OUTER HOUSE, COURT OF SESSION

 

[2006] CSOH 58

 

CA162/04

 

 

 

 

 

 

 

 

 

 

 

OPINION OF

LORD DRUMMOND YOUNG

 

in the cause

 

THE ADVICE CENTRE FOR MORTGAGES LIMITED

 

Pursuers;

 

against

 

FRANCES McNICOLL

 

Defender:

 

 

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Pursuers: Wallace; McKay Norwell W.S.

Defenders: Barne; Warners

 

6 April 2006

 

[1] The present action relates to heritable subjects consisting of a shop situated at 4/5 Crighton Place, Edinburgh. The defender is the heritable proprietor of those subjects; her title to the subjects was registered in the Land Register on 25 March 2004. The previous proprietor of the subjects was a company called Thomas H. Peck Limited.

[2] The pursuers contend that they are the tenants of the subjects, and further that they have an option to purchase the subjects, which they have validly exercised. Their claim to be tenants proceeds on two alternative bases. First, they seek a declarator that the terms of a valid contract of lease are set out in a formal offer dated 29 November 1999 from agents acting on behalf of Thomas H. Peck Limited to the pursuers' agents and a formal letter dated 22 May 2000 from the pursuers' agents to Thomas H. Peck Limited's agents (the offer and letter being together referred to as "the Missives"). Secondly, they seek a declarator that a valid contract of lease, containing an option to purchase the subjects, is found in an unsigned lease together with schedules and a draft offer to purchase (referred to collectively as "the Lease"), those documents having been agreed, it is said, between the pursuers and Thomas H. Peck Limited on 13 October 2000. On the basis of either of the first two declarators, the pursuers further seek declarator that they are tenants of the subjects in terms of the Missives or alternatively the Lease. Thereafter, they seek declarator that they have an option to purchase the subjects at the price of г145,000 adjusted according to the published retail price index, and decree ordaining the defender to implement that option.

[3] The pursuers' claims are based on the terms of the Missives or alternatively the Lease. The Missives are averred to be as follows. On 29 November 1999 the Lints Partnership, acting on behalf of Thomas H. Peck Limited, sent an offer to Golds, who acted for the pursuers, in the following terms:

"On behalf of our client, Thomas H Peck Limited ('the Landlords') we hereby offer to lease to your client, The Advice Centre for Mortgages Limited ('the Tenants') ALL and WHOLE the subjects comprising 4 & 5 Crighton Place, Edinburgh ('the Subjects') and that on the following terms and conditions.

 

1. The Lease will commence on the date of entry which shall be on 1 December 1999 ('the date of entry').

2. The Lease of the subjects will be for a period of 10 years from the date of entry.

3. The initial rent payable by the Tenants to the Landlords will be г12,000 (г12,000) STERLING together with Value Added Tax thereon (if requested by the Landlords) per annum payable quarterly in advance as specified in the said Lease.

4. The Tenants shall have the option to purchase the subjects at the end of five years from said date of entry upon the basis figure of ONE HUNDRED AND FORTY FIVE THOUSAND (г145,000) STERLING together with appropriate percentage increase at the relevant period of time in the retail price index, from date of entry hereunder until payment of the purchase price in terms of this Condition.

5. The rent will be reviewed every five years on an upward basis only and in terms of the rent review provisions contained in the Lease aftermentioned.

6. The Lease being granted by the Landlords to the Tenants of the subjects (said Lease being referred to in the missives as 'the Lease') will be on the terms, conditions and others and subject to the restrictions and provisions of the draft Lease annexed and signed as relative hereto subject to the completion by reference to the missives of the parts left blank.

...

9. From and after the date of entry until the Lease has been executed by the parties, the terms of the draft Lease will, subject to the other terms of the missives of which this offer is part, regulate the terms of the Lease of the subjects

...".

The draft lease referred to in that letter was not produced. I was informed that it had proved impossible to find either the principal or any copy of it.

[4] The reply to the foregoing letter, written by Golds on behalf of the pursuers on 22 May 2000, was in the following terms:

"On behalf of and as instructed by our clients The Advice Centre for Mortgages Limited we hereby accept the offer dated 29th November 1999 made by you on behalf of your client Thomas H Peck Limited to lease to our clients ALL and WHOLE the subjects comprising 4 and 5 Crighton Place, Edinburgh and that on the terms and conditions as stated in your said offer but subject to the following qualifications:-

1. With regard to Condition 4 of your said offer the option to purchase will be exercised by the tenants submitting to the Landlords on or within four weeks prior to the fifth anniversary of the date of entry an offer in self proving manner in terms of the draft offer forming Part IV of the Schedule to the Lease with any blanks therein completed as appropriate and the Landlords shall be bound to accept in self proving manner an offer in the foregoing terms within seven days of receipt of same.

2. With regard to Condition 6 of your said offer the Lease to be granted will be on the terms and conditions and others of the draft Lease annexed and docquetted as relative hereto with revisals thereon in red, blue and green ink and with the draft option offer inserted as Part IV of the Schedule to the Lease.

...".

The letter is a qualified acceptance and therefore constitutes, according to the standard legal analysis of such documents, a counter offer which is itself open for acceptance. Condition 2 of the qualified acceptance refers to a draft lease with revisals in red, blue and green ink. That document was not produced.

[5] The pursuers aver that on 13 October 2000 the Lints Partnership sent Golds an engrossed lease for execution; the lease is said to have included three schedules and a draft offer to purchase as a fourth schedule. Those documents as a whole are referred to in the pleadings as "the Lease". A copy of the Lease was produced; the pursuers aver that they have been unable to locate the principal lease that was sent to their agents for execution. It was not averred that that lease had ever been executed, and the pursuers appeared to accept that it had not in fact been executed. The pursuers further aver that, notwithstanding any informality in the constitution of the Lease, Thomas H. Peck Limited gave them entry and occupation of the subjects on 1 December 1999 on payment by the pursuers to Thomas H. Peck Limited of the sum of г3,000, that being the first quarter's rental payment in advance. The pursuers assert that on taking entry and actual occupation of the subjects on 1 December 1999 they acquired a real right of lease in terms of the Leases Act 1449. The result, it is said, was that the Missives or alternatively the Lease became binding on singular successors of Thomas H. Peck Limited.

[6] If the Leases Act 1449 is to apply, the relevant lease must be in writing. The writing founded on by the pursuers is the Missives or alternatively the Lease. At this point the pursuers confront two obvious problems. First, the Missives were not in fact concluded by an unqualified acceptance; they remained in the form of an offer and counter-offer. Secondly, the Lease was not subscribed by the granters in terms of section 2(1) of the Requirements of Writing (Scotland) Act 1995. The pursuers deal with the first of these problems by claiming that the essentials of a lease were agreed in the two letters that comprise the Missives; I discuss this argument below at paragraphs [9]-[14]. In relation to the second problem, they aver that, notwithstanding that the Missives were never concluded and the Lease was never subscribed by the granters in terms of section 2(1), there was nevertheless a valid contract of lease in terms of section 1(3) and (4) of the 1995 Act. Subsections (3) and (4) of section 1 require that a party in the position of the pursuers should have acted or refrained from acting in reliance on the document founded upon. To that end, the pursuers aver that on taking entry, in reliance on the Missives or alternatively the Lease, and with the knowledge and acquiescence of Thomas H. Peck Limited, they carried out improvements to the subjects. Those improvements included shop front decoration and signs and internal fixtures, fittings, furnishing and decoration. The pursuers further aver that they started trading as a mortgage advisory service and began to build up a business connection at Crighton Place. They invested in the goodwill of their business at Crighton Place and paid rent in terms of the Missives or alternatively the Lease. They aver that if the defender, who is of course a singular successor of Thomas H. Peck Limited, withdraws from her obligations under the terms of the Lease they will lose the goodwill that they have built up at Crighton Place and will lose the opportunity to purchase the subjects in terms of the option.

[7] For the defender it is averred that the option to purchase the subjects only involved a personal right that the pursuers had against Thomas H. Peck Limited; such a right would obviously not be effective against a singular successor of that company. In response to that contention the pursuers make the following averments:

"Explained and averred that even if the option to purchase was only a personal right between the pursuers and THP Ltd... it is nevertheless binding upon the defender as a result of her bad faith. ... [T]he defender's husband was a director of the pursuers. He dealt with the matter of the Missives and the Lease while purportedly discharging his duties as a director of the pursuers. The defender was an employee of the pursuers and working at the Subjects. As disclosed by the defender's averments in answer she has a detailed knowledge of the Lease and in particular the said option to purchase. The initial approach to THP Ltd was made to Mr Lints of the Lints Partnership by the defender's husband. The defender's husband initially attempted to negotiate a sale of the Subjects at the Option price. At the time of her purchase of the Subjects the defender would have been well aware of the existence of the said option to purchase".

