First Party: Brown; Miller Beckett & Jackson

Second Parties: Roxburgh; Burness Paull LLP

29 May 2014

[1] This is a summary trial under chapter 77 of the Rules of Court. The first party is Drimsynie Estate Limited (Drimsynie). The second parties are spouses, namely Mr James Ramsay and Mrs Carol Ramsay (the Ramsays). Drimsynie owns a chalet park at Corrow Farm, Lochgoilhead. Over the years chalets have been bought in situ by members of the public and a lease taken of the chalet site. In 1993 the Ramsays purchased chalet no18, which is on a plot with uninterrupted views over the loch. It has a red cedarwood frame and comprises two bedrooms, a sitting room, fitted kitchen and shower room. It can be used for holiday and recreational purposes, but not as a permanent dwelling. It was the chalet's location and its excellent views over the loch which appealed to the Ramsays. They felt fortunate to have the opportunity to buy a chalet on this particular site. The purchase price was £20,500. As with others in the park, the chalet is connected to mains electricity, a private water supply, and a drainage and sewerage system. That apart, the chalet simply rests on concrete foundations. It is sectional and can be removed and relocated.

[2] As part of the same transaction, the Ramsays entered into a lease of plot 18. The lease was in the estate's standard form at the time. It required the Ramsays to insure the chalet for a sum not less than the cost price, and to pay a ground rent - the last annual rental paid by the Ramsays was £2,438. While the lease was for just over 10 years, clause THIRTEENTH provided that, on its expiry, Drimsynie "shall have the option to acquire the chalet at a price to be agreed, failing agreement at a price to be determined by an arbiter to be appointed in terms of clause FIFTEENTH...or offer to (the Ramsays) a renewal of the lease for a period to be determined by (Drimsynie)...." In other words, for so long as the Ramsays wished to use the chalet, either the lease continued or the estate had to purchase the chalet. If the lease was renewed, the rent could be reviewed. Clause THIRTEENTH also stated that if the arbiter concludes that the condition of the chalet is such as to preclude its sale to a third party, "no payment shall be due....in respect of the chalet".

[3] After the expiry of the Ramsay's lease, it came to be renewed on an annual basis. However the estate has now terminated the lease, and an arbiter has been appointed to determine the sum to be paid for the chalet. The parties are in dispute as to how the arbiter should approach the valuation exercise set out in clause THIRTEENTH. In particular, and as the Ramsays contend, is the chalet to be valued on the assumption of a continuing right to occupy it on plot 18 on the terms of the lease? Alternatively, as Drimsynie suggest, should the arbiter consider only the market value of the chalet itself, which, on this hypothesis, is to be removed from the plot? The court is now asked to resolve the dispute, and provide guidance to the arbiter. (Given that it is the term used in the lease, I shall refer to "the arbiter" as opposed to "arbitrator", which is the preferred wording of recent legislation).

The background to the dispute

[4] The chalet on plot 18 has been there since about 1967. In the meantime, chalets have become larger, better equipped and more expensive. Many people now expect more space and modern comforts. The estate can sell a modern chalet on a plot for over £100,000. As well as generating greater profits on the sale, such chalets attract families and others more likely to use the leisure facilities available at the estate's nearby hotel. In short, in more recent times it has made good commercial sense for Drimsynie to remove an old chalet at the expiry of a lease, install one of the new larger chalets, and sell it along with a new lease of the plot. That is what the estate now wishes to do in respect of plot 18.

[5] The Ramsays' lease was terminated in 2010, at which point the current dispute emerged. In his evidence, Mr Keith Campbell, a director of Drimsynie, stated that there is a turnover of chalets and plots. The value of a chalet is determined by the location of the plot, and especially the merits of its view; the size and quality of the chalet itself; and the length of the lease. He accepted that there is a market for the original chalet on plot 18. "We could sell anything on that plot", the value being in the location of the plot. However, unless chalets are upgraded, the park will decline over time, and it will become difficult to persuade purchasers to invest in modern chalets and long leases. It is intended that chalet 18 will be scrapped to make way for a modern chalet. This has happened on about 40 plots in recent years. This increases the return for the estate and improves the quality and desirability of the park, making it more viable in the longer term. This approach to management of the estate has been successful. According to Mr Campbell, there can be no question of leaving an old chalet on a prime plot. In cross-examination he explained that, with the new larger chalets, the contractual arrangements are such that, on the expiry of the lease, there is no obligation upon the estate to renew the lease or purchase the chalet. Failing some agreement between the parties, the tenant must remove the chalet.

