When commercial property in Scotland changes hands, the new owner will also acquire the landlord's interest under any leases of the property. But not all of the obligations under a lease will bind the new owner. How do purchasers know which obligations they are taking on?
This article explains the test for whether or not lease obligations transfer to successor landlords, and what a recent court decision tells us about how the test will be applied.
The test
As is not uncommon with Scottish property law, the test for whether a new owner will take on a lease obligation or not involves a bit of Latin. Obligations will only transfer to successor landlords if they are inter naturalia of a lease or, in English, if they are 'of the sort normally found in a lease'. If an obligation is not of this type, it will bind only the original parties to the lease.
Deciding whether or not an obligation is 'of the sort normally found in a lease' is not always easy. The starting point is the nature of the obligation – is it of the essence of the lease or does it deal with an extrinsic issue? But it also matters whether or not the obligation is customary and usual in the particular class of lease in question. This means, for instance, that an obligation which is routinely included in shopping centre leases might be inter naturalia of those types of lease even if it is not strictly of the essence of a lease more generally.
What this means in practice
What all this means for purchasers is best illustrated by examples. Some obligations under a lease – such as the landlord's repairing obligations (if any) and obligations to light and maintain common parts – are so intrinsic to the lease that they will always transmit to successor landlords. On the other hand, it is generally accepted that where a lease gives a tenant the option to purchase the property then a new owner of the property will not be bound by this.
And then there are the obligations which fall somewhere in the middle. For example, the courts have grappled a number of times with the question of whether exclusivity clauses in leases bind successor landlords or not. There is, at present, no clear answer, but new owners will have at least a reasonable argument that they are not bound by any exclusivity clauses in the leases they take on.
The recent court decision
In a recent case, the court had to decide how the test should be applied to a provision in a long lease obliging the landlord to pay a significant premium to the tenant if the tenant exercised a break right after ten years.
The parties disagreed about which documents the court was allowed to take into account when deciding whether or not this obligation was inter naturalia of a lease. The tenant argued that the question had to be answered by looking at the lease alone. The landlord argued the court could take other documents into account.
The judge agreed with the landlord and held that a court is entitled to look at documents other than the lease when applying the test. In particular, he considered several other agreements between the original parties which were entered into around the same time as the lease. Having done that, he decided that the obligation to pay the break payment was related to the other contractual arrangements between the parties (which dealt with a car park investment scheme) and was not inter naturalia of the lease. That meant that the successors to the original landlord were not bound to make the payment if the tenant exercised its break right.
This area of the law is complex and the answer may turn on the specific wording of the provision in question. For advice on whether a particular lease obligation has transmitted or will transmit to a new owner, get in touch with our market-leading Real Estate Litigation team or your usual Brodies contact.
Contributors
Associate
Partner
