The case of Gibson v Royal Bank of Scotland plc [2009] CSOH 14 heard by the Court of Session in February this year explores what is known as the "offside goals" or bad faith rule in the context of heritable property transactions under Scots law.
Background
The offside goals rule is a common law principle under which a transaction might be invalidated by the grantee's bad faith. The main authority for the rule is Rodger (Builders) Limited v Fawdry & Others 1950 SC 483 in which a seller entered into separate and competing sale contracts with different purchasers. The title in favour of the eventual purchaser was contested and reduced on the grounds that the eventual purchaser knew of the earlier sale contract in favour of the first purchaser and had not independently investigated its status. The Court in the Fawdry case held that a purchaser is bound to enquire into the nature and result of such a competing previous contract and cannot rely on assurances given by the seller.
Facts
In the case of Gibson v Royal Bank of Scotland plc, Mr McAlister, a former husband of Mrs Gibson, had granted the Gibsons an option to purchase a property from him. The option agreement, which was not recorded or registered in the public records, prohibited Mr McAlister from granting securities and was accompanied by a lease of the property to the Gibsons for the intervening period. This arrangement had been entered into so that the Gibsons could recoup a debt owed by Mr McAlister by way of a discounted purchase price. Mr McAlister granted a Standard Security over the property in favour of the Bank in January 2006, after the Gibsons had exercised their option to purchase the property from him but before delivery of the conveyance transferring title to the Gibsons.
Argument
The Gibsons sought reduction of the Standard Security on the basis that the Bank was acting in bad faith as it had prior knowledge of the option agreement and had taken no steps to enquire into the nature and result of the option before taking the Standard Security.
The Bank argued that the action raised by the Gibsons should be dismissed as irrelevant as a mere personal or contractual, as opposed to real or property, right could not be founded on for the purposes of the offside goals rule. The Bank contended that the option contract was a personal right which should not fetter the freedom of a party to transact with heritable property on the faith of the public records.
The Bank further argued , relying on previous authority of Wallace v Simmers 1960 SC 255, that any action on the grounds of bad faith must be founded on a personal right capable of immediate conversion into a real right (enforceable by successors) such as concluded missives for the sale of the property. They argued that the option contract did not fit into this category.
Decision
The Court refused to dismiss the action as irrelevant and a proof before answer has been allowed to give the Gibsons the opportunity to prove, amongst other things, the extent of the Bank's knowledge. Lord Emslie, having made his judgment, went on to comment that the bad faith exception may be applied in a wide range of circumstances. He commented that "against the background of today's enhanced emphasis on considerations of fairness and justice in all branches of the law it would I think be unfortunate if, to an extent more than necessary, transactions in bad faith had to be upheld simply because they related to heritable property".
Conclusion
Options are often used to secure exclusive purchasing rights whilst developers, for example, secure planning permission for proposed works and uses. In recent times, options will undoubtedly have been used to buy time to line up funding to buy property. Unlike in England, contracts for options to purchase land in Scotland cannot be protected by restrictions in the title and are rarely registered in the public registers unless they are created as a burden on the land in the form of a right of pre-emption.
Generally, one would expect an option over land to be secured by the granting of a Standard Security by the seller in favour of the potential purchaser and such an arrangement will be disclosed by the public registers. However, there will be many options which are not secured.
The Gibson case is finally to be decided but the Court had no hesitation in allowing the Gibsons an opportunity to prove their arguments. Pending the final decision, and facing the possibility of an extension of the scope of the bad faith principle, it is necessary for funders and purchasers to ensure that their due diligence is even more thorough than before.
All prior knowledge of the status of the seller and the property and any third party rights affecting the property must be properly vetted and an informed judgement made as to whether the proposed transaction would prejudice those rights and as a result be open to third party challenge as being in bad faith. As well as options to purchase land from a seller, it may be necessary, for example, to look more closely at purchase options in favour of tenants contained in leases, which, until now, have generally not been considered to bind successors. At the same time, tenants and others looking to take options over land should not rely on this judgment to protect them against competing interests in the property and where possible should secure their option with a Standard Security.