Thus the pursuers contend that the option to purchase, even if it is wholly personal in nature, not involving a real right, is binding on the defender because of her bad faith in the manner particularized in these averments.

[8] The defender has tabled pleas to the relevancy of the pursuers' averments. The action was appointed to debate, and at the debate the defender's counsel moved me to sustain the first of those pleas and to dismiss the action. His arguments were presented under a number of heads, which I will consider individually.

 


Validity of the Missives

[9] The Missives consist of an offer and counter-offer only; there is no unconditional acceptance. Counsel for the pursuers submitted that the pleadings disclosed sufficient consensus as to the terms of the lease between the pursuers and Thomas H. Peck Limited; while such consensus did not appear on the face of the Missives it could be inferred from facts and circumstances that there had been acceptance of the terms contained in the two letters. In my opinion it is impossible to infer consensus on this basis. It is true that the essentials of a lease can be discovered in the terms of the Missives. The date of entry, the period of the lease and the initial rent are all specified in clauses 1-3 of the offer of 29 November 1999, and clearly the parties and subjects were agreed. Where agreement has been reached on the essentials of a lease it may be possible to infer that consensus has been reached. Where, however, it is apparent that the parties have been in discussion as to other possible terms of the lease but no agreement can be discovered on those terms, it will normally be impossible to infer that the parties have reached consensus, at least if those other terms were treated by one or both of the parties as significant. In such a case, when the totality of the parties' dealings is considered, it cannot be inferred that they have reached consensus on every significant matter that was the subject of negotiation between them. Indeed, terms other than the essentials may themselves have a bearing on the essential terms. Where, for example, a rent review clause is inserted, that may have an effect on the level of rent that is initially agreed.

[10] The present case falls into the latter category. In the first place, it is clear from clause 5 of the offer of 29 November 1999 that the rent was to be subject to review after five years, in terms of rent review provisions contained in the form of lease specified in clause 6 of the offer. Clause 6 provides that the lease to be granted by the landlords to the tenants would be on the terms and conditions of a draft annexed and docqueted as relative to the letter of offer. That document has not been produced, and it is accordingly impossible to know what was said in it about rent review, or indeed any other matter. Rent review provisions are important in modern economic conditions, and doubt as to what was being proposed about the matter is, I think, a serious objection to the argument that consensus was reached.

[11] In the second place, the two letters that constitute the Missives do not themselves disclose any agreement as to the terms of any option to purchase. This point is highly significant because the option to purchase was clearly regarded as important by the pursuers. An option to purchase is mentioned in clause 4 of the offer, whose terms are quoted in paragraph [3] above; under that provision the pursuers are given an option to purchase after four years at a price of г145,000 with an adjustment for inflation. The qualified acceptance of 22 May 2000 makes specific reference to clause 4 of the offer. In clause 1 of the qualified acceptance it is stated that the option should be exercised by an offer in a specified form submitted on or within four weeks prior to the fifth anniversary of the date of entry. The relevant form is contained in Part IV of the schedule to a draft lease, but that form of the lease has not been produced. Without it, it is impossible to know what the parties' final position was as to the exercise of the option.

[12] In the third place, clause 2 of the qualified acceptance makes further reference to the draft lease that was annexed; it is there stated that the lease to be granted would be on the terms and conditions of a draft lease annexed and docqueted as relative to the qualified acceptance with revisals in red, blue and green ink, and with a draft option offer. It is obvious that that draft lease is a different document from the draft referred to in the original offer, if only because revivals had been made during the intervening period. The revised draft lease has not been produced. The fact that a number of revisals had been made suggests that reaching agreement on the terms of the lease had not been wholly straightforward. Without the revised draft in its final form, however, it is simply impossible to discover what terms the parties might have agreed. That relates to the rent review provisions, and also to the terms of the option to purchase. It may relate to other matters. In these circumstances I am of opinion that it is impossible to spell out consensus in idem from the terms of the Missives.

[13] That is so even if the surrounding circumstances are taken into account. Entry was taken on 1 December 1999, but that was well before the qualified acceptance was sent. Consequently the giving of entry cannot have been referable to any concluded agreement as to the terms of the lease. Eventually, on 13 October 2000, it is averred that an engrossed lease was sent by the agents acting for the then proprietors to the pursuers' agents, for execution by the pursuers. That fact suggests that consensus had been reached by that time, but it is now quite impossible to know whether that was on the terms contained in any part of the Missives. In other words, any consensus as to the terms of a lease and option to purchase cannot be referable to the terms of the Missives. Such consensus can only be referable to the terms of the Lease, but that document, of course, was not executed.

[14] I accordingly conclude that the pursuers fail in their averments to demonstrate that any consensus as to the terms of a lease and option to purchase was reached in the Missives. In the absence of consensus, the Missives are in my opinion irrelevant to the pursuers' case.

 


Personal bar provisions of the Requirements of Writing (Scotland) Act 1995

[15] The pursuers' alternative case is based on the terms of the Lease. The Lease, of course, was not executed. In order to deal with this problem, the pursuers found on subsections (3) and (4) of section 1 of the Requirements of Writing (Scotland) Act 1995 in the manner described in paragraph [6] above. Counsel for the defender contended that the pursuers were not entitled to found on those provisions. So far as material, section 1 of the 1995 Act provides as follows:

"(1) Subject to subsection (2) below and any other enactment, writing shall not be required for the constitution of a contract, unilateral obligation or trust.

(2) Subject to subsection (3) below, a written document complying with section 2 of this Act shall be required for --

(a) the constitution of --

(i) a contract or unilateral obligation for the creation, transfer, variation or extinction of an interest in land;

...

(b) the creation, transfer, variation or extinction of an interest in land otherwise than by the operation of a court decree, enactment or rule of law;....

(3) Where a contract, obligation or trust mentioned in subsection (2)(a) above is not constituted in a written document complying with section 2 of this Act, but one of the parties to the contract, a creditor in the obligation or a beneficiary under the trust ('the first person') has acted or refrained from acting in reliance on the contract, obligation or trust with the knowledge and acquiescence of the other party to the contract, the debtor in the obligation or the truster ('the second person') --

(a) the second person shall not be entitled to withdraw from the contract, obligation or trust; and

(b) the contract, obligation or trust shall not be regarded as invalid,

on the ground that it is not so constituted, if the condition set out in subsection (4) below is satisfied.

(4) The condition referred to in subsection (3) above is that the position of the first person --

(a) as a result of acting or refrained from acting as mentioned in that subsection has been affected to a material extent; and

(b) as a result of such a withdrawal as is mentioned in that subsection would be adversely affected to a material extent.

(5) In relation to the constitution of any contract, obligation or trust mentioned in subsection (2)(a) above, subsections (3) and (4) above replace the rules of law known as rei interventus and homologation.

...

(7) In this section 'interest in land' means any estate, interest or right in or overland, including any right to occupy or to use land or to restrict the occupation or use of land, but does not include --

(a) a tenancy;

(b) a right to occupy or use land; or

(c) a right to restrict the occupation or use of land,

if the tenancy or right is not granted for more than one year, unless the tenancy or right is for a recurring period or recurring periods and there is a gap of more than one year between the beginning of the first, and the end of the last, such period".

Section 2 of the Act specifies the type of writing that is required for the formal validity of documents of the categories described in section 1(2). The requirements are very simple; only a signature is necessary for the document to be valid.

[16] These sections call for certain comments. First, it is obvious that they deal with the formal requirements of certain categories of legal act, including contracts relating to land. They are not concerned with the substance of the legal act concerned. Secondly, the formal requirements for contracts and other deeds falling within the specified categories are extremely simple and rational. It is not difficult to satisfy those requirements. In those circumstances, I am of opinion that there is no need to give the personal bar provisions in subsections (3) and (4) of section 1 a liberal interpretation. The legal acts specified in subsection (2) are either matters of obvious importance, as with contracts relating to land, the creation or transfer of an interest in land and the making of a testamentary instrument, or relatively unusual acts that are likely to be undertaken with due consideration. The need for a particular legal form should accordingly be obvious. If parties do not adhere to the very simple requirements that are now prescribed, they have only themselves to blame. That is especially so when they are legally advised.

