Biggart Baillie Solicitors

Property News 2011

Inside this issue

• Calling up called in to question
• Violence in the House?
• Planning Agreements
• Disability Adaptations
• A Quick Guide to Differences between English and Scottish Property Law
• Bird v Bank of Scotland
• Hope Value - Multi-Link Leisure Developments Limited v North Lanarkshire Council
• Competition Law to Apply to Property Sector from April 2011

Calling up called in to question 

The recent decision of the UK Supreme Court in the case of Royal Bank of Scotland plc v Wilson sent shockwaves through the financial community as it pulled the plug on most lenders’ traditional approach to enforcement of securities.

In this case, two brothers had business debts with RBS. The Wilson brothers and their respective wives had granted standard securities over their dwellinghouses, in security of all sums due to RBS. The Bank had written to the two brothers requesting repayment of the whole of the business debts. The Bank then applied to the court to evict the brothers and their wives without having made any further demands for payment. After eleven years of litigation, the Supreme Court ruled that the Bank had taken the wrong approach.

The Act

Standard Securities, and the procedure for enforcing them, are governed by the Conveyancing and Feudal Reform (Scotland) Act 1970. The Act provides that:

“Where a creditor in a standard security intends to require discharge of the debt thereby secured, and failing that discharge, to exercise any power conferred by the security to sell any subjects of the security or any power which he may appropriately exercise on the default of the debtor...he shall serve a calling up notice”

A calling up notice is a statutory form of notice which must be served on the registered owner of the property, and must grant a period of two months for repayment of the whole debt.

A creditor’s remedies (including the power of sale of the property) may be exercised where the debtor is in default. “Default” is in turn defined in the Act as being:-

1. Where a calling up notice in respect of the security has been served and not complied with;
2. Where there has been a failure to comply with any other requirement arising out of the security; or
3. Where the proprietor of the security subjects has become insolvent.”

The Background

The established practice amongst banks and their lawyers has, up until the Wilson decision, been that a formal calling-up notice is not always required. Where a loan is stated to be repayable on demand, then the traditional approach has been that any failure to comply with a demand will therefore be a default in terms of paragraph b) above.

If the debtor is in default, it is appropriate to serve a Notice of Default outlining the nature of the default and the creditor may use that Notice of Default as the basis of an application to the court to exercise the creditor’s remedies.

In essence, it has traditionally been an “either/or” scenario, as endorsed by some of the leading commentators in the field: a bank would have the option either to serve a calling up notice granting two months to pay, or they may serve Notice that a debtor is in default because a previous demand has not been met.

The Supreme Court decision

The UK Supreme court ruling puts beyond doubt that this has been the wrong approach. The Act clearly states that where the creditor requires the debt to be discharged, they shall serve a calling-up notice. The procedure which allows the creditor remedies based on an event of default, applies only to a failure to comply with any other requirement arising from the security (i.e. a non-monetary breach).

There is no basis for the historic practice that a creditor may serve a calling up notice if repayment of the debt is required. The Act states that they shall do so, and no leeway is given.

A notice of default is therefore only applicable to non-monetary breaches, such as failure to keep the property in good repair, failure to insure, or failure to observe title conditions.

The purpose of the calling up notice is to provide that no one can be evicted from their property (whether commercial or residential) without being given a period of two months to repay the whole debt and, on a strict interpretation, the Act does not provide any means around this approach.

Lenders should also be aware that, since the Wilson case first appeared in the courts, the enforcement procedure has been further complicated by the Home Owner and Debtor Protection (Scotland) Act 2010. This new Act provides that where the secured property has any residential element (which may be staff accommodation within commercial premises, and is not restricted to a dwellinghouse per se), the lender cannot exercise its power of sale under any calling up notice without first applying to the court. Before the court will consent to the exercise of the power of sale, the lender must first comply with various “pre-action requirements” including ensuring that the debtor is fully informed as to the nature of the debt and the security, and making attempts to agree repayment proposals with the debtor before seeking to remove them from the property.

Although it flies in the face of the approach which many lenders have taken to date, the decision of the Supreme Court in RBS v Wilson is clearly the right one, and a lender should always ensure that the correct form of calling up notice is served on the debtor, and that all procedural requirements have been fully satisfied, before commencing enforcement for non-payment of the debt.

