When is a provision in a commercial lease not binding on successors to the original landlord and tenant?

This blog explores, in more detail than our previous blog discussing a recent case on the topic , the sorts of conditions in a lease which are non inter naturalia of a lease and which therefore bind only the original landlord and tenant, but not successors.

What is the legal test?

The classic formulation of the distinction between those rights which are inter naturalia and those which are not comes from Montgomerie v. Carrick (1848) 10 D 1387, in which Lord President Boyd states: "It is no doubt most plain and obvious…that there is a distinction between those stipulations which are extrinsic to the lease, and do not transmit against singular successors, and those other stipulations which are of the essence of the contract, and do therefore of necessity transmit against them."

Inter naturalia therefore refers to those rights and obligations that are inherently part of the lease and thus bind successor landlords and tenants. Conversely, non inter naturalia rights are those that do not transmit to successors. This is a developing sphere of law with lots of grey areas, which makes understanding these distinctions difficult. It can sometimes be tricky to say, for sure, whether a provision is intrinsic to or extrinsic to a lease. But what we can look at is examples of rights which the courts have found to be non inter naturalia.

Examples of rights which may not be inter naturalia

1. Options to purchase: an option to purchase the leased property is usually non inter naturalia. This means that if the original tenant has an option to purchase the property, this right does not automatically transfer to a new tenant if the lease is assigned. This was asserted in Commercial Union Assurance Co Ltd v Watt & Cumine 1964 SC 84, and in Advice Centre for Mortgages v McNicol 2006 SLT 591, in which the court confirmed that options to purchase created purely personal rights which were not binding on successors of the original landlords.
2. Back letters: as the name suggests, back letters do not form part of a lease and are personal agreements between the original landlord and tenant which typically involve concessions being granted to a particular tenant (e.g. a rent reduction). They do not bind successors. If the obligation is sufficiently important to the tenant, then in theory it could seek to require the landlord to grant a standard security securing the obligation in the back letter but this adds an extra layer of complexity and is unlikely to be acceptable to most landlords. In practice, a tenant will normally require a landlord to obtain a back letter in identical terms from any successor landlord – but a breach of this obligation would leave the tenant with a damages claim against the original landlord rather than the right to enforce the terms of the back letter against the successor landlord.
3. Break options: while break options, which allow either the landlord or the tenant to terminate a lease early, are generally deemed to be inter naturalia, this is subject to the possibility that a lease includes specific wording to the contrary. This wording must be clear and unambiguous as wording that simply implies that the break option right is not transmissible will be insufficient to override the general legal position.
4. Exclusivity clauses: There remains significant debate about whether exclusivity clauses are inter naturalia. In Optical Express v Marks and Spencer 2000 S.L.T. 644, it was held that an exclusivity clause was non inter naturalia because it did not relate directly to the land leased and restricted what a landlord could do with other units in the shopping centre. However, Lord Drummond Young accepted that an exclusivity clause in the case of Warren James (Jewellers) Ltd v Overgate GP Ltd [2005] CSOH 142 was binding on successors, and in the much older case of Davie v Stark (1876) 3R 1114 the equivalent of an exclusivity clause was found to affect a successor landlord.

Conclusion

There remains considerable uncertainty about when a provision in a lease will be treated as non inter naturalia. The best questions to ask are usually (1) does this provision belong in a commercial lease or is it out of place? (2) does this provision have anything to do with the relationship of landlord and tenant or is it concerned with the wider relationship between the original landlord and tenant? and (3) is this provision usually found in a lease of this type / for a property of this type? If the answer to one or more of these questions is "no" then there is a risk that a provision may be non inter naturalia and therefore not binding on successors.

In practice, we are encountering more instances of parties arguing that a provision is non inter naturalia to try to avoid unwanted lease obligations. If you need advice on whether a provision in a commercial lease is binding on successors then please contact our Real Estate Litigation Team or your usual Brodies' contact.