[17] Thirdly, subsections (3) and (4) of section 1 set up a form of personal bar. The requirements of those subsections correspond closely to the classical requirements of personal bar in Scots law as set out, for example, in the well-known statement of the doctrine by Lord Birkenhead in Gatty v Maclaine, 1921 SC (HL) 1, at 7. In essence the second person, as defined in subsection (3), has entered into a transaction with the first person that lacks the prescribed formalities, and the first person has acted upon that transaction to his prejudice, with the knowledge and acquiescence of the second person. That by itself is a strong indication that the rights created by subsections (3) and (4) are personal in nature. Furthermore, the rules in subsections (3) and (4) are designed to supersede the common law rules of rei interventus and homologation, as subsection (5) makes clear. Those common law rules have always been classified as a form of personal bar. The fact that the provisions of subsections (3) and (4) set up a form of personal bar has two important consequences. In the first place, where those provisions apply they operate as a defence available to the first person; they prevent withdrawal from the contract, obligation or trust in question, and the contract, obligation or trust is not to be regarded as invalid. Those subsections do not, however, make any claim or positive right available to the first person. According to the classic metaphor, they operate as a shield rather than a sword. In the second place, because they set up a form of personal bar, subsections (3) and (4) only operate between the parties to the original transaction. They have no effect in relation to third parties, including singular successors. This is of importance in the present case, because the defender is a singular successor of Thomas H. Peck Limited. I deal with this matter at paragraph [23] below.

[18] Fourthly, the personal bar provisions of subsections (3) and (4) are confined to the categories of contract, obligation and trust mentioned in subsection (2)(a); they have no application to the types of transaction specified in subsection (2)(b). Subsection (2)(a)(i) refers to "the constitution of... a contract... for the creation, transfer, variation or extinction of an interest in land". Subsection (2)(b), by contrast, refers to "the creation, transfer, variation or extinction of an interest in land", subject to certain exceptions. The intention is clearly to separate contracts relating to land on one hand from dispositions and other deeds that actually effect the creation or transfer of an interest in land on the other hand. That is a distinction between a transaction that gives rise to merely personal rights and a transaction that gives rise to real rights, or at least rights that will be made real when another legal step is taken, that step being registration or, in the case of a lease, the taking of possession. Counsel for the defender submitted that the personal bar provisions in subsections (3) and (4) should be confined to transactions that create rights that are purely personal. If, by contrast, a transaction creates rights that can be made real by registration or taking possession, personal bar is not intended to operate. I agree with this submission. In the first place, section 1(2) draws a clear distinction between contracts and unilateral obligations for the creation, transfer, variation or extinction of an interest in land on one hand (subsection (2)(a)(i)) and the actual creation, transfer, variation or extinction of such an interest on the other hand (subsection (2)(b)). That distinction is between personal rights on one hand and real rights on the other. Subsection (3) is confined to the former category of transactions, namely those that create personal rights. In the second place, the wording of subsection (3) refers to the creditor and debtor in the obligation, who are referred to as "the first person" and "the second person". That wording is plainly habile to deal with personal contractual obligations, but it does not fit well with the creation of real rights, which of course affect the whole world, not merely a particular debtor and creditor. In the third place, at a purely conceptual level, the notion of personal bar does not fit comfortably into a system of real rights. It is true that under the pre-1995 law the concepts of rei interventus and homologation were applied to real rights; an example of this is found in Clark's Executor v Cameron, 1982 SLT 68. Nevertheless, the critical feature of a real right is that it is a good against the whole world, and it is clearly desirable that exceptions to this norm should be narrowly confined. In this connection, it is significant that the Scottish Law Commission, in their Report on Requirements of Writing (Scots Law Com No. 112), which led to the 1995 Act, recommended at paragraph 2.50 that there should be a general statutory requirement of writing for the voluntary creation, transfer, variation or extinction of an interest in land. They commented on this recommendation as follows:

"We do not think that there should be any provision for actings in relation to the matters covered by [the foregoing recommendation]. There is a distinction in this respect between the underlying contract or obligation for, say, the creation or transfer of an interest in land and the actual creation or transfer of it. The distinction is clearest in the case of missives for the sale of land and the disposition of the land, but exists in other cases too, although it becomes very blurred in the case of leases. It is reasonable to say that a person cannot back out of an obligation if the requisite actings have followed on it. It also seems reasonable to say that an actual conveyance is either valid or invalid whether or not actings have followed on it".

The commentary goes on to point out that that in cases where actings have followed missives they can be used to set up the missives, which can then be subject to an action for implement or damages for breach of contract. In any event, it is pointed out that the whole question of rei interventus will become much less important if the sole requirement for formal validity is subscription. In my opinion the foregoing commentary discloses a clear intention in the legislation to distinguish obligations that create purely personal rights from those that create real rights, and to confine the personal bar provisions to the former.

[19] As is pointed out in the passage quoted from the Scottish Law Commission's report, the distinction between a contract for the creation of legal rights and the actual creation of those rights can become blurred in the case of leases. On one hand, a lease is itself a contract for the creation of an interest in land. On the other hand, it creates an interest in land, which will give rise to real rights when possession is taken or the lease is registered. For present purposes it is not necessary to determine any general criteria for allocating leases to one or other of the two categories. It is sufficient to hold that, where it can be inferred that the intention of the parties to a lease is that possession should be taken by the tenant on the faith of the lease document, or the lease document should be registered, thus creating real rights in the tenant, that document will create an interest in land and will accordingly fall within subsection (2)(c) of section 1. In that event the personal bar provisions contained in subsections (3) and (4) will not apply. In my view that is the clear intention of subsection (2). That subsection draws a fundamental distinction between documents that create property rights on one hand and mere contracts on the other hand. That distinction must be given effect in the case of leases. While that task may in some cases be difficult, if the document in question is one that is clearly intended, objectively speaking, to create a right of property in the tenant, it must be treated as falling within paragraph (b) of the subsection and not paragraph (a)(i).

[20] In the present case the Lease is a formal document. Moreover, it was clearly designed to follow antecedent missives. In the circumstances I am of opinion that it must be inferred that the parties' intention was that possession should be taken on the faith of the Lease. It follows that the Lease is a document intended to create an interest in land, falling within section 1(2)(b), and not a mere contract for the creation of an interest in land, which would fall within section 1(2)(a)(ii). The consequence is that the personal bar provisions contained in subsections (3) and (4) do not apply. That is sufficient for me to hold that the pursuers' averments are irrelevant to the extent that they seek to apply those two subsections to the Lease. The personal bar provisions would be potentially applicable to the Missives, but for the reasons stated above at paragraphs [9]-[14] I am of opinion that no consensus can be discovered in the Missives.

[21] In the course of the argument I was referred by counsel to A. McAllister, Scottish Law of Leases, 3rd ed, at paragraph 2.5. In that paragraph the author discusses the possibility that missives of let might not be described as a contract for the creation of a tenant's right, since they actually create the right. He states that this would have the "unfortunate consequence" of excluding leases from the application of subsection (2)(a)(i), thereby preventing informal leases from being validated by the actings of the parties; that is described as a "disastrous interpretation". For present purposes it is not necessary for me to hold that missives of let should not be described as a contract for the creation of a tenant's right. Even if that is correct, however, I do not share the author's misgivings about such a result. In the first place, the 1995 Act has been in force for nearly ten years, and this is so far as I am aware the first case where the question of the application of subsections (3) and (4) to leases has been raised. In the second place, and more importantly, leases for one year or less are excluded from sections 1 and 2 of the 1995 Act by section 1(7). Consequently, if parties enter into a lease of subjects, entry is taken and rent is paid, but no document conforming to the requirements of section 2 is executed, the lease will be construed as an annual lease, renewable by tacit relocation. That appears to me to be a sensible result. A lease for a period in excess of a year is clearly an important transaction, and if parties choose not to put it in a document that conforms to the very simple requirements of section 2 I cannot see that the law should be assiduous to help them. Moreover, the law prior to 1995 was in practice even less helpful to those who sought to set up an informal lease. Under the common law, it was notoriously difficult to apply the principle of rei interventus to leases of more than one year, because the acts constituting rei interventus were equally consistent with an annual lease: see Gloag, Contract, 2nd ed, 173-174. Before 1995, therefore, if parties had entered into a lease for more than one year that was not in probative form, the result would commonly, perhaps usually, be a lease for one year, renewable by tacit relocation. Under the post 1995 law, this problem will only arise if a lease for more than one year is concluded either verbally or in a document that is not signed on behalf of both parties.