Got a question for Gregor?  Contact him on 0141 228 8000 or at gduthie@biggartbaillie.co.uk

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Violence in the house?

This recent Scottish case confirms that the courts are willing to interpret contractual provisions to give effect to the commercial objectives of the parties. As Lord Drummond Young comments “some slight violence to the wording of the parties' contract is involved, but the damage seems slight by comparison with the damage to the parties' objectives that would result from a contrary view”.

In 2004, Stewart Milne contracted to purchase 11 acres of land at Cairnie, Westhill, Aberdeen from Aberdeen City Council for an agreed purchase price of £365,000.   The contract provided for a further uplift or “profit share” on the purchase price to be payable to Aberdeen City Council on the occurrence of certain events, including the sale or lease of the property by Stewart Milne.  The contract in effect stipulated that the Aberdeen City Council’s uplift would be 40% of 80% of the estimated profit or gross sale proceeds or lease value of the land less the allowable costs (incurred in obtaining planning permission and making the land suitable for development).  In 2006, Stewart Milne subsequently sold the land on to one of their group companies for a price considerably less than the then open market value of the property.  The gross sale proceeds for the land were stated to be £483,020 and the allowable costs to be deducted from that amounted to £559,696.

The arguments in court focused on how the uplift provisions should properly be interpreted. This case was brought by developer Stewart Milne on appeal against the Outer House decision of Lord Glennie in favour of Aberdeen City Council.

Stewart Milne argued that, since there had been a sale, the gross sale proceeds should be applied to the overage provisions:  the contract did not provide for an open market valuation to be applied to a sale and Aberdeen City Council was due the gross sale proceeds less any allowable costs.  Given that the allowable costs were greater than the gross sale proceeds, no uplift payment was due to Aberdeen City Council.

Aberdeen City Council, on the other hand, argued that because the sale to a related company did not take place at arm’s length, the open market value of the land at the time of sale to this related company should be applied and not the gross proceeds of sale.  This interpretation would prevent Stewart Milne from evading the agreed contract provisions for overage through controlling the price paid by the third party on a sale by Stewart Milne.  The application of an open market value to the overage provision in the contract would lead to a value for the Aberdeen City Council's overage payment of around £1.7 million. 

The Court in this appeal rejected Stewart Milne’s argument and upheld the decision of the Outer House in favour of Aberdeen City Council.  Lord Drummond Young found that the uplift provisions in the contract should give effect to the clear intentions of the parties when agreeing to these contractual provisions.  Central to the calculation of the uplift was the definition of profit share as 40% of 80% of the estimated profit or gross sale proceeds or lease value less certain allowable costs.  This formula provided for different ways to calculate the profit share depending upon the situation: estimated profit was the uplift from contract price to open market valuation of the property once planning consents had been obtained (under deduction of allowable costs).  Gross sale proceeds was the uplift from the contract price to the actual price received by Stewart Milne upon a sale of the property.

The Court considered that the critical question was whether, in terms of the contract, the profit share should be calculated by reference to the actual consideration paid to Stewart Milne or by reference to the open market valuation of the property at the date of transfer.

In Lord Drummond Young’s opinion, the commercial purpose of the contract was clear: if the subjects of sale turned out to have a value in excess of the initial price paid at the time of the contract (as was likely), Aberdeen City Council were to take a share of the increase in value.  Any other construction would defeat the parties' clear commercial objectives. For Stewart Milne to sell to an associated group company and calculate the uplift by reference to an actual sale price set artificially low would defeat Aberdeen City Council’s contractual right to the increase in the value of land. That outcome did not make commercial sense when the uplift provision was clearly an important aspect of the parties’ bargain.

The Court therefore held that the parties must have intended that where a sale of the property was effected at arms’ length and at open market value, the profit share payable by Stewart Milne would be the actual price paid. If, however, a sale was not effected at arms’ length and at open market value, then the profit share should be based on an open market valuation.

While this case is helpful in demonstrating that the Courts will give effect to the clear commercial intentions of the contracting parties, it highlights that best practice is to have a clearly drafted contract. 

To find out more or to seek advice, please speak with your usual Biggart Baillie contact or contact Lorraine Tollan at ltollan@biggartbaillie.co.uk.

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Planning Agreements

It is some four years since the 2006 Planning Act was passed.  This Act updated the Town & Country Planning (Scotland) Act 1997 with a view to making the planning system more efficient and fit for purpose. 

