The late Alfie Phillips’ fight for a better deal for commercial tenants faced with irritancy, and an assessment of how the resulting reforms have served

Outside the family Alfred Phillips was known to the world as “Alfie”. I had the good fortune to be his Edinburgh agent from 1979 until he retired. That period was dominated by Alfie’s fight to establish a better deal for commercial tenants faced with irritancy of their leases.

Scots common law governing these issues is primitive. The common law implies that a lease may be terminated after two years’ rent is unpaid, but the irritancy is purgeable provided the rent is paid before decree of removing, the tenant can stay. That might have been a reasonable arrangement between 18th-century estate owners and tenant farmers, but in other contexts it was impractical.

The two year “legal” irritancy inevitably came to be surpassed in every case by a contractually agreed “conventional” or “pactional” irritancy which could not be purged. No warning notice was required by law, although individual leases often provided for some notice to be given. Once the landlord had decided to exercise the irritancy the tenant was doomed, regardless of the reason for the delay in payment, the length of any delay or the nature of any non-monetary breach. Textbooks stated that irritancy could not be used oppressively, but what that meant was not clear.

Dorchester and after

For Alfie, the story started with Dorchester Studios v Stone 1975 SC (HL) 56. The defenders, clients of Alexander Stone & Co, ran a carpet store. The lease provided that if the rent was in arrears for more than 21 days, the landlords could irritate the lease. In October 1972, the landlords issued their usual rent notice for Martinmas, but through oversight it was not paid. No reminder was issued and the landlords proceeded to terminate the lease and refused to accept the rent when it was sent on 13 December.

The case was fought from the sheriff court to the House of Lords, but the landlords succeeded at all levels and the tenants had to remove, losing the goodwill built up in the premises.

In Dorchester Studios, the House of Lords restated the position that a conventional irritancy was not purgeable unless it was used oppressively, but held that there had been no oppression in this case.

As the 70s merged into the 80s, there was a spate of irritancy cases in Scotland. Most notably, the Glasgow property investor HMV Fields Properties Ltd started to terminate high street leases when rent was late. There are three HMV Fields Properties cases reported and the landlords were successful in each case. In HMV Fields v Tandem Shoes 1983 SLT 114, for example, the defenders ran the oppression argument left open by the House of Lords, but to no effect. Alfie acted in two other unreported HMV Fields actions which we won on technical knockouts, as the landlords had not followed the lease procedures properly.

Incomplete reform

Agitation for reform by Alfie, among others, led to the passing of sections 4 and 5 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985. These provisions introduced a minimum requirement for notice to be served by recorded delivery 14 days before an irritancy clause could be invoked for non-payment. A non-monetary breach could not be used as a ground for irritancy unless it was reasonable for the landlord to do so; and an opportunity had to be given to remedy a remediable breach.

Events were soon to expose the limits of the protection.

In October 1987, Alfie’s clients Dollar Land (Cumbernauld) Ltd acquired various interests in Cumbernauld town centre. Part of the package was a sublease of Phase IV which cost about £4 million. The head tenant was CIN Properties Ltd, under a lease from the Corporation at a nominal rent for 125 years. CIN had sublet back to the Corporation at an annual rent of about £1 million and the Corporation let the individual shops to traders for an aggregate rent of about £1.4 million. Dollar Land bought out the Corporation’s interest as subtenant.

The sublease contained an irritancy clause which provided that CIN could irritate after the rent was in arrears for 21 days, but first they had to give Dollar Land 14 days’ notice. In this respect the sublease specifically met the requirements of the 1985 Act. The rent of about £250,000 due at 11 November 1988 had not been paid by 15 December, and a 14-day warning letter was sent to say that if payment was not received by 4 January the lease “may be terminated”. A cheque was sent on 4 January but on 5 January the lease was terminated and a bank draft hand delivered on 6 January was refused.

Battle lines were drawn up quickly and the landlords raised Court of Session proceedings for declarator of irritancy. Alfie realised that another trip to the Lords was inevitable and that the House would have to be persuaded that there was oppression in this case, unlike Dorchester Studios, or even that the whole question of purgeability needed to be looked at again.

The case was duly lost at debate in the Outer House of the Court of Session and at the reclaiming motion, and in 1992 I found myself with Alfie and the rest of the team in the House of Lords for the first day of the appeal.

The first day went well. The arguments attracted attention, the committee was on our side and it looked as if we might persuade the court to do something for us. By day two, the atmosphere had changed. Overnight the court had clearly reflected on the changes introduced by the 1985 Act and concluded that it would not be appropriate for the court to revisit the law on this topic so soon after Parliament had dealt with it: CIN Properties Ltd v Dollar Land (Cumbernauld) Ltd 1992 SC (HL) 104. It was also held that a clause of this type could not be treated as unreasonable, so not oppressive even though it might be penal. Their Lordships were evidently unconvinced that the law was right and Lord Keith suggested that a landlord might be obliged to compensate the tenant for improvements. The appeal was dismissed “with regret”.

Alfie and the client battled on and a case was launched by Dollar Land seeking recompense for the considerable enrichment obtained by CIN. In effect CIN took Dollar Land’s share of the rent. The case received some encouragement from Lord Rodger in the Inner House, but the proceedings in Scotland were unsuccessful and the House of Lords refused Dollar Land’s Appeal: Dollar Land (Cumbernauld) Ltd v CIN Properties Ltd 1998 SC (HL) 90.

Strange ways of the law

Dollar Land had been six weeks late with a substantial amount of rent: but should that have been enough to allow the head tenant to terminate a 125-year lease with a value of £4 million in 1987 money? Clearly it was within CIN’s legal rights - a landlord in the same position today could irritate with confidence - but does this represent fair protection for a tenant who might be overwhelmed by temporary circumstances, or affected by an excusable oversight, yet must lose the goodwill built up at a site over years? Where is the protection for the secured lender, or the employees whose jobs disappear?

It is ironic that 2009 should have seen a decision on this topic which has caused some excitement among property lawyers.

In Kodak Processing Company Ltd v Shoredale Ltd [2009] CSIH 71 the landlords had served the irritancy warning letter by sheriff officers, rather than recorded delivery. (There was a concern that recorded delivery would not reach the tenant during a postal strike.) It seems that a view had developed amongst property lawyers that it would be necessary to ensure that a tenant had actually received the irritancy warning required by the 1985 Act, otherwise irritancy might be considered oppressive, and that intimating the notice in more than one way would be too confusing.

The sheriff rejected the tenants’ challenge on the basis that sheriff officer service was a form of recorded delivery. The Inner House, however, held that recorded delivery meant postal recorded delivery: the 1985 Act procedures had not been followed and the landlords were not entitled to possession. It is noted in the report that the 1985 Act only requires the notice to be posted and does not expressly require that the notice be received. The Inner House did not comment on whether it would have been acceptable only to send a notice knowing it would not or might not be received, but it might be questioned whether it could be oppressive to follow the procedure laid down by Parliament. It would have been acceptable for the landlords to have sent the notice and intimated by sheriff officer or in some other way that the notice had been sent, and if it was not received this is what it said.

Correct, of course – but I can well imagine the Alfie Phillips reaction to this sort of legal daftness.

The Author
Ian Anderson is a partner with Burness LLP
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