[22] As mentioned above, the common law doctrines of rei interventus and homologation were available in respect of transactions designed to give rise to real rights as well as those that created purely personal rights. The new statutory personal bar does not in my opinion extend to transactions that our intended, by themselves, to create real rights. It could be argued that the common law rules remain applicable to transactions intended to create real rights, especially as the abolition of the common law rules effected by subsection (5) is confined to the transactions referred to in subsection (2)(a), which of course involve personal rights only. In my opinion this argument is not correct. I agree with the view expressed by Professor K.G.C. Reid in his annotations to the Current Law Statutes version of the 1995 Act, where he states

"The alternative and, it is submitted, the better view is that the bald and unqualified statement in subs. (2) that writing is required for para. (b) rights has the effect of excluding the common law of personal bar".

Professor Reid points out that that was the intention of the Scottish Law Commission in their Report on Requirements of Writing of July 1988 (Scottish Law Commission No. 112), as stated at paragraph 2.50. Moreover, I am of opinion that the plain meaning of subsection (5) is that the previous law of rei interventus and homologation is superseded in its entirety. That subsection states that subsections (3) and (4) replace the rules of law known as rei interventus and homologation, and the ordinary significance of the verb "replace" is that one thing is wholly superseded by another.

[23] I accordingly conclude that the personal bar provisions contained in subsections (3) and (4) of section 1 of the 1995 Act cannot be used to set up the Lease, because it is not a document falling within subsection (2)(a)(i). In addition, because subsections (3) and (4) operate as a form of personal bar, as discussed at paragraph [17] above, I am of opinion that they cannot be used against the present defender, who is, of course, a singular successor of Thomas H. Peck Limited. The pursuers' averments amount in essence to the following. They entered into the Lease with Thomas H. Peck Limited. The Lease did not satisfy the requirements of sections 1 and 2 of the 1995 Act; nevertheless, the pursuers' subsequent actings brought subsections (3) and (4) of section 1 into operation. Consequently, in terms of subsection (3), Thomas H. Peck Limited was not entitled to withdraw from the Lease, and the Lease was not to be regarded as invalid. The pursuers now claim that the Lease is binding as against the defender as a singular successor. The difficulty with that line of reasoning is twofold. First, because the Lease was unsigned, there is no writing binding on both parties, with the result that the Leases Act 1449 does not apply. This means that the arrangements between the pursuers and Thomas H. Peck Limited are purely personal in nature, and will not bind singular successors of the landlord. Secondly, because subsections (3) and (4) set up a form of personal bar, they do not bind third parties, including singular successors. Thus all of the rights that the pursuers enjoy, according to their averments, are personal as between then and Thomas H. Peck Limited. It is obvious that one personal right, in the form of personal bar, cannot convert another personal right, under a lease that does not satisfy the requirements of the Leases Act 1449, into a real right. Personal bar only operates as a defence; it does not create any claim or positive right, and thus cannot create a real right. The result is that such rights as the pursuers had under the Lease are only good against Thomas H. Peck Limited, and are not effective against the defender.

[24] The pursuer's response to this was that the defender, when she acquired the property, was aware of the Lease. The result was that, in refusing to give effect to the terms of the Lease, she was in bad faith. Consequently the principle in Rodger (Builders) Ltd v Fawdry, 1950 SC 483, came into operation, and the defender could not now deny the validity of the Lease. The pursuers' averments of bad faith are those set out in paragraph [7] above. Those averments are directed to the separate question of whether the option to purchase was binding on the defender because of her bad faith and, perhaps for this reason, most of the argument on the question of bad faith was directed towards the option rather than the Lease itself. Nevertheless, if I understood his argument correctly counsel for the pursuers also founded on those averments in relation to the Lease. I discuss the question of bad faith below at paragraphs [41]-[51]. For present purposes, it is sufficient to say that I have concluded that the defender's knowledge of the Lease is immaterial. The rights that the pursuers enjoyed as against Thomas H. Peck Limited prior to the sale to the defender were purely personal in nature, and came to an end as soon as that company disponed the property to a third party. That was the inherent nature of those rights; consequently, the sale of the property by Thomas H. Peck Limited did not give rise to any breach of an existing legal obligation. Without the breach of an existing obligation, however, the principle that a purchaser in bad faith cannot defeat existing personal rights does not operate. The result is that the pursuers' argument that the Lease is set up by their actings, in accordance with section 1(3) and (4), is ill-founded, and the averments to that effect are irrelevant.

[25] In addition, I am of opinion that the pursuers' averments on subsections (3) and (4) of section 1 are open to a further criticism. The provisions of the 1995 Act are, generally speaking, concerned with the form of documents rather than their substance. The pursuers, however, appear to rely on subsections (3) and (4) to deal with the problem that they face regarding consensus as to the terms of any lease. They make the following averment:

"Notwithstanding that the Missives were never concluded or the Lease was never subscribed by the granter is in terms of section 2(1) of the Requirements of Writing (Scotland) Act 1995, there is nevertheless a valid contract of lease in terms of section 1(3) and (4) of the said Act".

That averment is followed by the averments of actings that are summarized at paragraph [6] above. This appears to involve an attempt to deal with the failure to conclude the Missives by making use of subsections (3) and (4). In my opinion that is not legitimate. Those subsections are concerned with deficiencies in the form of documents. They cannot deal with any deficiencies in substance, and a lack of consensus falls into the latter category. It may still be possible to rely on actings to infer consensus; I deal with this aspect of the case at paragraph [31] below. Nevertheless, any such argument must be based on the common law, not on the 1995 Act.

 

Rei interventus and completion of contract

[26] In the law as it existed prior to the Requirements of Writing (Scotland) Act 1995, the concept of rei interventus was used in two different senses. These are explained by Gloag (Contract, 2nd ed, p. 46) as follows:

 

"The normal application of the plea of rei interventus is in cases where it is not disputed that an agreement has been made, but where the mere agreement is not binding, because the contract in question is one of the class in which writing is necessary to constitute a binding obligation....But the term rei interventus is also applied, though not so frequently, to the case where parties have been in negotiation for a contract, and one of them has acted, and been known and allowed to act, on the mistaken assumption that the negotiations had reached the point of a completed contract".

The first of these senses is that discussed above, where the principle of rei interventus was used to perfect an agreement that did not satisfy the formal requirement that it should be in writing. The second sense is not concerned with failure to satisfy formal requirements; it is rather concerned with the manner in which the parties' agreement is established. Gloag goes on to point out that, although the result in both cases is that a contract is completed, the theory underlying that result is different. He states

"In the case of an agreement which is not binding unless it is entered into in writing..., the rule that a merely verbal agreement becomes binding when followed by rei interventus is simply an exception to the primary and more general rule that contracts of the class require writing. But when rei interventus is relied upon in cases where parties have not arrived at any agreement, verbal or in writing, the rule that actings may bind them to a contract is not an exception to the general rule that contract requires agreement. What is really meant is that the actings in question are evidence that agreement has been actually reached, though it has not been indicated in words or in other way than by the actings. In the former case the actings render an agreement binding; in the latter they prove that an agreement was reached".

[27] The pursuers' averments of actings following their taking entry to the subjects are summarized at paragraph [6] above. These might be construed as inferring rei interventus in the second sense, completing the parties' agreement, and the pursuers' counsel advanced an argument to that effect; in doing so he referred to Errol v Walker, 1966 SC 93, a case where such an argument was successful. For the defenders it was argued that the effect of section 1(5) of the 1995 Act was to replace the law of rei interventus in its entirety, in both of the senses discussed in the last paragraph. It is accordingly necessary to decide whether the principle of rei interventus in its second sense has survived the 1995 Act. In my opinion the answer to this question must depend upon the proper analysis of that principle as explained in the decided cases.

[28] Perhaps the definitive expression of the principle of rei interventus in its second sense is the decision of the Second Division in Errol v Walker. In that case the defender had been the tenant of property. The pursuer, who had been his landlord, brought an action of declarator and removing, and the defender pled that he had purchased the property from the pursuer. He averred that he had delivered a probative offer to purchase of property to the pursuer's agent, and paid instalments to account of the price in terms of that offer. He had never, however, received a formal acceptance. He further averred that he had to the pursuer's knowledge carried out substantial improvements on the property. It was held that the defender's averments, if established at proof, might be sufficient to infer acceptance of the offer by the pursuer, and that those averments might be proved by parole evidence. Lord Strachan, who delivered the first of the opinions, referred (at page 99) to the rule that a contract relating to heritage could be proved only by writ or oath, but that an informal obligation could be binding if followed by rei interventus. He then pointed out that rei interventus could be proved by parole evidence, and continued

"In the present case there is a probative writing by the defender, and the contention is that the contract was completed by rei interventus, that the actings of the parties are evidence that agreement has been reached. If that be sound law, it seems to follow that proof of rei interventus will be proof of the completion of the contract, and in that event there would... be no reason to restrict the normal method by which rei interventus can competently be proved. Apart from that possible ground I see no warrant for relaxing the rule requiring proof by writ or oath of a contract relating to heritage".

