Decision of the Scottish Land Court

Messrs C & E Ingram (Applicants) v Messrs James M Watt (Respondents)

Case reference SLC 29/15
before
Lord Minginish, Chairman, and Mr John A Smith
2 September 2015

[1] In this application the owners of 55 acres of land at Northfield, Rothiemay, Aberdeenshire seek declarator that no agricultural tenancy in favour of the respondents exists over that land and an order for the respondents’ removal. The respondents oppose the application and, in the event that they are unsuccessful, counterclaim for compensation for improvements carried out during the tenancy.

[2] The applicants having taken a plea to the relevancy of the respondents’ answers and counterclaim, these matters came before us for debate at Edinburgh on 25 August 2015, when the applicants were represented by Mr Hamish Lean, solicitor, and the respondents by Mr Michael Watt, one of their partners.

Factual background

[3] Before setting out their submissions it is convenient to describe the factual background. The respondents are a partnership. The original partners were Mr James M Watt and his wife Mrs Mary Helen Watt. No partnership agreement has been produced and it is not clear to us when the partnership was formed but in 1981 Mr & Mrs Watt assumed their son Michael as a partner and in 1993 his wife, Mrs Gerardine Watt, joined the firm. Mary Helen Watt died in January 2007 and James Watt on 12 April 2014. Since then Michael and Gerardine Watt have continued the business of the firm. No rent has been accepted since the death of James Watt.

[4] There is an unsatisfactory amount of uncertainty as to the origins and nature of the lease. No written lease has been produced and the applicants aver that there is none. In their written response to the application the respondents say that the tenancy was first entered into in 1976 between the then owners of the land and Messrs James M Watt but at debate Mr Watt produced copies of correspondence comprising two letters from Messrs Stephen & Robb, solicitors, to Mr J M Watt and a reply by him to the second of those. The first letter is dated 23 April 1993. It says that Mr Ingram, for whom Messrs Stephen & Robb were acting, had recently purchased the land and refers to a copy of “the particulars and conditions of let which commenced on Whitsunday 1969 from which it would appear that you personally were the tenant at the outset of the let”. The letter goes on to ask whether Mr Watt still considered himself to be the tenant or whether the current tenant was the firm of James M Watt. No reply to that letter has been produced. The second letter from the solicitors is dated 16 September 1994. It begins by reference to Mr Ingram’s death on 1 August 1993 and goes on to deal with a proposed increase in rent and to sound out Mr Watt about the possibility of the Ingram family buying out the tenancy. Both the possibility of a rent increase and being bought out got short shrift in Mr Watt’s undated reply. Instead he offered to buy the land from the Ingram family at the price Mr Ingram had paid for it. All we have is the file copy of this letter. Although the signatory is J M Watt, without reference to the firm, it may well have been sent out on the firm’s headed notepaper. It is certainly in language suggestive of the partnership being the tenant. Thus it begins “We are in receipt of your letter” and goes on to use the plural throughout.

[5] It appears, therefore, that by 1994 a lease which had originally been in favour of Mr J M Watt personally had, somehow, evolved into a lease in favour of the partnership. In the course of the debate Mr Watt asked if it would be possible to issue an order asking Messrs Stephen & Robb to produce a copy of the lease, if one exists. We declined to go down that route because we did not, and do not, think there is a sufficiently firm basis for it. If there ever was a written lease in favour of the partnership it is very surprising that neither party holds a copy. Mr Lean explained that he had not taken over agency directly from Messrs Stephen & Robb – there had been an intervening firm of agents – and that he did not have their whole file. Mr Watt did not positively assert that a written lease exists; he just wondered whether one did. That is not a sufficiently firm basis upon which to grant any order for the retrieval of papers. We think it likely that the partnership accountants, to whom Mr Watt made reference in a different context, would have satisfied themselves as to the basis upon which the partnership was occupying the land and would, in the course of doing so, have traced any written lease if such existed. Accordingly we proceed on the basis that the original let in favour of Mr J M Watt to which the letter of 23 April 1993 refers has been superseded by an unwritten lease in favour of the partnership of Messrs J M Watt, although that ignores questions as to whether the tenancy in favour of Mr Watt, if it was one to which the Agricultural Holdings (Scotland) Act 1991 (“the 1991 Act”) applied, could be ended in that way of the kind discussed in cases such as Morrison’s Executors v Rendall 1986 SLT 227, Kildrummy (Jersey) Ltd v Calder 1994 SLT 88 and Knapdale (Nominees) Ltd v Donald 2001 SLT 617.