The last significant changes made by the Act came into effect on 1 February. These relate to planning obligations and good neighbour agreements.

While the phrase “planning obligations” is new, the concept is not.  The 1997 Act made provision for planning agreements (Section 75 Agreements) and that section replicated provisions found in the previous legislation (which resulted in planning agreements initially being referred to as “Section 50 Agreements”).  It is not unusual in practice to come across a Section 50 Agreement which is still in effect. 

In Scotland until now (unlike England) it has generally not been possible to amend nor discharge a planning agreement (whether made under Section 50 of the 1972 Act or Section 75 of the 1997 Act) other than by agreement with the Council.

The 2006 Act was not particularly clear as to whether the provisions regarding modification and/or appeal were to apply to agreements already in effect.  The Scottish Government clearly believe that they do. 

Regulations have now been brought out which make clear how an application to modify or discharge a planning obligation is to be made (in effect varying the planning agreement) and how, if the local authority are not agreeable to that, the matter may be pursued by an appeal. 

There is no guidance as to the criteria which will be applied on appeal.  In some cases it may be very clear that a planning obligation should be varied.  For example it is not unusual to find planning agreements of some vintage still in effect which restrict the occupation of a house in a rural location to a worker involved in agriculture or forestry.  With the significant changes which have taken place in these areas over the last few years (including a reduction in manpower in particular) such restrictions may no longer be necessary.  Other cases are likely to be less clear cut and it will be interesting to see how the Directorate for Planning & Environmental Appeals deals with such cases on appeal, albeit it is unlikely that any decisions will be made for a number of months yet given the timescale of the appeal process. 

The 2006 Act introduced a new form of planning agreement namely a good neighbour agreement.  To some extent these came out of “left field” in the sense that they were not subject to any detailed consultation as part of the processes which resulted in the 2006 Act.  Good neighbour agreements are different from planning agreements.  A good neighbour agreement needs to be entered into with a community body rather than an individual and while it may govern obligations or activities in relation to the development and use of land, it cannot deal with financial obligations.  The Scottish Government appear to think that good neighbour agreements will be limited in scope and apply to activities such as mining and quarrying and may be used to restrict (for example) hours of operation over and above whatever might be provided by way of a planning condition.

In the same way however as there is need to be able to amend a planning obligation, there is a need to be able to amend a good neighbour agreement where appropriate and rules have been brought out governing how such applications (and any consequent appeals) might be made.  Given the fact that good neighbour agreements are new and are really only now taking effect it is unlikely that rules relating to the modification or discharge of good neighbour agreements will be relevant for some time to come.

While it has always been possible to seek to negotiate a modification or amendment to a planning agreement with the Council as planning authority, the fact now that an appeal can be made to DPEA if no agreement is reached is likely to strengthen the negotiating position of the party who is seeking a change.  In reality it is unlikely that an agreement which is of fairly recent origin will likely be amended by a Reporter on appeal (particularly if the existence of that agreement was a material consideration in granting planning permission).  However the ability to appeal (especially in relation to planning agreements which may have been in place for some time) is certainly nonetheless welcome.

If you wish to review the planning agreements in place and whether or not these are likely to be amended please contact Murray Shaw to discuss the position.

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Disability Adaptations

According to the Scottish Government, around 2,200 households in Scotland consider that they need a significant adaptation to the common parts of residential premises to accommodate the needs of a long-term sick or disabled person.

To help address that need legislation is being proposed that would entitle disabled persons to insist on adaptations to the common parts of the buildings in which they live, regardless of the objections of their neighbours, unless such objections are deemed ‘reasonable’ in terms of the new legislation.

Common parts are those parts of a building that are not owned by any one person, such as the stairs or the front door in a block of flats or tenement. Currently, disabled people can only have adaptations made to common parts if everybody who owns a share of those common parts gives permission. The Scottish Government is consulting on regulations which would prevent owners from withholding their permission except in limited circumstances.

The range of potential adaptations is not restricted; they could be anything from the installation of ramps for the mobility impaired, to redecorating in high contrast colour schemes for those with sight issues.