Lord Walker stated (at page 103) that the averments of actings might all competently be proved prout de jure, and identified the critical question as being whether those averments if proved would infer acceptance of the written offer. On the basis of the authorities he concluded that it would. Lord Justice-Clerk Grant stated (at page 105) that

"[T]he giving of possession may be treated as an implied acceptance and one then has a completed (though informal) contract to which the 'actings' may be unequivocally referable and to which they may give binding force".

I note, however, that at page 107 the Lord Justice-Clerk stated that he did not find the case easy and had found the authorities at times both confused and confusing.

[29] The statements of the law in Errol v Walker are based on earlier decisions such as Stewart v Countess of Moray, 2 Pat. App. 317, Keir v Duke of Atholl, 6 Pat. App. 130, and, most importantly, Colquhoun v Wilson's Trustees, 22 D. 1035. It seems to me that two distinct approaches can be discerned in the court's opinions. Lord Strachan and Lord Walker appear to assume that the two senses of rei interventus are both to the regarded as manifestations of a single principle. That appears in particular from the opinion of Lord Strachan at page 99, where a single principle, rei interventus, is regarded as both completing the contract and overcoming its informality. The same is true of the discussion by Lord Walker at page 104. The Lord Justice-Clerk takes a noticeably different approach. He distinguishes the question of implied acceptance on one hand from the curing of informality in the constitution of the contract on the other hand. He treats the giving of possession as amounting to implied acceptance, and the subsequent actings on the faith of the contract as curing the informality in expression. I am bound to say that I find this approach more coherent intellectually; nevertheless, it seems clear that the approach of the majority represents the ratio of the case. Moreover, the approach of the majority appears to accord with the discussion of the law in Colquhoun v Wilson's Trustees.

[30] On the basis that the majority approach represents the ratio of Errol v Walker, I am of opinion that the decision no longer represents the law following the enactment of section 1(5) is of the 1995 Act. That subsection provides that, in relation to the constitution of any contract as mentioned in subsection (2)(a), subsections (3) and (4) "replace the rules of law known as rei interventus and homologation". In my view that must apply to rei interventus in both senses. At the level of the language used in subsection (5), the expression "rei interventus" applies to the rule in Errol v Walker as formulated by the majority just as much as it does to the rule that informal writings can be set up by subsequent actings of one party with acquiescence of the other. It can be said that the two senses of the expression fulfil different functions. Moreover, the 1995 Act is concerned with the formal requirements of documents rather than the substance of the underlying transaction. Nevertheless, as the rule is formulated by the majority in Errol, no clear distinction is drawn between the two functions of the concept. On the facts of the case, it was held that the defender's payment of instalments of the price and carrying out of improvements, to the pursuer's knowledge, were capable of both evidencing completion of the contract and perfecting the contract's informality. That is clear, for example, from Lord Strachan's statement of the defender's argument (at page 97):

"[R]ei interventus normally follows on a contract which has been completed, although informally, and its effect is to prevent a party from resiling during the locus poenitentiae which is consequent upon the informality of the contract. In this case the argument is that the rei interventus completed the contract where no previous contract existed".

Throughout the remainder of the opinion, and in the opinion of Lord Walker, it seems to me that the two manifestations of rei interventus are regarded as essentially a single principle applicable to the same facts. If that is so, there does not appear to be any good reason for failing to give the wording of subsection (5) its full import. While the 1995 Act is concerned with form rather than substance, rei interventus was a unitary principle that covered both form and substance. In the circumstances I consider that the legislative intention behind subsection (5) was to abolish the principle in its entirety. If that is so, the approach of the majority in Errol v Walker no longer represents the law. I do not regret this result; as the Lord Justice-Clerk points out in that case, the law in this area was confused, and the legal theory underlying the cases was far from clear.

 


Completion of contract by parties' actings

[31] It does not follow, however, that a case such as Errol v Walker should now be decided any differently. It is possible for parties to demonstrate consensus through actings as well as words, and that is not affected in any way by the 1995 Act. Consequently, on the facts of Errol, it would now be possible to hold that the parties entered into a contract for the sale of the property on the terms of the defender's offer to purchase it. Consensus could be inferred from the defender's being permitted to retain possession after the offer was submitted and, even more importantly, from the pursuer's acceptance of payment of instalments of the price specified in the offer rather than the rent that was previously due. Such a contract would clearly not be in the form prescribed by section 1(2) of the Act. Nevertheless, it could be set up under subsections (3) and (4) as a result of the defender's payment of instalments of the price and, in particular, making improvements to the property in reliance on the contract for sale of the property. That analysis is essentially in accordance with the approach taken by the Lord Justice-Clerk in Errol. It has the advantage of drawing a clear distinction between the inference that the parties have reached consensus in idem and the actings necessary to set up the contract. It also recognizes the abolition of the rule that a contract for the sale of heritage could only be proved by writ or oath. A major source of the defender's difficulties in Errol was the fact that the only writing evidencing a contract was his own offer to purchase; there was nothing in writing from the pursuer. The court dealt with this problem by holding that the pursuer's consent was established by his actings in giving possession, accepting instalments of the price and permitting improvements to be made, and that those actings could be proved prout de jure: see Lord Strachan at 99 and the Lord Justice-Clerk at 105. The rule that the terms of a contract for the sale of heritage must be proved by writ or oath has been abolished by section 11(1) of the 1995 Act. The result is that there is nothing to prevent a court from drawing the inference that a contract for the sale of heritage has been completed by the parties' conduct alone, or by conduct following the tendering of a document by the party who seeks to set up the contract. Thereafter, all that the court requires to consider is whether the personal bar requirements of section 1(3) and (4) are satisfied. This perhaps illustrates very clearly why it is undesirable that the majority approach in Errol should remain law; the 1995 Act involves a new start, on a comprehensive basis, and it is better that that should be recognized fully.

 

Whether pursuers' actings referable to Missives and Lease

[32] The argument for the present pursuers was presented on the basis of Lord Strachan's opinion in Errol. As I have indicated, I am of opinion that that view of rei interventus has been abolished by section 1(5) of the 1995 Act. For that reason the pursuers' argument must fail, at least in the terms in which it was presented. Even if the argument is reformulated in the manner suggested in the last paragraph, however, I am of opinion that it must fail.

[33] When actings are relied upon as completing an agreement, it is important that the particular agreement should be identified and that the actings should be referable to that agreement. The same point applies where actings are relied upon to set up an informal agreement under provisions such as section 1(3) and (4) of the 1995 Act. That is clear from the decision of Lord Hamilton in Tom Super Printing Supplies Ltd v South Lanarkshire Council, 28 September 1999 and 19 November 1999, unreported. In that case it was claimed by the pursuers that a contract had been varied, and that the varied form of the contract had been set up by actings under section 1(3) and (4). It was held that most of the acts relied on by the pursuers predated the variation, and that the subsequent acts that were averred were no more referable to the contract as varied than to the contract prior to variation. Lord Hamilton held that acts sufficient for the purposes of section 1(3) must be "clearly referable to the terms of the contract as varied; acts equally consistent with the contract prior to variation do not... suffice". That illustrates very clearly the requirement that actings, if they are to be relevant, must be referable to a particular agreement. That in turn means that the actings must follow the date when the material contract or other document came into existence. This point is explained by Professors Robert Rennie and D.J.Cusine in their work on the 1995 Act, "The Requirements of Writing", at paragraph 2.10. It is there stated

"The contract must also precede any of the actings otherwise they can hardly be said to be in reliance on the agreement".

[34] The pursuers' averments relating to their actings in reliance on their alleged agreements with Thomas H. Peck Limited are summarized at paragraph [6] above. The critical passage is as follows:

"On taking entry, the pursuers, in reliance on the terms of the Missives or alternatively the Lease agreed between themselves and [Thomas H. Peck Limited] and with the knowledge and acquiescence of [Thomas H. Peck Limited], carried out improvements to the Subjects which included shop front decoration and signs and internal fixtures, fittings, furnishing and decoration. They commenced trading as a mortgage advisory service. They began to build up business connection at Crighton Place... They have paid rent in terms of the Missives or alternatively the Lease".

