mention of "breach" in that provision is of no importance or significance.

[8] I have not overlooked the terms of clause (eight) in part III of the schedule, which requires the tenants to leave the subjects in good repair at the expiry or sooner termination of the lease. The defenders offer to prove that there was no breach of that obligation, but there is an admitted failure to comply with the repair and maintenance obligations in clause (three)(a), and, on my construction of clause SECOND, this disentitles the tenants from relying on the notices served in May 2012. Nothing in clause (eight) of part III contradicts or is inconsistent with that approach to the break provisions in the main lease. In short, if the tenants fail to perform their repairing obligations under the lease, they are in breach of their obligations. In my view it would require clear wording before clause SECOND is to be construed in a more restricted sense.

[9] The West Middlesex Golf Club case dealt with a wholly different situation, namely whether there was a breach of the tenants' covenant to keep in good repair the moment the subjects of lease were vandalised. Understandably, the court held that there was no breach of contract, and thus no deprivation of a right to renew the lease, unless and until a reasonable period had elapsed during which the tenants failed to remedy the problem. In other words, there was no absolute warranty that at every moment in time the subjects were in good repair. I have no difficulty with this proposition, but it is of no relevance to the current dispute. I have studied the passages in McBryde on Contract, but find none of them of direct assistance.

[10] This leaves Mr Dunlop's submission that the commercial purpose of clause SECOND is served if there is no subsisting breach at the expiry of the notices. It is sufficient to say that this approach is contradicted by the proper construction of clause SECOND, which requires the tenants to be in compliance with their obligations as at the date of the notice.

[11] During his address Mr Sandison drew attention to a lengthy tract of case law south of the border, including Finch v Underwood [1876] 2 Ch 310, Bass Holdings Ltd v Morton Music Ltd [1988] 1 Ch 493, and Fitzroy House Epworth Street (No 1) Ltd v Financial Times Ltd [2006] 1 WLR 2207. Counsel submitted that there is a well understood purpose in requiring that there be no breach at the date of the notice. Many of those cases concerned the separate and distinct question of whether an historic breach of a negative covenant remained a subsisting breach for the rest of the duration of the lease, and so would disable a break or renewal option. However there is a running theme in the authorities that landlords have a commercial interest in certainty as to whether a notice is or is not valid, something which would be subverted by a materiality test: see for example the judgment of Sir Michael Kerr in Bairstow Eves (Securities) Ltd v Ripley [1992] EGLR 47. In Bass Holdings Ltd, Bingham LJ noted that if a tenant wishes to take advantage of a break clause, the landlord will be concerned that the covenants are "fully observed" so that the property can be re-let or sold without delay or additional expenditure (page 538). This is all readily understandable, and when one bears in mind that under clause SECOND a breach can be operative at either or both dates, I prefer Mr Sandison's submission that, in the present case, the commercial purpose was to give the landlords reassurance that, come the termination date, the property would be in a proper condition, thereby allowing marketing of the subjects during the 12 months notice period.

[12] I have not overlooked the Scottish decision in Trygort (No 2) Ltd v UK Home Finance Ltd 2009 SC 100. It followed the English cases which decided that spent breaches do not destroy a tenant's right to break or renew a lease. The present case falls into the category of an admitted subsisting breach at the date of the notice, and thus the decision in Trygort is of no direct assistance to its proper disposal. However the First Division acknowledged that it is natural and sensible, particularly in respect of break options, for landlords to require that the lease is clear on the operative date (or in the present case, the operative dates).

[13] Mr Dunlop accepted that, if his construction of clause SECOND were to be rejected, the pursuers would be entitled to decrees of declarator in terms of their first and second conclusions, which are to the effect that both leases remain in full force and effect. In my opinion the pursuers are entitled to declarators in terms of those conclusions. It follows that the defenders are liable for non-payment of rent since May 2013. The pursuers' claim in this regard is set out in the third conclusion. On the hypothesis that it became necessary to do so, both counsel invited the court to put the case out by order so that the appropriate financial order can be formulated. That is what I shall do.