The regulations being proposed are modelled on the existing rights that disabled tenants have to require their landlords to make adaptations to their rented home to accommodate their disability. In the same way as landlords are not able to unreasonably refuse to make changes, it is suggested that neighbours should be likewise barred. However, in the case of a disabled tenant the landlord is being paid rent and there is a commercial relationship with the disabled person from which the landlord is deriving an economic benefit. There is no equivalent benefit between neighbours who share ownership of common parts. The disabled person will undoubtedly benefit from the adaptations but it will be his or her neighbours who will also need to share the maintenance costs in the future and potentially also the cost of reinstating the property should the adaptation ever need to be removed. Neighbours may query why they are meeting the costs of something they neither need nor want.

Whilst neighbours may be able to object to a disabled person’s proposal on grounds of adverse effect on the value of the neighbour’s property or that the works would be unduly disruptive, it isn’t clear what weight will be given to such objections. The proposed regulations derive from provisions in the Equality Act which itself is designed to eliminate disadvantages suffered by the disabled.
 
A failure to respond to the disabled person within one month would automatically trigger a right for the disabled applicant to make an appeal to the court.

And whilst a disabled person could appeal a refusal of consent from neighbours, it isn’t clear that a disaffected neighbour would be able to appeal a majority vote that agrees alterations they don’t want.

Residential developers in particular will need to consider their position where one of the first sales in a block is to a disabled person, and before the other flats are sold the disabled person insists on changes to the common parts. Developers may find themselves compelled to have workmen on site rebuilding common parts whilst still trying to market empty units.

There is still time available to comment on the proposed legislation and influence the final shape of what comes into force.

If you would like to respond to the current proposals there is an opportunity to do so by accessing the consultation papers on the Scottish Government website at here. Alternatively we at Biggart Baillie would be happy to discuss a formal response with you.  Anthony McEwan is already making representations on behalf of clients with an interest in this area, and can be contacted at amcewan@biggartbaillie.co.uk.

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A Quick Guide to Differences between English and Scottish Property Law

There are significant differences in the law of commercial property between England and Scotland.  In this quick guide we highlight some of these differences.

LAND OWNERSHIP

Types of Land Ownership

The law of Scotland recognises two types of land ownership. Firstly, outright ownership, which is generally termed “heritable title”, and is the equivalent of English “freehold” title.  Secondly, “leasehold title”. This form of ownership is less common in Scotland than in England.

Covenants and Real Burdens

A covenant is an obligation commonly found in English freehold titles.  They can be “positive” i.e. one which obliges the burdened owner to do something, such as a fencing obligation, or “negative” i.e. one which obliges the burdened owner not to do something, such as a prohibition on keeping livestock on the owner’s land.  Whilst negative covenants may bind successive owners, positive covenants cannot.  It is not possible under English law to pass on the burden of a positive covenant to a successor in title. The Scottish equivalent of a covenant is a “real burden”.  Similarly, these can be “positive” or “negative”.  However, under Scots law, both positive and negative burdens may be passed on to successors in title.

Easements and Servitudes

The Scottish equivalent of an easement, such as a right of access over neighbouring land, is a servitude.

Legal and Equitable Interests

In England, the outright owner of land who has title “against the world” has what is termed a “legal” interest in the land.  However, other parties may have an “equitable” or “beneficial” interest in the same piece of land, which is often described as a personal right.  For example, if someone contributes part of the purchase price of land, it may be implied that they have a beneficial interest in the property, even if the legal title is not in his name.  English law has a system for the protection of beneficial interests in title which does not exist in Scotland. In principle, in England a beneficial interest is a minor interest and is capable of being overreached by the legal owner.

Registered and Unregistered Land

The system of Land Registration has existed in England since 1925 and as a result most land in England is registered in the Land Register.  A small number of titles, often in rural areas, remain unregistered.  Land Registration was introduced in Scotland in 1979.  Accordingly the number of Scottish titles registered with the Land Register of Scotland is smaller (but of course growing significantly as time passes).  However, in Scotland a register of deeds known as the General Register of Sasines, has existed since 1686 so save for land which has not been transferred since that date (and there is some, such as some ancient University sites) there is no “unregistered” land as such.