It is a reasonable inference most of the matters that are relied on in this passage occurred very soon after entry was taken; that is the obvious time for installing a new shop front and refurnishing and redecorating the premises. It is also the obvious time when the pursuers would start to trade from the premises. At the very least, no indication is given in the pursuers' pleadings that these actings occurred any significant time after entry. The pursuers aver that entry was taken on 1 December 1999. The actings founded on appear, therefore, to have occurred shortly after that date, or in the case of trading and the payment of rent to have started shortly after that date. The two letters that are said to constitute the Missives are dated respectively 29 November 1999 and 22 May 2000. Thus the "Missives", as that expression is used by the pursuers, did not come into existence until more than five months after entry. The document described by the pursuers as the "Lease" was sent to the pursuers on 13 October 2000, more than ten months after entry. It follows that the pursuers' actings immediately following entry cannot have proceeded in reliance on either the Missives, as that expression is used in the pleadings, or the Lease.

[35] It is no doubt possible that at least some of the actings relied on might have occurred following the sending of the qualified acceptance on 22 May 2000, or even after the sending of the engrossed Lease on 13 October 2000, but if that is so it should be made clear. The pursuers' present averments relate expressly to the date of entry, and the natural inference is accordingly that, for the most part, the actings relied on occurred shortly after that date. On that date the document governing the relationship between the pursuers and Thomas H. Peck Limited was neither the Missives nor the Lease but the offer of 29 November 1999 whose terms are set out in paragraph [3] above. Clause 9 of that letter states that from the date of entry until a lease has been executed the terms of the lease will be regulated by "the terms of the draft Lease"; that is obviously the draft lease referred to in clause 6 of the letter. That document was not produced, however, and without it is impossible to discover whether it differed in any material respect from the engrossed Lease a copy of which was produced. The pursuers' actings, therefore, are likely to be referable to a document which is not now available and which is not in any event relied upon by the pursuers in their pleadings. In these circumstances I conclude that the pursuers' averments of actings following the date of entry are irrelevant, in that those actings are referable not to either the Missives or the Lease but to another document that is not relied on.

[36] The principles discussed above apply not only to the completion of the contract by the parties' actings; they also apply to the use of the parties' actings to set up an informal contract under section 1(3) and (4) of the 1995 Act. Once again, the actings appear to have been referable to the draft lease sent with the offer of 29 November 1999. They do not appear to have been referable to either the Missives, as that expression is used in the pursuers' pleadings, or the Lease. For this reason I conclude that the pursuers averments of actings to satisfy the personal bar requirements of section 1(3) and (4) are irrelevant. This reason is of course additional to those already discussed, namely the lack of consensus disclosed in the Missives (paragraphs [9]-[14] above) and the inability of subsections (3) and (4) to cure the lack of formality in the Lease (paragraphs [15]-[25] above).

 

Status of option to purchase

[37] Counsel for the defender presented a further argument that the option to purchase was a personal right between the original landlord, Thomas H. Peck Limited, and the pursuers. As such, it was not binding on the defender, who is of course a singular successor of Thomas H. Peck Limited. This argument was based on the proposition that not all of the terms of a lease are necessarily binding on singular successors. If a term is to be binding on singular successors, it must be inter naturalia of the lease. Reference was made to a number of authorities, notably Montgomerie v Carrick, 1848, 10 D 1387, Bisset v Magistrates of Aberdeen, 1898, 1 F 87, and Optical Express (Gyle) Ltd v Marks & Spencer PLC, 2000 SLT. Counsel submitted that an option to purchase was not normally inter naturalia of a lease. It might be rendered inter naturalia through custom and practice, but no averments of that nature were made by the pursuers.

[38] In my opinion this argument is clearly correct. Indeed, the primary submission advanced by counsel for the pursuers did not challenge it directly, but was rather that the option to purchase was rendered binding on the defender because of her bad faith. I deal with this argument at paragraphs [41]-[51] below. So far as the primary argument for the defenders is concerned, it is clearly established that not all of the terms of a lease will necessarily bind singular successors; only those that are inter naturalia will do so. In Montgomerie v Carrick, supra, a case involving an arbitration clause in a mineral lease, the Lord President stated (at 1395)

"It is no doubt most plain and obvious... that there is a distinction between those stipulations which are extrinsic to the lease, and do not transmit against singular successors, and those other stipulations which are of the essence of the contract, and do therefore of necessity transmit against them".

In Bisset v Magistrates of Aberdeen, supra, the granters of a lease of heritable property for 999 years bound themselves to deliver to the tenant and his heirs, executors and successors at any time they should desire the same a feu charter of the subjects of let. It was held that the option to purchase was not binding on singular successors. Lord Trayner stated (at 98)

"Here the obligation is to put an end to the right created by the lease, and to substitute for it another and different right -- to substitute a right of absolute property for a right merely to use. I agree with the Lord Ordinary in thinking that the obligation to grant a feu right was personal to the granter of it, and that it did not transmit against singular successors".

Lord Moncreiff stated (at 90)

"The lease is one for 999 years... 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".

In Optical Express (Gyle) Ltd v Marks & Spencer PLC, supra, Lord Macfadyen considered Bisset in the context of an exclusivity clause in a lease of a unit in a shopping centre. He stated (at 650)

"It is clear from Bisset v Magistrates of Aberdeen that one factor relevant to determining whether an obligation is inter naturalia of the lease will be whether it is one of common occurrence in the particular class of lease.... I infer from [the passage quoted above from Lord Moncreiff's opinion] that the matter is primarily a question of the nature of the obligation, although evidence of customary practice will assist in making out a case that a particular obligation is inter naturalia of a particular class of lease".

It was held that an exclusivity clause was prima facie not inter naturalia of a lease.

[39] In my opinion Bisset is clear authority that an option to purchase is not normally inter naturalia of a lease. No doubt the reason is that identified in Bisset, namely that it involves converting the rights of a tenant into a wholly different relationship, one of feu or, today, outright ownership. That is the normal rule, and exceptions may exist. One such exception has been identified; that is where it is established by evidence that the custom and practice in leases of a particular nature is to insert a particular form of clause. If that is relied on, however, the party who asserts that a practice exists would require to make appropriate averments. No such averments have been made in the present case. Other exceptions may exist, but none was suggested in relation to the present lease. I accordingly conclude that any option to purchase would not be inter naturalia of the lease, and would accordingly not be binding on singular successors.

[40] Counsel for the pursuers submitted that options to purchase were common in leases, and that that fact might be within judicial knowledge. In this respect he suggested that there was scope for development of the law. In my opinion this argument must be rejected. Bisset clearly establishes that a an option to purchase is not normally to be regarded as inter naturalia of a lease. If this is to be displaced by common practice, evidence that effect would be required. I do not think that judicial knowledge can be of any assistance in this connection; while options to purchase are encountered, many leases do not contain such options. Indeed, in leases granted by investment institutions, which are very common, it is difficult to imagine why an option to purchase should be common practice.

 


Bad faith

[41] The primary submission advanced by counsel for the pursuers in relation to the option to purchase was that when the defender acquired the subjects she knew of the option; consequently she was in bad faith, and could not now deny that the pursuers had a valid right to purchase the subjects. In advancing this argument, counsel founded on the well-known decisions in Rodger (Builders) Ltd v Fawdry, 1950 SC 483, and Trade Development Bank v Crittall Windows Ltd, 1983 SLT 510. He submitted that these cases indicated a general principle that the law should not extend protection to those in bad faith, and for this purpose simple knowledge was sufficient to give rise to bad faith. Counsel also founded on the decision of Sheriff Principal Ireland in Davidson v Zani, 1992 SCLR 1001, where the circumstances were very similar to the present; the purchaser of property subject to a lease was aware that the tenant had an option to purchase, and it was held that because of that knowledge the landlord was obliged to recognize the option.

[42] In my opinion this argument is fundamentally wrong. It appears to me to be based on a misunderstanding of the principle that underlies the cases relied on. Moreover, the argument ignores, and indeed subverts, the distinction between real rights and personal rights. It is also wholly at variance with the rule discussed in paragraph [38] above that in a lease only those clauses that are inter naturalia of the type of lease in question are binding on singular successors.

[43] The leading authority in this area of the law is Rodger (Builders) Ltd v Fawdry, supra. That case involved two successive contracts to sell the same property. The purchaser under the second contract was aware of the earlier contract. The relevant principle was stated by Lord Jamieson in the following terms (at 1950 SC 499):

"If an intending purchaser is aware of a prior contract for the sale of the subjects, he is bound to inquire into the nature and results of that prior contract, and his duty of inquiry is not satisfied by inquiry of the seller and an assurance by him that the contract is no longer in existence".