[6] Turning to Mr Ramsay's evidence, he stressed that he did not buy a chalet to be put on a location chosen later. He bought a chalet on this prime location, along with a lease of the plot, which he was told would be renewed on its expiry. The price of £20,500 reflected all of that. He paid council tax for the chalet. It remains a sound, durable and robust structure. It is warm and well-decorated. It has been double glazed. He and his wife were hoping to enjoy it for many years to come. He is confident that, given the plot, there is a market for the chalet. The purchase of the chalet and the lease were part and parcel of the same transaction - "it was a package". At the time, no one suggested that in due course the chalet might be removed and replaced with a bigger and better structure.

[7] In about 1999 rumours began to the effect that leases expiring in 2004 would not be renewed. From about 2000 the estate stopped giving informal assurances as to renewals of leases. A chalet owners association was formed, the purpose being to safeguard owners' interests. Mr Ramsay spoke about two recent sheriff court actions, but it is unnecessary to dwell on their details. It is clear that for some years relations between the estate and some of the owners have been fraught.

[8] Mr Ramsay understands the commercial logic behind the estate removing old style chalets and selling more modern units on long term leases. However "this is at the expense of long established owners". Since 2000, approximately 60 chalets have been based on year to year leases. Since then, around 40 owners have left with little or no compensation from the estate. The Ramsays received a letter dated 8 January 2010 which stated that, rather than renew their lease, the estate wished to acquire their chalet. £1,500 was offered, which was considered to be derisory. An arbiter has been appointed, and the court is now asked to clarify the basis upon which the arbiter should conduct the valuation exercise for the estate's purchase of the chalet.

Mr Brown's submissions on behalf of Drimsynie

[9] Mr Brown's submissions on behalf of Drimsynie can be summarised as follows. The Ramsays had two separate and distinct proprietorial interests. There was their interest in a piece of moveable property, namely the chalet. Secondly, they enjoyed a ground lease of plot 18. The lease has now expired, and the landlord is doing no more than exercise a right to control the use of the land. The commercial purpose of clause THIRTEENTH is to recognise that the tenants could have difficulties in moving the chalet, and that there might not be a ready market for it if it has to be relocated. There would be transport and other costs. Clause THIRTEENTH means that the tenants do not have to remove the chalet. The estate acts as a "kind of clearing house", it being best placed to find a purchaser.

[10] Given the passage of time and changing circumstances, the desirability of the chalet itself has fallen out of step with the value of the plot and the view. Drimsynie is entitled to put the plot to the use which would realise its true value to the estate, namely by the sale of a high specification larger, more modern chalet on a long lease. Otherwise the plot will be sterilised. No rational landlord would grant a new lease with the current chalet on the plot. The Ramsays are entitled to be paid for the chalet, not for the chalet on this plot. The parties contemplated the possibility of the condition of the chalet deteriorating to such an extent that it attracted a nil value. Likewise they must have understood that market conditions might change over time, including that a much higher return could be gained by selling a new chalet in conjunction with a long lease of the plot.

[11] In these circumstances Mr Brown submitted that the arbiter should ask: what is the value of the chalet to a rational commercially motivated landlord? Such a landlord would remove and scrap the chalet. It followed that it should be valued on that basis. The estate asks the court to hold that the price is to be assessed by reference to the sum which a hypothetical reasonable and rational landlord in the position of the estate would be prepared to pay for the chalet. The relevant circumstances include the larger return which can be obtained by selling a modern chalet to a new owner in conjunction with the grant of a new lease.

[12] Mr Brown observed that the tenants' approach gives the valuer little or no guidance as to the duration of the assumed continuing right of occupation of the chalet on the plot. Any special assumptions could have been expressed, but there was nothing of that kind. The tenants are attempting to create an artificial value which contradicts the reality of the situation.

