Only those provisions which are inter naturalia of a lease bind singular successors, transmitting on sale of the property to a new owner. These terms are effective as "real rights" and are "good against the world" and not just as between the original contracting parties. In general terms, a provision is inter naturalia if it is commonly found in the type of lease concerned and is essential to the lease.

The scenario

Renfrewshire Council (RC) v. HR 150 Limited (HR) and Others [2024] CSOH 75 concerns a complex investment scheme involving a lease of a car park in Paisley. The investment scheme failed but the underpinning lease remained in place. As part of a proposed regeneration project, RC intends to use its compulsory purchase powers to acquire the car park. In doing so, RC will become landlord and subject to the terms of the existing lease, in so far as these are binding on singular successors.

The lease

The case centred on clause 2.2 of the car park lease which contained a tenant break right and consequent provisions for payment by the landlord to the tenant of (at least) £3.75 million. This sum represented the price paid by HR in terms of an underlying purchase agreement entered into by the original contracting parties. The question before the court was whether this unusual and costly term was inter naturalia of the lease and so binding on RC as the new landlord.

RC's position

In summary, RC's position was that while the payment was enforceable as a matter of contract, this was a personal obligation which bound the original landlord only. The law of property restricts what may be transferable as real rights. The nature of the payment obligation was not amenable to transfer as a real right. While the parties have freedom of contract, this does not extend to creating real rights from obligations which by their nature are not part of the law of property. The intention of the parties is not sufficient to transmit obligations to singular successors, if the nature of the obligation means it is not inter naturalia of the lease. While the payment obligation could not transmit to singular successors, this was considered severable from the break right itself, which could do so.

HR's position

In summary, HR's position was that the answer to the critical question of whether the payment obligation was inter naturalia fell to be decided within the four corners of the lease. The other documents, including the purchase agreement, were irrelevant. If they did fall to be considered, they backed up HR's position that the payment obligation was transmissible; had the parties intended to create personal obligations only, these obligations could have been left in the purchase agreement. They were not and were included within the lease itself. It was accepted by both parties that the tenant was entitled to assign the lease and with it the tenant's right to receive payment on exercise of the break. It was submitted that this was fatal to RC's argument, there being no basis for treating the landlord's interest differently.

Under the Registration of Leases (Scotland) Act 1857 (the Act), it is clear that registered leases which are binding on original granters are effectual against singular successors. The Act permitted personal rights to be made real and excluded only those rights and obligations incapable of becoming so, such as "a right for the landlord to dance a jig". The principal effect of the Act was that rights created under a lease which were not made real by the preceding 1449 Act were given real effect by registration. Consequently, so can the other personal obligations contained in the lease in question. Further support is found in the statutory right of assignation under the Act. The effect of registering such assignation is to vest "the assignee with the right of the granter thereof in and to such lease". There is no qualification of the right assigned.

On a proper characterisation, the purchase price should be seen as an advance payment of rent. The payment obligation was a necessary consequence of the break clause, which was central to the relationship of landlord and tenant. The break clause and the payment obligation were not severable and it could not be argued that the payment was "extrinsic to the lease".

The decision

The court addressed (i) the effect (if any) which registration of the lease in the Land Register under the Act had on the nature of the payment obligation and (ii) whether at common law the payment obligation was transmissible to RC as the landlord's singular successor.

The court held that the first argument falls to be resolved as a matter of statutory construction. The reference to "leases" under the Act should be construed narrowly. The Act is referring to the rights of lease created by the contract and it is these rights of lease which are effectual against singular successors. Registration creates real rights from the rights of lease and related ancillary rights which are contained within the contract. It does not affect other personal rights which happen to be incorporated. The term "lease" does not refer to the full collection of rights within the lease contract, which would include essentially whatever the parties agree to. This broad interpretation advanced on behalf of HR was rejected. The Act preserved the existing distinction between rights extrinsic to the lease and those inter naturalia, and consequently transmissible against singular successors.

The test for determining whether the payment obligation was inter naturalia of the lease, and transmissible at common law, was that expressed by Lord MacFadyen in Optical Express (Gyle) Limited v. Marks & Spencer plc. This was principally whether the obligation was customary and usual. The intention of the parties was not a determining factor. The parties agreed that the essence of the distinction between transmissible and non-transmissible terms was captured in Montgomerie v. Carrick (1848) 10 D 1387 by Lord President Boyd: "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."

Other factors considered by the court were whether the obligation commonly occurs in a particular type of lease, and whether the obligation hinges on the relation of landlord and tenant or on the private relation between the contracting parties.

The court confirmed that quite different factors are at play in determining the conveyance of personal rights via assignation and the existence of the tenant's right of assignation was not considered relevant.

The court did not restrict itself to consideration of the lease in isolation, but rather considered the suite of documentation related to the investment scheme. To do otherwise was considered artificial and to prevent a proper understanding of the obligation from the perspective of the contracting parties.

The court found in favour of RC. HR's argument that the payment obligation was inseparable from the break right was unfounded. The issue was not one of contractual construction but rather of the law of property. The intention of the parties is not a deciding factor in the test of whether an obligation is inter naturalia of a lease. HR's argument that the payment obligation should be characterised as repayment of advance rent was rejected. Such characterisation was considered to be artificial, and the payments fell to be seen as extrinsic to the lease and a part of the wider contractual structure. As a result, the payment obligations were considered severable from the break option and to be personal rights only. The payment obligations did not form part of the essence of the lease, they related to the investment scheme and did not centre on the general relation of landlord and tenant. The payment obligation was in essence part of the contractual arrangements between the parties to the investment scheme and personal to them.

We appreciate the contribution of Corrie Gwynne in drafting this article.