BUYING AND SELLING LAND

Pre-contract Enquiries

It is standard English practice for the buyer’s solicitor to send the seller a set of pre-contract enquires in one of the industry accepted standard forms requesting information about the property.  In Scotland this practice does not exist to such a degree.  Title queries are raised, but they are often not in any standard form nor as extensive.
Searches

In England it is the buyer’s solicitor who obtains all of the searches needed for the property, such as the environmental search, coal mining and the local search.  Conversely, in Scotland it is the seller’s solicitor who obtains these searches, including the property enquiry certificate which is the equivalent of the local search.

Sale Contract v Missives

It is standard practice for the seller’s solicitor to prepare a draft contract for the sale of English property. This draft will normally be based on one of the English Standard Contracts, either the Standard Conditions of Sale or the Standard Commercial Property Conditions of Sale.  Once the terms of the contract are agreed and the due diligence done, the contracts are sent out for signing by the clients in counterpart. In Scotland the solicitors acting for the buyer and seller exchange formal or “missive” letters on behalf of their respective clients which collectively comprise the contract of sale and purchase, and reference is made to concluding the contract or “missives”, rather than exchanging contracts.  The relevant letters are nearly always signed by the solicitors on behalf of their clients, and rarely by the contracting parties themselves.  Notably, save for some regional agreed form missives for residential transactions, there is no Scottish equivalent of the Standard Conditions of Sale or Standard Commercial Property Conditions of Sale.

Deposit

In contrast to the English position, it is rare for a deposit to be paid on conclusion of the contract in Scotland.

Priority Searches

Buyers of English property will almost always carry out priority searches. If their deed is registered within the 6 week priority period it will take priority over any other deeds lodged in the meantime.  There is currently no equivalent of such “priority” in Scotland.  Instead the seller’s solicitor will issue what is termed a letter of obligation, containing an undertaking to clear the Land Register/Register of Sasines of any competing deeds registered within 14 days of completion of the transaction (or earlier registration of the buyer’s title).  However, the draft Land Registration (Scotland) Bill does propose the introduction of advance notices in Scotland which would be roughly equivalent to priority searches.  The form of the Bill is yet to be finalised and introduced to the Scottish Parliament.

Transfer Document

In England title is transferred by way of a document known as a “TR1”.  In Scotland the traditional instrument of transfer is called a “disposition”.

Dating Deeds

There is no Scottish equivalent of “dating” deeds at completion of a transaction. In Scotland, a deed is said to be dated on the actual date it is signed by the relevant party or parties. 

LEASES

Landlord and Tenant Act

There is no Scottish equivalent of the Landlord and Tenant Acts which apply in England, and accordingly comparatively little statutory provision governs commercial leases in Scotland.
 

Duration

Following the Abolition of Feudal Tenure etc. (Scotland) Act 2000 which came into force on 9 June 2000, leases of Scottish commercial property cannot be granted for a period of more than 175 years.  Note this does not apply to leases granted before that date.  Such a restriction does not exist in England.

Consent

Unless specifically provided for in the lease (which is often the case), the words “which consent will not be unreasonably withheld or delayed” will not be implied in Scotland in respect of those matters where landlord’s consent is required.  This is contrary to the general position in England where (subject to certain exceptions) the landlord must not unreasonably refuse or delay consent.

Assignation and Privity of Contract

Scotland has no privity of contract rules.  There is no implied residual liability upon the original tenant under a lease following a permitted assignation (English “assignment”) of its interest.  This is in contrast to England, where privity of contract applies to leases granted prior to 1 January 1996 such that the original tenant of a lease remains liable to perform all of the tenant’s obligations even after a permitted assignment.  Since the Landlord and Tenant (Covenants) Act 1995 privity of contract does not apply to English leases granted after that date.  This Act instead makes provision for “Authorised Guarantee Agreements”.  In Scotland, it is unusual for an outgoing tenant to guarantee an incoming tenant’s obligations and it is rare for provisions equivalent to AGAs to be included in Scottish leases.

Sub-letting (or Under-letting)

In Scotland, a sub-tenant does not acquire any security of tenure against the head landlord, (unless negotiated direct with the head landlord in what is usually termed an “irritancy protection agreement”).  Accordingly, on termination or forfeiture of the head lease, the sub-lease automatically terminates without the requirement for any action to be taken by the head landlord.  Unlike in England, a sub-lease for the full term of the head lease does not constitute a deemed assignation under Scots Law and it is quite appropriate for the sub-lease to expire on the same date as the head lease expires.

