An Outer House decision in which an agreement calling itself a lease was held not to be one for want of common law cardinal elements of a lease.
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| Sunwick Farm |
The terms of the lease Alexander Orr claimed to hold may be given in full (subject to some immaterial abbreviations):-
“Lease for 10 years to Duncan Alexander Andrew Orr regarding the whole of Title BER2353 Sunwick Farm and Houndwood Farm […].
I, Martin Frank Frost on behalf of the directors and shareholders of, and as director and Chairman of [HOL, the company which owned the farms at the time], grant Duncan Alexander Andrew Orr in accordance with previous agreements with the shareholders of [HOL], a lease for the occupation of Sunwick Farm and Houndwood Farm. Sunwick Farm in its entirety to include the farmhouse, out buildings, land and machinery and livestock not accredited to any other company without agreement, with the exception of all Sunwick Cottages and land belonging to Janet Orr Frost namely Title BER7040. All land at Houndwood with the exception of the forestry belt.
This lease granted for the term of 10 years starting 20th September 2016 with the view that Duncan Alexander Andrew Orr will have the opportunity and ability to purchase both properties at the earliest. The farms thus after said term be returned to [HOL].
The conditions are:
1. That DAAO undertakes to make the farms profitable and agrees that he shares 50% of his profits with [HOL] within lease timescale.
2. That DAAO undertakes to purchase the farms at the earliest opportunity.
3. That DAAO undertakes to give annual reports of progress to the company secretary or any director of any [HOL] director (sic) or shareholder who wishes an update.
4. That DAAO undertakes to have no hold on Harcarse Hill Farm or its assets through the occupancy of this lease.
5. That DAAO undertakes to absent himself, or refuse to become involved, in any legal action against any director or employee of Avocet companies.”
Cardinal elements of a lease
As is well
known, four so-called cardinal elements must be identified and agreed for an
agreement to be a lease. These are the parties (identification of landlord and
tenant), subjects (the property let), term (duration), and rent. And a further
requirement for it to be a lease is that the tenant must have the exclusive
possession of the subjects. Only if it is a lease – i.e. all four cardinal
elements are agreed and the tenant has exclusive possession – will the tenant get
a real right, that is to say he will be able to remain in possession of the
subjects for the full term notwithstanding changes of ownership of the subjects
or a heritable creditor seeking to repossess them during the term. (If an agreement lacks any of these ingredients, it may nevertheless still be valid as against the original owner of the subjects who entered into it so long as he continues to own them but not against any subsequent owner (or heritable creditor) coming in during the term who will be entitled to evict the tenant notwithstanding that the term still has time to run.)
Rent
As can be seen from the alleged lease quoted above, there was no difficulty about three
of the cardinal elements: parties, subjects and term. The issue arose over the
rent, agreed at 50% of the profits of the farms. It is perfectly permissible
for a rent to be expressed as a share of profits from the subjects (as opposed
to a fixed periodical sum) but the problem here was that the agreement
contained no mechanism for determining what the profits were in case of dispute
between landlord and tenant (for example that they be determined by an independent
accountant). Therefore, there was, in effect, no agreement about the rent and so
that cardinal element was missing. In the words of Lord Braid (para. [73]):
It is immediately apparent that the lease contains no machinery by which any sum due could be fixed. The gaps are far beyond the power of the court to fill by means of implication of terms: cf Crawford v Bruce 1992 SLT 524 at 532. I therefore conclude that the agreement cannot be a lease enforceable against third parties, in that it does not provide for payment of a rent. (An alternative analysis, leading to the same result, is that the provision for rent is simply void for uncertainty.) This conclusion is reinforced by my finding, above, that no rent was as a matter of fact paid, whether by sharing of profit or otherwise.
Exclusive possession
There was
another problem with the agreement being a lease: the ‘tenant’, Mr Orr, didn’t
have exclusive possession of the farms. The facts in this regard established
at the proof (trial) were (para. [66]):
Alexander Orr was (or rather, continued to be) employed by one of the [Landlord’s group] companies … as farm foreman and … he worked at the [farms] in that capacity rather than as a tenant … . Whether or not he (or his company) also possessed the [farms] in the pursuit of his own (or his company’s) business, he (or his company) did not have exclusive possession because the [farms were] also possessed by [the Landlord] who installed hydroponics on [them] in connection with its own business and who kept an admittedly small number of cattle on [them]. The evidence that rent was paid by way of deduction from Mr Orr’s wages, which was not vouched, I do not accept, and in any event that was not what the lease provided for by way of rent … . No accounts were ever produced, [nor were the farms] ever made profitable, nor was any rent ever paid. Not only was there no apparent sign to the outside world that Alexander Orr occupied the farm as tenant, nor did he make mention of the existence of the lease on several occasions when it would have been natural that he do so … .