[13] Mr Brown observed that if a rational landlord would offer the existing chalet for sale on that plot, different considerations would apply. Everything depends upon the particular facts. Mr Brown stated that he was proposing a midway position, which recognised that if someone purchased an old style chalet with a 20 year lease for a substantial sum, and then, within a very short time the lease ended, for example because the tenant was killed in an accident, it would be odd if the chalet was to be regarded as worthless. A valuer could have regard to the objective commercial reality. According to Mr Brown, his approach is not a case of "one size fits all". It will "vary from plot to plot, and from date to date". However the tenants are asking the arbiter to assume a tenancy which will never be granted. That is very different from the position if a 20 year lease is terminated after only two years. The value is in the plot, to which the tenants have no right. Drimsynie should not be compelled to act contrary to its interests.

[14] In his oral submissions Mr Brown suggested that the issue has to be tested by reference to the compromise arrangement reached in 2007, whereby year to year leases were agreed. Thus it is the circumstances in 2007 which matter, not those existing in 1993 when the terms of the lease were first agreed. By 2007 the estate was in dispute with the Ramsays, and it was clear that its management policy had changed. The tenants, by way of a compromise, agreed to a yearly lease, subject to possible renewal. That was a very different situation from that pertaining in 1993. In 2007 there could be no question of any contra proferentem argument. The missives of let were adjusted by solicitors against a background of ongoing litigation. Counsel was involved. In any event, the old canons of construction, such as the contra proferentem rule, no longer have any application. Reference was made to Credential Bath Street Ltd v Venture Investment Placement Ltd [2007] CSIH 208 at paragraphs 25 and 38. Mr Brown submitted that the court should simply address the parties' mutual intention. Finally, and whatever the court's decision, counsel suggested that the case should be put out by order to allow a discussion as to the appropriate terms of the interlocutor.

Ms Roxburgh's submissions for Mr and Mrs Ramsay

[15] Ms Roxburgh stressed that the two transactions, namely the purchase of the chalet and the ground lease, were linked. The effect of clause THIRTEENTH was that, until the estate decided to purchase the chalet, the Ramsays could occupy it on plot 18 on the terms set out in the lease. Its value should be determined by reference to its value if purchased along with the right for the chalet to be occupied on plot 18 on the terms set out in the lease. Reference was made to various authorities on the proper approach to the construction of contracts.

[16] Reliance was placed on the contra proferentem rule, the lease being in the estate's standard terms. It should be read against the interests of the estate, with the price for the chalet being calculated on the same basis as the original purchase price paid by the Ramsays. In any event, that is the meaning which the words used in clause THIRTEENTH would convey to a reasonable person in the position of the parties. The chalet was purchased on the basis that it could be occupied on plot 18. There is no dispute that when a chalet on the estate was purchased, its location and the length of the lease were reflected in the price paid to the estate. A reasonable person would understand that in clause THIRTEENTH the parties set out their intention that the estate would purchase the chalet on the same basis. Any other meaning would require to be expressed in clear words.

[17] There is nothing to suggest that the bargain was struck on the basis that, when the lease expired, the chalet would be removed or scrapped. On the contrary, until about 10 years ago the assumption was that, so long as the chalet is in reasonable condition, it will remain in situ. The original chalets are, in effect, fixed to the ground, being connected to water and drainage services, and to mains electricity. Chalet 18 appears on the ordnance survey map. It is classified as a dwelling for council tax purposes. On termination of the lease, the Ramsays had no right to remove it. It was intended that the arbiter should value the chalet as located on plot 18. If it was in such a condition that it could not be sold to a third party, no payment was due. Nonetheless the Ramsays could still not remove it. In the whole circumstances, a reasonable person would understand that the arbiter should identify a sum reflecting the price at which the estate could be expected to sell the chalet to a new tenant who was obtaining a right to keep it on plot 18 on the same terms as the Ramsays' lease.

[18] Counsel referred to clauses ELEVENTH and TWELFTH, which contain similar valuation provisions. Had the Ramsays failed to make payment of the first annual rental within 21 days of entering the lease, those valuation provisions would have applied. It could not have been intended that the price would be calculated on any basis other than that used by the parties when the chalet was purchased. If it were otherwise, the estate would obtain an unintended windfall benefit. Reference was made to the provisions in clause TENTH as to assignation of the lease. Similar comments would apply if the estate's approach to the valuation exercise is correct. Clear wording would be required if, in terms of clause TENTH, the arbiter was to value the chalet at a sum below that which could be achieved on the open market.