[6] Against that background the applicants aver that the original partnership and lease terminated with the death of Mary Helen Watt and that the ensuing lease or leases ended with the death of James Watt. They also aver that any claim for compensation for improvements is now time-barred. The respondents say that the original partnership and lease have continued in existence despite these deaths but, if they are wrong about that, they say they are entitled to compensation as aforesaid.

Legislation

Agricultural Holdings (Scotland) Act 1991, sec 62(2)
Agricultural Holdings (Scotland) Act 2003, secs 45(1), 80 and 94

Cases

Carter & MacIver v Kenneth MacIver and Philip MacIver 2010 SLCR 13
IRC v Graham’s Trustees 1971 SC (HL) 1
Jardine-Paterson v Fraser & Ors 1974 SLT 93
Moray Estates Development Co v Butler 1999 SLT 1338
William S Gordon & Co Ltd v Mrs Mary Thomson Partnership 1985 SLT 122

Submissions

(i) For the applicants

[7] Mr Lean explained that the applicants had not been aware of the composition of the original partnership but were happy to proceed on the basis that it was as stated by the respondents. That being so, the original partnership and, therefore, the lease by which it had occupied the land had come to an end with the death of Mary Helen Watt in January 2007; Partnership Act 1890, sec 33(1). The continuing partnership was, therefore, a new one and it occupied the land by virtue of a tenancy arising by operation of law. Because this was happening after the coming into force of the Agricultural Holdings (Scotland) Act 2003 (“the 2003 Act”) the tenancy which arose was a short limited duration tenancy, running from year to year. That tenancy had expired on its fifth anniversary, in January 2012, and, by virtue of secs 4 and 5 of the 2003 Act as amended by the Public Services Reform (Agricultural Holdings) (Scotland) Order 2011, it had been replaced by a limited duration tenancy of ten years backdated to January 2007 and expiring in January 2017. However that tenancy had come to an end with the death of Mr J M Watt on 12 April 2014, again because the partnership had come to an end by virtue of sec 33(1) of the Partnership Act.

[8] This was not a lease to “the house” of the kind discussed in IRC v Graham’s Trustees. Two things were needed to establish such a lease. The first was that the partnership agreement itself must provide for the partnership to continue despite the death of one of the partners, as was permitted by sec 33(1). There was no evidence as to what the partnership agreement said in this case. But in a question with third parties it was not enough that the partnership agreement provided for that. The second thing that was needed was the agreement of the third party; Lord Maxwell in Jardine-Paterson v Fraser at page 97 and Lord Hamilton (as he then was) in Moray Estates Development Company v Butler at page 1344. Where the tenant was a partnership there required to be clear contractual provision between landlord and tenant that the contract was with “the house”.

[9] Mr Lean then turned to the respondents’ counterclaim for compensation for improvements. A partnership which had been a tenant under the 1991 Act and in which a partner had died could make a claim for compensation for improvements because the Partnership Act gave the remaining partners continuing authority to wind up the affairs of the partnership. But it had to be made within two months. The statutory provisions were very strict on that. Section 80 of the 2003 Act applied on termination of a limited duration tenancy. It provided that sec 62 of the 1991 Act applied to any claim under sec 77(2)(c) of the 2003 Act. The effect of that was that a claim of this kind was not enforceable unless written notice of it was given to the landlord before the expiry of two months after the termination of the tenancy. Subsection (6) of sec 62, which allows notice to be given within two months of the termination of occupancy where the tenant lawfully remains in occupation of the land following termination of the tenancy, did not apply here because there was no tenant who lawfully remained in occupation. The position was different where the tenant was an individual who had died. His executor might be lawfully in occupation because executors were included in the definition of “tenant” in sec 93 of the 2003 Act whereas surviving partners in a partnership were not.

