Read a free online chapter from ‘A Practical Guide to Ending Commercial Leases in Scotland’ by Amir M Ismail

CHAPTER ONE

CREATION OF LEASE OBLIGATIONS


A lease, at its very basic level, is a contract between the heritable proprietor of land and a third party, regulating the use and possession of a property, subject to certain conditions. It would make sense, in my mind, to set out the essential requirements for a Lease to be constituted in the first place. It goes without saying that if there is no Lease in existence from day one then there is no contract capable of termination, and the question then becomes one about the recovery of possession from the occupier, through voluntary agreement or judicial intervention.

A lease can be created at common law without it being in writing if it is less than or equal to a year in its duration, failing which, in all other instances, a Lease must be in writing1.

There are four essential elements required in order to constitute a Lease, at common law or otherwise, and these can be summarised as follows:

  1. Parties

A lease, being a contract between a Landlord and Tenant, requires at least 2 distinct legal entities. The parties in question can be individuals, partnerships, Limited Liability Partnerships, Companies, Trusts, and so forth, but the same party cannot be both Landlord and Tenant in a Lease. There is a stand-alone chapter on confusio in this book, so it won’t be discussed here, albeit there will be a cross-reference to this section in some instances. In the case of Kildrummy Estates (Jersey) Limited V Commissioners of Inland Revenue2 Lord President Hope emphasised in his judgement that “the whole basis of a contractual obligation is the agreement of two or more parties as to the act or thing to be done. This is as true of a Lease as it is of any other contract. It is impossible to conceive of a Lease by a man in his own favour……3.

There are 2 cases that go on and emphasise what is and is not permitted under Scots law when parties are not simply different stand-alone entities. Pinkerton V Pinkerton4 involved a Lease being granted by Alexander Pinkerton in favour of his wife, his two sons and himself. The Lease was held to be valid and Lord Mackay of Clashfern commented that “there is nothing in the authorities…… which would strike at the right of an individual named as one of the tenants to sue to prevent his being denied the character of a co-tenant and thus enforcing the primary obligation on the Landlord to admit him as a co-tenant with others; an attempt on the part of the Landlord to deny him this right would appear to be analogous to a pro indiviso proprietor being subject to encroachment by a co-proprietor.5 This decision, on face value, should work the other way round but this was subsequently held not to be the case. In Clydesdale Bank Plc V Davidson6 it was held that a Lease granted by 3 co-proprietors in favour of 1 co-proprietor was invalid. Lord Clyde commented in his judgement that “it does not seem to me that any or all of those that are co-proprietors can validly create a lease of the lands in favour of one of their own number. In the present case the appellant was by virtue of his co-ownership entitled to the use of the lands, albeit along with the other co-proprietors. He needed no grant of a right to use or occupy the lands. He already had that right. If the others chose to surrender their rights of use so as to leave him in exclusive possession that did not create in him a right of tenancy but simply removed a qualification on the rights which he enjoyed as co-proprietor….. A right of sole occupation cannot co-exist with a right of ownership, albeit co-ownership, in the same person. The greater right must absorb and extinguish the lesser right. The narrow path of which Lord Mackay of Clashfern adopted in Pinkerton V Pinkerton, whereby a Lease could validly be constituted between a sole proprietor and several persons including himself as tenants, is not available where the greater right is held in its entirety by the Landlord.”7 This case should not be seen as conflicting with a Lease by a Partnership in favour of one of its Partners as an individual, given the partnership as Landlord and the individual as Tenant, are deemed to be 2 distinct entities in Scots law8.

  1. Premises

Any valid Lease must have a property that is the subject of use by the Tenant. It is strongly recommended that the full address and title number are narrated in the context of a title registered in the Land Register of Scotland. A plan is strongly recommended in circumstances where (a) the title is still recorded in the General Register of Sasines; or (b) the extent of the grant of the Lease involves only part and portion of the property owned by the Landlord. In the absence of specific and clear drafting, the question of the extent occupied by a Tenant can lead to disputes that will, ultimately, end up in litigation and shall depend on the facts and circumstances in each case. For example, in United Kingdom Advertising Co V Glasgow Bag-Wash Laundry9 a right to use space for advertising in a post office, subject to the location being changed by the granter alone, was classed as a licence on the basis that there was no specific part of the heritable premises exclusively allocated to the grantee.