Repair

• Fitness for Purpose - At common law, there is an implied warranty from landlord’s of Scottish property that the subjects are reasonably fit for the purposes for which they are let.  Landlords will generally “contract out” of the common law in the lease, by providing that the tenant accepts the property in good and tenantable provision.  English common law does not, generally, imply such a warranty.
  
• Wind and Watertight - At common law, there is a further implied warranty from landlord’s of Scottish property that the subjects will be kept “wind and watertight”.  Again, landlords will “contract out” of the common law in the lease by passing on this obligation to the tenant through express terms.  English common law does not, generally, imply such a warranty.
  
• Latent and Inherent Defects – As the underlying common law in Scotland places the main responsibility for upholding the building on the landlord (see above), the underlying common law responsibility for latent and inherent defects remains with the landlord.  Again, in a full repairing and insuring lease the landlord will contract out of this obligation so that the responsibility for latent and inherent defects lies with the tenant.  The English common law is more complex, but where a lease is silent with regard to liability for repair of inherent defects, the liability can fall within a tenant’s standard obligation to repair.  In these circumstances, the question is one of degree.

Compensation for Improvements

Tenants of English property may be able to claim compensation for the value of improvements at the end of the lease term.  Compensation is not payable for heritable improvements under Scots Law, unless the lease specifically provides for this.

Destruction

In Scotland, if the subjects of lease are destroyed or so damaged that the tenant ceases to have use of them, then the lease will terminate.  However, commercial leases almost invariably contain provisions excluding the effect of this principle and usually state that the lease will continue subject to abatement of rent whilst the premises are rebuilt.

Termination and Renewals

Subject to limited rights of renewal conferred on tenants of shop premises by the Tenancy of Shops (Scotland) Act 1949, tenants of commercial property do not acquire security of tenure in Scotland.  Provided the landlord’s solicitor serves a notice to quit within the prescribed statutory period (which varies according to the length of the lease, but is often as little as 40 days) the lease will come to an end on its contractual expiry date.  This is in contrast to the position in England, where under the Landlord and Tenant Act 1954 tenants of commercial property have a statutory right to renew their leases at the end of the term.  It is, however, now possible to contract out of this right to security of tenure without first needing to obtain a court order.

Forfeiture or Irritancy

Until the passing of legislation in 1985, a tenant of commercial property in Scotland had no statutory protection from forfeiture, known in Scotland as “irritancy”.  Legislation passed in 1985 (which cannot be contracted out of) now provides that, in the case of payment of rent or other monetary payments due in terms of a lease, the landlord is not entitled to terminate the lease unless a notice has been served on the tenant requiring payment under threat of irritancy.  The minimum period of notice is 14 days and longer periods may be contractually provided for in the lease.  In the case of non-monetary breaches, a landlord is not entitled to rely up an irritancy provision in a lease if “in all the circumstances of the case a fair and reasonable landlord” would not do so.  Regard will be had to whether a tenant has had a reasonable period within which to remedy the breach.    As regards non-payment of rent, the irritancy once incurred is irrevocable (unless the landlord is willing to revoke it). This contrasts with the position in England, where an evicted tenant may apply to the court up to six months after their lease has been forfeited.  If they pay off any arrears (or remedies the breach which cased the forfeiture) and compensates the landlord for expenses the court has the discretion to reinstate him as tenant.

This is not intended to be an exhaustive guide.  To find out more or to seek advice please speak with your usual Biggart Baillie contact or contact John McKie (jmckie@biggartbaillie.co.uk or 0131 226 5541).

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Bird v Bank of Scotland

The Court of Session has ruled that a debtor can be liable for repayment of loan funds, even where they have not received the benefit of those funds due to the fraud of a third party.

In Bird v Bank of Scotland plc, Mr Bird had instructed his solicitor in the purchase of property in Aberdeen (now his home) at a price of £200,000. The solicitor persuaded Mr Bird to sign a standard security over the property in favour of the Bank of Scotland. On the basis of that security, the Bank advanced loan funds to Mr Bird (through the solicitor) in the sum of £209,077 to facilitate the purchase.

Unknown to Mr Bird, however, the solicitor did not complete the purchase in Mr Bird’s name as instructed – instead he fraudulently completed the purchase in the name of his own company, at a reduced price of £170,000. Mr Bird did not have title to the property and no deed was registered in his name (meaning that the standard security granted to the Bank was not valid security). Nevertheless, Mr Bird continued to make loan repayments, unaware of his solicitor’s fraud.