That case involved a double grant of the same property, but the principle has been extended more widely. In Trade Development Bank v Crittall Windows Ltd, supra, the defenders offered to purchase the tenant's interest under a lease from the existing tenant. The offer was accepted. Subsequently, the existing tenant obtained a fresh lease of the subjects from the landlord, and shortly thereafter granted a standard security to the pursuers over its interest in the lease and certain other leases. The original tenant then granted an assignation in favour of the defenders, and the assignation was recorded. The original tenant subsequently went into liquidation, and the pursuers sought to realise their standard security. They raised an action against the defenders for declarator that they had the right to enter into possession and for removing. It was held that, as a matter of relevancy, the principle of good faith was capable of applying to those circumstances, if it were proved that the pursuers had some knowledge of the contract to grant an assignation to the defenders. In this case there was no double grant of the same subjects. Nevertheless, the contract for the sale of the tenant's interest contained an obligation of warrandice, in that it provided for "a valid marketable and recordable assignation of the subjects of sale". The grant of the standard security was in breach of that obligation. Thus, on the defenders' averments, the pursuers had taken their standard security in the knowledge that its grant would involve a breach of contract by the granter.

[44] The theoretical basis for the foregoing principle is not discussed in any detail in the decided cases, perhaps because its practical application is very obvious, at least in simpler cases. The origins of the principle seem to lie in the concept of fraud in its older sense. This is not the modern sense, involving a false representation made knowingly, but rather consists of actings designed to defeat another person's legal right. Nevertheless, the law has moved away from the concept of fraud. In Rodger Lord Jamieson said (at 1950 SC 499):

"[F]raud in the sense of moral delinquency does not enter into the matter. It is sufficient if the intending purchaser fails to make the inquiry which he is bound to do. If he fails he is no longer in bona fide but in mala fide".

Thus implied or constructive knowledge, just as much as actual knowledge, will bring the principle into operation and render the second purchaser in mala fide.

[45] Nevertheless, however extended the concept of knowledge may have become, it is clear that a purchaser of property must have some sort of knowledge of prior rights before the principle can come into operation. That leads on to the question: knowledge of what? The answer to this question must, I think, depend upon the underlying rationale of the principle. In Trade Development Bank v Crittall Windows Ltd, the Lord President stated (at 1983 SLT 517)

"It is clear from the opinion of Lord Jamieson in Rodger (Builders) Ltd v Fawdry... that the decision rested upon the broad principle in the field of contract of fair dealing in good faith".

The Lord President went on to cite with approval certain remarks of the Lord Ordinary, Lord McDonald, in the earlier case of Trade Development Bank v Warriner & Mason (Scotland) Ltd, 1980 SC 74, at 82:

"The principle evolved in these cases is subject to limitation. It is founded on equity and can, on one view, be regarded as a development of the doctrine of personal bar... It is an exception to the general rule that the person who transacts with the proprietor of lands need not look beyond the position revealed by the Register of Sasines. Moreover it only operates where the right asserted against such person is one which is capable of being made into a real right".

These statements indicate that the principle is equitable in nature. It operates as an exception to general legal rules, and is based on the notion of fair dealing in good faith in the field of contract. If that is the underlying rationale of the principle, I am of opinion that what the purchaser must know, actually or constructively, to bring it into operation is that the implement of the contract in his favour will render the seller in breach of a legal obligation that he has undertaken to a third party. If there is no breach of any existing obligation, it is difficult to see that any question of dealing in good faith arises, because the seller is merely doing what he has a legal right to do. Nor is there any reason to bring equity into play in such a case to disrupt the normal operation of legal rules; all existing rights and obligations are respected. Where a contract of sale involves the seller in the breach of an existing legal obligation, however, the justification for applying principles of good faith is very obvious. It is the breach of an existing obligation that justifies the intervention of equity. The purchaser, of course, is not a party to that breach; accordingly, if the consequences of the breach are to be visited on him, he must have actual or constructive knowledge of the breach. Once again, the justification for that requirement is obvious. It seems that the consequences of the breach can also be visited on a person who acquires property gratuitously, or for a manifestly inadequate consideration, although so far as I can discover this situation has not been the subject of any decided cases outside the field of trusts. Nevertheless, the justification for equitable intervention in such a case is once again clear, subject to the qualification that any consideration that has been paid by the purchaser will normally be repayable as a condition of reduction. For present purposes, however, what matters is that the intervention of equity on the ground of bad faith is only warranted by the breach of an existing legal obligation.

[46] For the foregoing reasons I am of opinion that the principle is accurately stated by Professor KGC Reid in The Law of Property in Scotland at paragraph 695:

"Any attempt to identify a principle capable of explaining all the different manifestations of the rule is to some degree hazardous, but it is thought that the original analysis based on 'fraud' remains correct, provided that 'fraud' is not confined to its narrow modern meaning. In current legal language the principle is expressed more accurately by saying that what is required is the breach by the granter of an antecedent obligation which was binding upon him. Thus the situation envisaged is that a granter undertakes, expressly or by implication, that he will not make a particular grant; nonetheless he makes the grant; and the grantee, either knowing of the obligation or failing to take for value, is affected by it".

Professor Reid continues:

"In order for the rule... to operate it appears that all of the following must be shown, namely:

(1) that there was an antecedent contract or other obligation affecting the granter;

(2) that the grant was in breach of a term, express or implied, of that obligation; and

(3) either that the grantee knew of the antecedent obligation prior to the completion of his own right or that the grant was not for value".

I agree with that formulation of the law. I also agree with Professor Reid's comments on Trade Development Bank v Crittall Windows Ltd; at paragraph 697 of the same work he states:

"The decision in Crittall Windows reaffirms, if only by implication, the primacy of the requirement that the grant which is being challenged must breach an antecedent obligation, and this requirement seems the key to the future development of the law".

[47] If that is a correct view of the law, the result in the present case is very clear. The sale of property by Thomas H. Peck Limited to the defender did not involve the seller in any breach of its existing obligations. No such breach is averred, and it is difficult to see how any breach could be averred. The right to sell is one of the most normal incidents of a right of property, and in my opinion clear wording or a clear implication would be required to restrict or remove that right. Nothing in either the Missives or the Lease comes close to achieving that result. Indeed, in the Lease the expression "the Landlords" is defined as including, where the context so admits, all persons deriving title from them. Nor is there any breach of the right conferred by the option as a result of the sale. For this purpose it does not matter whether the option to purchase takes the form found in the Missives or that found in the Lease. In either event that option is not inter naturalia of the lease, for the reasons stated above, and is accordingly personal to the original landlord, Thomas H. Peck Limited. Thus the option was always liable to be defeated when the property passed to a singular successor. Because there was no breach of any antecedent obligation by the seller, the rule in Rodger (Builders) Ltd v Fawdry has no application even in the extended form adopted in Trade Development Bank v Crittall Windows Ltd.

[48] That appears to me to be an entirely sensible result. If the pursuers' argument were correct, the result would be that the personal right conferred in the option was converted for practical purposes into a real right. Any purchaser of the property would be likely to discover that a tenant was in occupation, and would therefore be required to investigate the lease under which the tenant held the property. Thus the purchaser would almost inevitably discover the existence of the option. That knowledge would make the option binding on the purchaser, notwithstanding that the obligation imposed by the option was personal to the original landlord. That cannot be correct. The same would be true in a number of other cases involving personal rights conferred by the owner of property. An obvious example is a right of occupancy or other form of contractual licence. Another is a lease that does not satisfy the requirements of the Leases Act 1449; I discuss this further in the next paragraph. In all these cases the rights conferred on the occupier or tenant are purely personal, and do not survive a sale of the property. If the parties to any such transaction wish to avoid this result they can do so quite easily, by a number of mechanisms. The simplest is to insert a term in the lease obliging the landlord to bind any disponee of the property to the terms of the option. In that event, if the landlord sold the property without imposing such a term, he would be in breach of the lease, and the rule in Rodger (Builders) Ltd v Fawdry would apply. Another possibility is to secure the option by means of a standard security (which can secure an obligation ad factum praestandum: Conveyancing and Feudal Reform (Scotland) Act 1970, section 9(8)(c)). In that way the option is made a real burden over the subjects.

[49] The question of bad faith also arises in relation to the Lease itself. As indicated above at paragraph [23], the Lease itself, because it was unsigned, does not satisfy the requirements of the Leases Act 1449, and thus gives rise to personal rights only. The personal bar provisions of section 1(3) and (4) of the 1995 Act only give rise to personal rights. Thus all of the rights that the pursuers enjoyed against Thomas H. Peck Limited were purely personal in nature. If the defender's knowledge of the Lease, and indeed the Missives, is to put her in bad faith, the sale of the property to her must involve Thomas H. Peck Limited in the breach of an antecedent obligation. No averment is made of any such breach, and I find it impossible to see how such a breach could have occurred in the circumstances. The right to sell is a normal incident of property that can only be excluded by clear wording or clear implication. Nothing in the terms of the Lease or the Missives suggests that the right to sell was restricted in any way. In particular, the existence of the Lease could not do so, because it only gave rise to personal rights that would necessarily terminate on a sale because they were not valid against singular successors. Thus the rule in Rodger (Builders) Ltd v Fawdry does not apply to the Lease, and the rights conferred on the pursuers by the Lease, being personal in nature, do not affect the defender in any way.