Against that factual background, Lord Braid opined (para. [74]):
The second requirement where the pursuers face a difficulty is the requirement that the tenant have exclusive possession of the subjects: see Millar v McRobbie 1949 SC 1. The need for possession is explained in Rankine [a classic textbook on leases] at page 137 as being the “only means whereby at common law a singular successor or creditor of the landlord...can become acquainted with the existence of a lease and be enabled to learn its stipulations.” Having found as a fact that Alexander Orr did not have exclusive possession - see, again, para [66] - quite simply, the agreement could not be a lease, whatever else it was.
(It's not entirely clear whether Lord Braid is basing his decision on the fact that Alexander Orr didn’t have exclusive possession of the farms (because he shared them with the landlord’s hydroponics and “admittedly small number” of cattle: see para. [66] quoted above) or whether he had no possession of them at all (because his role on the farms was not as tenant but as their owner’s employee). But as the greater (no possession at all) obviously includes the lesser (only non-exclusive possession shared with the landlord) here, the result is the same: the agreement is not a lease.)
Good faith and ‘sham’
Although not
the focus of this note, it’s worth noting that the alleged lease was granted after
the standard security (mortgage) to the defender. As the ‘lease’ hadn’t been
agreed to by the creditor (mortgagee), that meant that, even if it were a true lease,
it still wouldn’t have protected the tenant, Alexander Orr, from being evicted
by the creditor seeking to repossess the farms unless he had been in good faith
– i.e. he hadn’t known of the existence of the standard security. Lord Braid
found as a matter of fact that Mr Orr did know about it (or, at the very
least, and which amounts to the same thing, should have known about it:
paras. [76]-[79]).
The defenders, the heritable creditor seeking eviction of the Orrs so they could repossess and sell the farms with vacant possession, also ran an alternative argument that Alexander Orr’s alleged lease was a ‘sham’ designed for the ulterior motive of frustrating their rights under their security and, as such, a nullity. The possibility of agreements being null and void as ‘shams’ was much talked about in the last quarter of the 20th century in the context of elaborate paper exercises to try and circumvent agricultural tenants’ security of tenure (limited partnerships if you’re old enough to remember them) but the plea never really gained much traction in Scotland. And Lord Braid had little difficulty dismissing this argument in Orr: “it is likely that the parties did intend that the ‘lease’ should have some contractual effect” (para. [71]).
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| The Berwickshire Merse from above |
Analysis/takeaway
I can’t help thinking Lord Braid was a bit quick to rule the rent provision in the lease void from uncertainty simply because it didn’t contain a mechanism to resolve any dispute about the amount of the profits the landlord was to receive 50% of by way of rent (for example that the profits be determined by an independent accountant). Was he right to say (para. [73]):
The gaps [i.e. absence of mechanism to fix the amount of profit] are far beyond the power of the court to fill by means of implication of terms
in the context of this short, ‘home made’ lease (as opposed to lengthy document prepared by lawyers who can be assumed to have covered every base)? I’m retired and don’t have access to a law library to look into this but is the ‘officious bystander’ test not still good law? If it is, if an OB had suggested to Alexander Orr and Martin Frost (the director of the landlord company) as they were about to sign the lease: “shouldn’t there be something in there about an independent accountant fixing the profits if you two can’t agree them?” wouldn’t they have “testily suppressed him with a common ‘Oh, of course!’”? (That last quotation is from MacKinnon LJ in Shirlaw v Southern Foundries (1926) Ltd [1939] 2KB 206 which I found by googling ‘officious bystander’. For any non-lawyers still reading this, it’s one of the tests for when it’s legitimate to imply a term in a contract. An implied term of a contract is one which is taken as read without having to be explicitly written into the contract.) The Orrs were not represented by counsel and I strongly suspect that, if they had been, the legitimacy of implying a term into the lease to provide for a mechanism to determine the profits in the event of disagreement would have been pressed much harder. (It doesn’t look as if Mrs Orr, who conducted their case, took the point at all as is entirely understandable given that she’s not a lawyer.)
As it’s just an Outer House decision (meaning it has little value as a binding judicial precedent), I can’t really see Orr entering the canon on implied terms in contracts. But what I think the real takeaway of the case is that it’s a reminder that, just because an agreement calls itself a lease, that doesn’t necessarily mean it is one. And that, although it can seem like it’s been totally hidden under layers of statutory accretion (Rents Acts, agricultural holdings et al), the basic common law of leases – the need for a rent and exclusive possession by the tenant – can still be the decisive factor in the outcome.
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| Houndwood |