This can be compared and contrasted with Brador Properties Limited V British Telecom Plc,10 where a reference to the use of part of an office, washroom and w.c. facilities, with access rights over common parts, all as may be designated by the granter of the Lease, was considered to be a sufficient description to create a Landlord and Tenant relationship in the circumstances. Furthermore, Lord Justice-Clerk Ross made it clear that “I am not satisfied that, for there to be a lease, the subjects must remain the same throughout the duration of the agreement. Provided that parties are agreed as to a mechanism for determining what the subjects of the agreement is to be, there may still be a lease created”.11 The fact that the tenant was given an entry card and key in the latter case was perhaps far more suggestive of exclusive possession being granted, tantamount to a Lease, which was arguably missing in the earlier case, where no such exclusive possession existed. This may or may not be definitive on its own but, in my view, it may have played an important factor in distinguishing both cases.

  1. Rent

The third constituent element is the payment of rent by the Tenant to the Landlord. If there is a grant of an agreement with no rent then the contract in question will not constitute a Lease. In Mann V Houston12 a lease of 10 years, with no rent payable during the entire term, but which had a lump sum paid by the Tenant to the Landlord on the date of entry, was deemed not to be a Lease. As Lord President Clyde opined “there is no provision of payment of a rent of any kind, however nominal, nor any acknowledgement that any rent has ever been paid, nor even an effectual discharge of the rent…… One or other of such provisions might have made the contract a lease binding on the granter and his heirs…. But none of them is present here…….. and it becomes impossible to describe this contract as a lease as that word is understood in the law of Scotland…….. In reality, in my opinion, the missives do nothing more than confer on the defender a personal right of occupancy of the garage for a certain period and subject to certain conditions……….13. There is no minimum figure of rent required by Scots Law, so a reference to the rent being expressed as “£1 per annum, if demanded” would be sufficient to constitute a rent obligation in a Lease. In Shetland Islands Council V BP Petroleum Development Limited14 the council gave BP possession of the premises on the understanding that a lease would subsequently be put in place. Several licences were put in place during the period of occupation whilst the draft Lease was still to be adjusted and agreed. The Council asked the Court to determine the existence of a Lease between the parties and to fix a fair rent for the period of occupation by BP. In short, the Court refused to do so on the basis that the absence of a rent being paid was fatal to the constitution of a Lease between the parties. Furthermore, and on a separate note, Lord Cullen commented that “I would have concluded that….. the licence was destructive of the pursuer’s case as to the existence of a long lease between them and the defenders15. The refusal of a court to fix the rent was also demonstrated in the earlier case of Gray V The University of Edinburgh16, where the parties were argued to have agreed to a payment of a reasonable and fair market rent. As Lord Justice-Clerk Thomson made clear, “It is clear from what is said that the reference to a reasonable or fair market rent was nothing more than a convenient formula to be used as a guide to the negotiations. The parties went on to attempt to negotiate such a rent, but the negotiations broke down……… I find it impossible on these averments to hold that there was consensus [in idem] as to rent……… Accordingly, there being no consensus as to rent, there was no contract of lease, and the pursuers case on this aspect is irrelevant.”17 The position in both the Shetland Islands Council case and the Gray case may have been decided differently if there was a specific mechanism, agreed by both parties, to determine how a dispute about rent would be determined. In the absence of such provisions, it is clear the Court will not step in and read between the lines to create a Lease between both parties.

  1. Duration / Termination Date

The duration of a lease, by statute, cannot exceed a total of 175 years.18 In the absence of a specified termination date there is case law to imply that the term of a Lease is one year from the date of entry.19 However, this is only on the strict understanding that all three of the other essential elements of a Lease are clearly established / determined. In the Gray case it was made clear that the failure to have an agreed and specified rent would not enable the parties to imply that the agreement was for an implied term of one year. If the parties had an agreed rent then the implied one year term would almost certainly have assisted in the determination of a Lease being in existence between the parties.

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1 Sections 1(2)a and 1(7) of the Requirements of Writing (Scotland) Act 1995;

2 1991 SC 1

3 Page 6

4 1986 SLT 672

5 Page 676

6 1998 SC (HL) 51

7 Pages 60 and 61

8 See Mair V Wood 1948 SC 83

9 1926 SC 303

10 1992 SLT 490

11 Page 496

12 1957 SLT 89

13 Pages 92 and 93

14 1990 SLT 82

15 Page 91

16 1962 SC 157

17 Page 163

18 s67 of the Abolition of Feudal Tenure etc (Scotland) Act 2000

19 Gray V The University of Edinburgh 1962 SC 157