When letting commercial property, landlords need to be aware of existing title conditions (also known as title rights) and how those interact with the lease rights granted to tenants. Here we look at Scots law title conditions.
Generally speaking, the term ‘title rights’ describes title provisions that one owner can exercise or enforce against another. The term ‘title conditions’ describes the corresponding restrictions affecting the other property. For example, if 10 High Street has a right to use a road over 11 High Street for access, that is a title right for 10 High Street and a title condition on 11 High Street. Title rights and title conditions affect the properties themselves, so apply to subsequent owners and to anyone using the property, including tenants and other occupiers.
Many title conditions impact how a property is used and therefore could impact tenants. Title conditions should therefore be considered by landlords when granting commercial leases. Examples of such title conditions include:
- use restrictions, such as a prohibition on using a retail unit for the preparation or sale of food;
- exclusivity provisions or other restrictions affecting use, such as limits on servicing hours;
- maintenance obligations, including obligations to contribute to common maintenance costs for roofs, access roads or other common parts shared with other properties; and
- access rights over the landlord’s property in favour of neighbouring properties.
Who can enforce title conditions and title rights?
Title rights are enforceable by the owner of the ‘benefited property’ against the owner of the ‘burdened property’. The ‘benefited property’ is the property that has the benefit of the right. The ‘burdened property’ is the property over which the right is granted and exercised. Coming back to our earlier example, where 10 High Street uses a road over 11 High Street for access, 10 High Street is the benefited property and 11 High Street is the burdened property. Similarly, the benefited owner is the owner of the benefited property; and the burdened owner is the owner of the burdened property.
If the title right is restricted or prevented in a way which breaches the underlying title conditions then irrespective of who causes the restriction or prevention - whether the burdened owner or its tenant – the benefited owner can enforce the right against the burdened owner.
Title rights therefore have implications for the burdened owner in terms of both how it can use the burdened property and also the potential cost if the title rights are breached or prevented and then formally enforced.
Under statute the benefited owner can enforce negative burdens/ title conditions (i.e. a prohibition) directly against a tenant. As that only applies to negative title conditions, it is therefore important from the landlord’s point of view that positive burdens/ title conditions (e.g. payment of common repair costs) are specifically included in the lease as tenant obligations. That ensures that compliance with all title conditions is passed down to the tenant.
There are specific legal tests which need to be met before an owner can enforce a title condition. Those are, in short, that a party must have both title and interest to enforce a title condition. Establishing title and interest is technical and can be complex, so we do not go into it further here, but it has been covered by The Enforceability of Deeds of Conditions in Scotland: Lessons from Malcolm v Paton and Restrictions on the use of land. It is worth noting that, under statute, a tenant has title to enforce a title condition against the burdened owner. Whether it also has interest to enforce is a separate test.
What are the implications of title conditions on commercial leases?
In the context of commercial leases, it is important for landlords to consider who will be responsible for complying with title conditions. The legal starting point is that a title condition binds the owner of the burdened property, rather than any tenant or occupier. However, to avoid any breach of the title conditions resulting in a claim or court action by the owner of the benefited property, a landlord will want to ensure that their tenant also complies with the title conditions. Modern commercial leases therefore typically pass all compliance obligations on to the tenant, including obligations to:
- comply with all title conditions affecting the lease premises;
- not to do anything that would cause the landlord to be in breach of any title conditions;
- comply with any notices relating to title conditions; and
- indemnify the landlord against claims arising as a result of the tenant’s breach of any title conditions.
The intention being that if the benefited owner of the seeks to enforce title rights against the landlord ((as burdened owner) the landlord has immediate contractual recourse against the tenant under the lease.
How do title conditions interact with lease rights?
A landlord should avoid granting lease rights that are inconsistent with the title deeds. A landlord can only grant a tenant the rights that the landlord itself has. For example, if the title deeds to the lease premises contain a use restriction stating that the property must only be used as offices, but the permitted use under the lease is retail, the lease does not, and cannot, override the title condition. The title condition would remain enforceable.
If a landlord grants the tenant a right it does not have, or which contradicts the title deeds and the benefited owner successfully enforces a title condition, the tenant could have a claim against the landlord for breach of the landlord’s lease warranties. For that reason (a) commercial tenants usually review the landlord’s title to ensure they are aware of all such title conditions, and (b) most modern commercial leases state that the landlord does not warrant that the lease premises are suitable for the permitted use and that the tenant is to comply with all title conditions. This puts the onus on the tenant to satisfy itself that the lease premises and the underlying title are fit for the tenant’s proposed use.
Key takeaway
When granting commercial leases, the landlord should be mindful of both the title conditions affecting the property and the tenant’s proposed use and other requirements, to ensure they are not incompatible.
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