[19] As to the submission that matters should be determined by reference to the circumstances in 2007, counsel drew attention to statement 5(b) in the petition, which states that the 1993 lease "was extended" by the missives of let dated 13 August 2007. The 2007 arrangement was simply a renewal of the pre-existing lease. With only one minor and immaterial addition, its terms remain the same. In his witness statement Mr Ramsay said that the new lease "had to be on precisely the same terms". The meaning of the provisions in the lease did not change. The result is that the current lease requires to be interpreted by reference to the parties' intentions in 1993.

[20] It had been accepted that there is a market for the chalet on the plot, so there is no reason to suppose that the arbiter will be unable to value it on the basis that it can be occupied for so long as it remains habitable. There is nothing in the lease, nor in the surrounding circumstances, to suggest that a different approach applies if the landlord has decided to scrap the chalet and sell a larger more modern chalet because it will be more profitable for the estate. There is nothing to stop this happening, but the estate requires to pay a fair price to the Ramsays for their chalet. In 1993 the understanding was that the chalet would remain on the site until the end of its useful life. The terms of clause THIRTEENTH reflect that shared assumption. There is nothing in the lease, nor in the surrounding circumstances in 1993, which would support Mr Brown's suggestion that the arbiter should have regard to what a commercially motivated landlord would do. No explanation was given as to why the tenants would agree to such a provision. Ms Roxburgh agreed that, after reaching a decision, I should put the case out by order.

Discussion and decision
[21] I shall deal firstly with Mr Brown's submission that the issue should be approached by reference to the events in 2007, when the lease was renewed on an annual basis, rather than 1993, when the lease was first agreed. This submission was not foreshadowed in either the petition or the note of argument. It emerged during the court hearing. The note of argument concentrates on the circumstances in 1993 - see for example paragraph 5. So far as the petition is concerned, it simply states that the 1993 lease "was extended" by virtue of the missives dated 13 August 2007. The only change made to clause THIRTEENTH was the addition of a declaration, which simply echoes the terms of the clause, that the options available to the landlord at the expiry of the lease are purchase of the chalet or renewal of the lease. If the parties intended to change the nature of the valuation exercise to be carried out by the arbiter under clause THIRTEENTH, they would have said so. On the contrary, Mr Ramsay explained that the whole idea was that there was to be no change to the lease (his witness statement, paragraph 7.2). In my opinion it is clear that in 2007 there was no alteration to the meaning and effect of the key terms of the lease. I accept Ms Roxburgh's submission that the relevant factual background is that which pertained in 1993, and I shall proceed upon that basis.

[22] The preamble to the 1993 lease recorded that the Ramsays had purchased a chalet "erected upon site number 18" and "therefore" the parties had entered into the lease of the plot. The Ramsays were obliged to insure the chalet at a sum not less than the cost price. The estate had first option on any proposed sale of the chalet and as to any assignation of the lease - also, failing agreement, with the price for the chalet being determined by the arbiter. The Ramsays could have lost their right of occupation at any time as a result of a failure to pay the rent or because of some other breach of the terms of the agreement, in which event the same termination provisions, including arbitral valuation, would apply. Mr Brown recognised that the parties could hardly have intended that on a premature termination, particularly one occurring at an early stage of the lease, the price could be fixed on the assumption that the chalet was being removed from the site. However, in my view he did not offer a convincing reason for the adoption of a different approach to the valuation exercise if it was taking place after the lease had expired due to the passage of time, but when the landlord had, for good commercial reasons, decided to replace the chalet with a modern structure.

[23] Both the 1993 contract and the current lease provide that, "notwithstanding the terms of (clause THIRTEENTH), if the arbiter shall consider that the chalet is at the date of termination in such a condition as to preclude it being sold by (the estate) or otherwise conveyed to any third party, no payment shall be due to (the Ramsays) in respect of the said chalet." This suggests that it was envisaged that, if at any stage the Ramsays lost their right of occupation, the estate would sell the chalet in situ, so long as it was in a reasonable and habitable condition. There is nothing in the lease nor in the surrounding circumstances in 1993 to indicate that the chalet might be scrapped and removed from the plot before the end of its useful life.