When the fraud came to light, the solicitor was struck off and his firm dissolved. Mr Bird applied to the court to have the standard security set aside (since it contained an obligation to repay the loan), and to have the Bank repay the monies which he had paid over to them by way of loan repayments to date.

It is an established rule that a principal cannot benefit from the fraud of their agent (i.e. the Bank cannot benefit from their solicitor’s fraud) and the court confirmed that the Bank should therefore not have the benefit of the standard security.

However, the court further found that the contract of loan was independent of the security. Monies were advanced by the Bank to the solicitor in his capacity as an agent for Mr Bird. It was, in the court’s eyes, irrelevant that the funds were misappropriated thereafter. From the Bank’s perspective loan funds were advanced in accordance with their standard terms and conditions and, on that basis, they were entitled to repayment.

There has not yet been any judicial discussion as to the remedies which Mr Bird may have against his solicitor and this case may yet appear before the courts again. However, as between Mr Bird and the Bank of Scotland, the full loan requires to be repaid even although Mr Bird has not had the benefit of the loan funds.

It is therefore wise to obtain full independent legal advice prior to entering into any loan transaction for the purchase of property.

Got a question for our property finance team?  Contact Gregor on 0141 228 8000 or at gduthie@biggartbaillie.co.uk.

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Hope Value - Multi-Link Leisure Developments Limited v North Lanarkshire Council

North Lanarkshire Council (“the Council”) granted a 50 year lease in favour of Multi-Link Developments Limited (“Multi-Link”) of an agricultural area of land on the outskirts of Cumbernauld. Multi-Link developed and used the land in question as a pay and play golf course. The lease contained a purchase option in favour of the tenant.

The lease provided that if the purchase option was exercised after the first year of the lease then the option price would be "equal to the full market value of the subjects as at the date of entry for the proposed purchase (as determined by the landlords) of agricultural land or open space suitable for development as a golf course".

The land was subsequently identified by the planning authority as having potential for residential development. The difference in valuation should this ‘hope value’ be taken into account in the option price was significant. The Council valued the land at £5.3 million taking into account the ‘hope value’, whereas Multi-Link, ignoring the ‘hope value’, valued the land at £500,000.

The case focussed on the construction of the words “of agricultural land or open space suitable for development as a golf course”. Broadly, Multi-Link’s contention was that the valuer should assume this was the purpose of the purchase and that therefore no ‘hope value’ should be attributed to the option price.

However, at appeal the Supreme Court deemed this phrase to be a description of the subjects of sale as at the date of entry under the lease, rather than being a direction about the purpose for which the subjects of sale are purchased. That being the case the valuation of the land was not limited by reference to a specific use of the land.

In considering the lease the Supreme Court also thought it unlikely that it would have been the parties’ intention on entering into the lease that Multi-Link should be permitted to purchase the land taking no account of any ‘hope value’. If that had been the intention the parties would have specifically stated that in the lease. Indeed, it seems unlikely that the Council would ever have agreed to Multi-Link benefitting from a £5.3 million ‘windfall’.

The Supreme Court unanimously dismissed the appeal. The justices held that the Council was entitled, when determining the option price, to take account of any ‘hope value’.

This case highlights the problems that can occur when interpreting option clauses in leases. Even well established phrases such as “full market value” can be open to debate depending on context. If there are specific factors to be taken into account in determining the option price, or indeed disregarded, that should be clearly stated.

To find out more or to seek advice please speak with your usual Biggart Baillie contact or contact Jennifer Laurie.

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Competition Law to Apply to Property Sector from April 2011

The UK’s commercial property sector will soon be subject to the full rigours of UK competition law for the first time.  An “exclusion order” which has protected most types of commercial property agreements from competition law, will cease to have effect as from 6th April.  In the past landlords and tenants were free to enter into anti competitive arrangements relating to land.  As from April property owners and tenants will need to take advice on whether their existing contracts are compliant or otherwise face the consequences.