[50] The foregoing view of the law is consistent with all of the cases to which I was referred in the course of the argument, with one exception. For the reasons stated in paragraph [45] I am of opinion that that view follows from the rationale of the law as laid down in Rodger (Builders) Ltd v Fawdry and Trade Development Bank v Crittall Windows Ltd. I was also referred to two cases involving rights of pre-emption. In Matheson v Tinney, 1989 SLT 535, land subject to a right of pre-emption in favour of the original seller was sold to third parties without being offered to the original seller. The clause of pre-emption bore to impose the obligation on the "disponees" and not on their assignees or successors. Lord Kirkwood held that the obligation bound only the original purchasers, who had resold the subjects. Nevertheless, the obligation was declared a real burden. As such it was capable of being enforced against singular successors of the disponees who had acquired the subjects in circumstances in which the disponees failed to implement the obligation first to offer the subjects to the original seller. The principle applied in Rodger (Builders) Ltd v Fawdry and Trade Development Bank v Crittall Windows Ltd. was not referred to. Nevertheless, there was a clear breach by the original purchasers of the obligation contained in the clause of pre-emption. That was sufficient to bring the principle into operation. In Roebuck v Edmunds, 1992 SCLR 74, it was accepted by parties that the last case should be followed, with the result that the subjects that had been resold without regard to the clause of pre-emption should be reconveyed to the original purchaser. I was also referred to Jacobs v Anderson, 1898, 6 SLT 234, where the tenant of commercial premises granted a sublease in favour of the pursuer, the sublease and the head lease expiring together. The landlord, in consenting to the sublease, granted an undertaking in favour of the pursuer that he would renew the subtenant's lease for four years. On the faith of that document the pursuer carried out considerable alterations to the premises. Thereafter the landlord sold the premises to the defender, who intimated to the pursuer that, as a singular successor, he was not bound by the terms of the landlord's letter. The pursuer averred that, before the purchase, the defender was made aware of the terms of the letter and of the actings that had followed upon it. The pursuer brought an action of declarator that the defender was a bound to grant a new lease. Lord Kyllachy held that the action was irrelevant. The two principal grounds were that the pursuer's obligation had to be ascribed to his sublease, not to the arrangement with the head landlord, and that the arrangement with the head landlord did not constitute a lease at all in the sense of the Leases Act 1449. The significant part of the case for present purposes, however, is a subsidiary argument that the letter granted by the head landlord constituted a good personal obligation against the granter, and that it was therefore enough that the pursuer offered to prove that its existence and terms were within the knowledge of the defender, the granter's singular successor. That was said to constitute personal bar. The authorities relied on were those cited in Rodger (Builders) Ltd v Fawdry. That argument was rejected. Lord Kyllachy stated that it might not be easy to fix the precise limits of the doctrine established by those cases, but continued

"But it is certainly the fact that that doctrine has never been applied to leases or similar contracts affecting land which remain merely personal and on which possession has not followed. The Act of 1449 supplies the rule in such cases".

Although the report is brief, this decision seems wholly in accordance with the view that I have adopted in the present case.

[51] The only decision that is clearly inconsistent with that view is Davidson v Zani, 1992 SCLR 1001. In that case the pursuer agreed to take a lease of shop premises for seven years. The missives granted her an option to purchase the subjects at the termination of the lease, but that option was not incorporated into the lease. The landlords subsequently concluded missives with the defender for the sale of the subjects. At the time the defender was shown a copy of the original missives. A dispute arose as to whether the pursuer's option was binding on the defender as a singular successor of the landlord. The sheriff held that it was so binding, and his decision was upheld by the sheriff principal. Rodger (Builders) Ltd v Fawdry was followed. The principal argument for the defender was that the rule in that case was inapplicable because the pursuer's right under the option to purchase was not capable of being converted into a real right. It had been established in Wallace v Simmers, 1960 SC 255, that a personal right that was not capable of being made into a real right could not in any circumstances bind the ultimate purchaser. Counsel argued that the pursuer's option was in that category, because that the time of the sale to the defender it could not be exercised; exercise was only possible within the last three months of the lease. In addition, it was not effective until the pursuer chose to exercise it. That argument was rejected, on the basis that the obligation on the landlord was future and not conditional or contingent. As the sheriff principal succinctly put the matter,

"The obligation is indeed solvendum in futuro, but it is still debitum in praesenti".

In my opinion that may well be correct. My hesitation is that an option may properly be characterized as a power rather than a right, and what is made real is not the entitlement in the option but the right that arises when it is exercised. Nevertheless, this sort of distinction does not appear to have been taken in any of the cases in this area of the law. Counsel for the defender went on to refer to Bisset v Magistrates of Aberdeen, supra. The sheriff principal held that that decision had no bearing on the case before him, in that it was concerned solely with the construction of the terms of the lease, under which the obligation in question was assumed only by the original lessor without reference to successors. In my opinion the decision in Bisset goes significantly further than that. Lord Moncreiff makes it clear that the ground of decision was that an option to purchase, involving an obligation to alter the tenure from one of lease to one of feu, was not inter naturalia of a lease. The result of that was that it would not affect singular successors. The brief opinion of the Lord Ordinary, Lord Kyllachy, is to the same effect. Lord Trayner agreed with the Lord Ordinary. He was the only judge to refer to the feature of the clause relied on by the sheriff principal, namely that it did not refer to the heirs and successors of the lessor. He only did so, however, in the course of distinguishing an old case, and this feature was only one of the grounds for distinguishing that case; indeed, he doubted whether the case would now be followed. In my opinion the sheriff principal did not give Bisset its proper significance. Bisset is of course binding on me. I accordingly conclude that Davidson v Zani was wrongly decided. I note that the decision is cogently criticized in an article by Mr Stewart Brymer, Enforcing Commercial Lease Terms Against Successor Landlords, 2000 Prop LB 49-4.

 

Conclusion

[52] I accordingly conclude that the pursuers' case is irrelevant. First, the Missives do not disclose consensus in idem between the parties. Secondly, the Lease does not satisfy the formal requirements of sections 1 and 2 of the Requirements of Writing (Scotland) Act 1995, and it cannot be set up using the personal bar provisions found in subsections (3) and (4) of section 1 because they only apply to contracts intended to create purely personal rights. Thirdly, the Lease, being unsigned, falls outwith the Leases Act 1449, and thus creates rights that are personal to the original parties; these do not bind the defender, who is a singular successor. This result is not affected by subsections (3) and (4) of section 1, as these provisions create rights that are purely personal in nature and do not bind singular successors. Fourthly, that result is not affected by the defender's knowledge of the Lease or the Missives, because the sale to her did not involve breach of any existing legal obligation imposed on the seller, the original landlord of the property. Fifthly, the doctrine of rei interventus can no longer be used to infer that parties to a contract have reached consensus, in consequence of section 1(5) of the 1995 Act. Sixthly, the pursuers' attempt to infer consensus from the actings of the parties fails because the critical actings occurred prior to the dates of both the Missives and the Lease, and therefore could not be referable to either of those documents. Seventhly, the pursuers' reliance on those actings for the purpose of subsections (3) and (4) of section 1 fails for the same reason. Eighthly, the option to purchase the property created purely personal rights in the pursuers, which are not binding on the defender as a singular successor of the original landlord. Ninthly, that result is not affected by the defender's knowledge of the option, because the sale to her did not involve any breach of any antecedent obligation imposed on the seller. For these reasons I will sustain the defender's first plea in law and dismiss the action. For the sake of completeness, I should mention that the defender has made certain averments as to the application of section 320 of the Companies Act 1985. It was ultimately accepted by her counsel that those averments were not well founded. If I had not dismissed the action, I would have excluded the averments from probation. I should also mention that counsel for the pursuers stated that, if I were against his primary arguments, he would like an opportunity to consider whether consensus had been reached between the pursuers and Thomas H. Peck Limited on the basis of the letter of offer of 29 November 1999. He did not put forward any specific proposals for amendment. In the circumstances, I consider that the action should be dismissed; if the pursuers wish to present their case on a different basis they can raise a fresh action.