[24] My task is to interpret the lease, and in particular the valuation provisions in clause THIRTEENTH, and this by reference to the understanding of a reasonable person in the position of the parties at the time, and sharing their knowledge as to the purpose of the agreement and the relevant background circumstances. It is important to notice that the lease was not a stand alone contract. It was linked with the associated purchase of the chalet. I agree with Ms Roxburgh's description of "an over-arching transaction." The Ramsays did not simply purchase the chalet - they bought it along with the right to use it on plot 18. Furthermore, the effect of clause THIRTEENTH was that, so long as they wished to do so, the Ramsays could remain in occupation of the chalet on the plot in terms of the lease until the chalet was purchased by the estate. If the estate wanted to place a new chalet on the site and sell it to a third party, they first required to purchase the old chalet. In my view both parties would have understood that the estate was buying out the Ramsays' right to continue to use the chalet on the plot in terms of the lease.

[25] The change in the estate's business model did not occur until around 1999/2000. In 1993 there was no discussion or anticipation of a chalet being removed and replaced by something newer, larger, and more expensive. In 1993 the expectation was that the chalet would be used until it was no longer in a condition to allow it to be sold to a third party - see the proviso allowing for a nil payment in that situation. There is no equivalent provision to cover the case where the estate wishes to scrap a still useable chalet. Looking at matters as they were in 1993, and having regard to the terms of the lease as agreed by the parties, I see no basis for the notion that the parties must be taken as having understood that the estate could remove the chalet and have it valued on some different basis if, for sound commercial reasons, it wanted to replace the chalet before the end of its economic life. Clause THIRTEENTH does not prevent this, but the estate must first pay a proper price to the Ramsays. In 2010 they wanted to maintain their right to occupation of the chalet on the plot. The chalet is still habitable. There is no dispute that it could be sold to and used by a third party on the plot. There is a market for that - but it no longer fits with Drimsynie's plans for the chalet park. As in 1993, the location with uninterrupted views over the loch is a valuable asset. That value was reflected in the price paid by the Ramsays, and, in my opinion, the parties agreed that it would be reflected in any price to be paid by the estate to the Ramsays for the chalet. A reasonable person in the position of the parties in 1993 would have understood that the estate would purchase the chalet on the same footing as they sold it. The only exception is where the chalet is in a condition which prevents its sale to a third party. That is a wholly fair and reasonable departure from the more general provision, and would have been readily understandable to a reasonable person.

[26] All of this is supported by the element of permanence associated with the chalet. The lease talked of it having been "erected" on the plot. Although simply resting on its foundations, it was connected to services, including water and drainage. It had been on the site since about 1967, and was shown on the OS map. The Ramsays paid council tax in respect of it. In my view, in 1993 both parties assumed that the chalet would be staying on the plot for so long as it was habitable, and that it would be sold in situ to another tenant if, for any reason, the Ramsays decided to stop using it or the estate wanted to bring their right of occupation to an end. Both sides would have understood that the estate would pay the Ramsays on the same basis as a new tenant would pay the estate for the right to use the chalet on plot 18. Provisions in the lease were designed to ensure that there would remain a chalet on the plot which could be conveyed to a third party.

[27] In the whole circumstances, I do not accept that a reasonable person would have understood clause THIRTEENTH as allowing a lower price to be paid by the estate simply because it had changed its business model and had identified a way of increasing its profits by using different chalets. In other words, the lease should not be construed by reference to the changed circumstances after 1999. The price payable to the Ramsays should recognise the value left in the chalet on the assumption that it continues to be used on plot 18 for the rest of its useful life. That is the right which the Ramsays purchased from the estate - subject to the buy-out clause - and that is how the arbiter should assess the price to be paid by the estate. Ms Roxburgh submitted that the chalet is to be valued on the basis that it can be used on plot 18 for so long as it remains habitable. I agree with that submission. This requires a degree of judgment on the part of the valuer, which will be dependent upon the current condition of the chalet and its durability for the future.

[28] In these circumstances I do not need to rely upon the contra proferentem rule. In my opinion the correct position emerges from the above considerations. Having decided the dispute in favour of Mr and Mrs Ramsay, and as requested by both parties, I shall put the case out by order for consideration of the appropriate form of interlocutor.