Consequences of Infringing Competition Law

The UK competition rules prohibit, inter alia, agreements (whether or not they are legally binding) which restrict or distort competition in the UK.  The consequences for parties who enter into such agreements can be significant.  Firstly, if an agreement is caught by the competition rules, you will not be able to rely on the restrictions in that agreement which infringe competition law.  If a landlord agrees with its tenant not to grant a lease to a competitor of the tenant in the same shopping centre, the question is whether such a restriction is enforceable.  If the landlord ignores what he has previously agreed and proceeds to grant a lease to a competitor, the tenant may now find it difficult to rely on this restriction because the landlord may argue in defence that such a restriction infringes competition law and is therefore unenforceable.  Another consequence is that any persons who are adversely affected by a restriction (such as a disgruntled competitor who is being excluded from a shopping centre), may sue the parties for damages for any loss they can establish they have suffered as a result of an illegal agreement.  Those who are adversely affected also have the ability to complain to the Office of Fair Trading (“OFT”).  The OFT has the power to carry out investigations into illegal agreements and in serious cases can impose fines on the parties of up to 10% of their total turnover.

Restrictions in property agreements will now need to be assessed to ensure that they comply with UK competition rules.  The sorts of restrictions that raise potential competition law issues include covenants in a shop or office lease limiting the type of commercial activity that a tenant may undertake.  Others include restrictions in a lease which limit the landlord’s freedom to let other premises or units to competitors of the tenant.  Similarly restrictions accepted by an owner of land not to sell adjacent property to a competitor of the buyer may cause problems.

Must Be An Appreciable Effect On Competition

However, not every restriction on competition will be caught by the rules.  To be caught, the restriction must have an appreciable effect on competition.  Unlike property law, competition law is not concerned with the legal wording of a provision but more about its economic effect in the relevant market.  Therefore if a shopping centre restriction provides that only one department store will be allowed in the shopping centre, the assessment as to whether the restriction will have an appreciable effect on competition will depend on whether the department store faces at least potential competition from other department stores.  For example there may be supermarkets outside the shopping centre which are nevertheless regarded by shoppers as a realistic alternative.

The OFT has given some guidance on whether there is likely to be an appreciable effect on competition.  The OFT considers that agreements between companies do not appreciably restrict competition if the aggregate market share of the parties does not exceed 15% in circumstances where they do not compete and 10% if they compete.  Such agreements are regarded as de minimis.  However, to do that assessment consideration needs to be given to what constitutes the relevant market.  The process of defining a market involves looking at the substitutes for the product in question.  Consideration needs to be given to what would happen to sales and profitability of a given product if there was only one supplier of the product and that supplier implemented an increase in price.  If an increase is not profitable due to customers switching to substitute products then those alternative products will form part of the same market.  Consideration also needs to be given to what constitutes the relevant geographic market.  A shopping centre may not in itself constitute the relevant market because it will depend on the ability of consumers to use alternative suppliers within the same catchment area.

Will there be an appreciable effect on competition if the owner of a shopping centre on the outskirts of Glasgow has undertaken with a major supermarket not to grant a lease to any of its competitors in the shopping centre?  This depends on what constitutes the relevant geographic market.  Is the geographic market Glasgow or the south of Glasgow or is it limited to the shopping centre itself?

Exemption

UK competition law states that even if a restriction in an agreement has an appreciable effect on competition the agreement may nevertheless be exempt if it satisfies certain conditions.  The conditions are:

• The agreement must contribute to improving production or distribution of goods or promoting technical or economic progress.
  
• It must allow consumers a fair share of the resulting benefits.
  
• The restrictions must not go beyond what is necessary to achieve the objectives of the agreement.  Therefore a shopping centre restriction could be exempt if you can establish that it is “indispensable” to attracting an anchor tenant.
  
• Finally, the restriction must not allow the parties to eliminate competition in relation to a large part of the products in question.

Implications

Property agreements will become subject to the new rules as from April.  Owners and tenants should now take advice on whether their existing leases comply.  Similarly prospective investors need to review contracts to ensure there are no anti-competitive restrictions.  However, market conditions constantly change.  What is permissible now may become a problem at a later date.

To summarise:

• Review your leases to check whether there are any restrictions.
  
• Consider what is the relevant market in which you operate.
  
• Is there are a risk that someone might be upset by this restriction eg being kept out of a shopping centre?
  
• Is the agreement “de minimis” or is there likely to be an appreciable effect on competition?
  
• Does the agreement nevertheless benefit from exemption?

For more information please contact Colin Miller.