[10] Asked when it would first have come to the attention of the remaining partners that the landlords were regarding the lease as having terminated, Mr Lean understood that to have been when the landlords’ previous agents had written to Mr Michael Watt on 30 July 2014. He acknowledged that the time limit gave rise to unfairness where nothing happened within two months of a death to put the surviving partners on notice that the lease had ended. But that was simply the result of the strict statutory provisions. Mr Lean made clear, however, that he did not know when Mr J M Watt’s death had come to the attention of the landlords.

(ii) For the respondents

[11] Mr Watt produced the copy letters to which we have referred. He had not been back to Messrs Stephen & Robb to ask them about this correspondence or whether they held a written lease. He wondered whether the court could make such an order.

[12] There had been public notice of the death of Mrs Mary Helen Watt. The landlords would probably have known about it. In any event the lease had not come to an end then, nor had the partnership. Mrs Watt’s share in the partnership had already been made over to him and the surviving partners had gone to see the partnership accountants and elected to continue the partnership.

[13] Mr Watt made reference to the case of William S Gordon & Co Ltd v Mrs Mary Thomson Partnership. It showed that a partnership did not necessarily end with the death of one of the partners and that where the partnership continued so also did the lease. Perhaps because Gordon was a Court of Session case, Mr Watt asked whether this court had jurisdiction to decide what kind of tenancy we were dealing with and whether it had come to an end.

[14] In conclusion Mr Watt submitted that this was a “callous attempt to bully a legal tenant out of a full tenancy” and that the Land Court should not be party to such an act.

[15] With reference to the respondents’ claim for compensation for improvements, Mr Watt confirmed that the first thing that had alerted him to the fact that the landlords were saying the lease had come to an end was the letter of 30 July 2014 referred to by Mr Lean. He explained that the relationship between landlord and tenant in this case was not a close one; the landlords could be sitting in court and he would not recognise them.

[16] Asked about rent payments, he explained that rent was paid half-yearly, on 25th May and 26th November. The cheque for May 2014 and subsequent cheques had not been cashed. He also suggested that two rent cheques had not been cashed while his father was still alive but he seemed to be uncertain about that.

[17] In answer to questions from the court Mr Watt explained that the respondents’ main farm was at Buckie and that the land with which this application is concerned was used for making hay, rearing young stock and sheep grazing during winter months. It was, however, an integral part of the farm business and they wanted to go on farming it.

Decision

(i) Jurisdiction

[18] We deal first with the question of our jurisdiction. Section 60(1) and (2) of the 1991 Act gives us jurisdiction to determine “(a) whether a tenancy of an agricultural holding in relation to which this Act applies exists or has been terminated; (b) any question or difference between the landlord and tenant of such a holding arising out of the tenancy or in connection with the holding, whether such question or difference arises during the currency of or on or after the termination of the tenancy; [and] (c) any claim by the landlord or tenant of such a holding against the other which arises, under this Act or under any rule of law, custom or agreement, on or out of the termination of the tenancy (or part thereof)”. Section 77(1) and (2) of the 2003 Act gives us identical powers in relation to short limited duration tenancies and limited duration tenancies. Accordingly we have jurisdiction to determine whether the lease, be it a 1991 Act tenancy, a short limited duration tenancy, or a limited duration tenancy, has come to an end and to decide whether the respondents’ claim for compensation is time-barred, again irrespective of the nature of the tenancy.

(ii) Whether the original lease and any succeeding lease ended with the deaths of Mary Helen Watt and James Watt

[19] Having dealt with that, we turn to the substance of the case. The question is what effect did the death of a partner have on the lease? It arises at two stages – the death of Mrs Mary Helen Watt and the death of her husband – but the answer is the same at each.

[20] There is in fact a question prior to that: what effect did the deaths have on the partnership? The partnership agreement has not been produced but for present purposes it is convenient to assume, in favour of the respondents, that it contains an agreement that the death of a partner does not dissolve the partnership.

[21] Mr Lean’s submission is that such a provision on its own would not prevent the termination of the lease. In Jardine-Paterson v Fraser & Ors Lord Maxwell decided that, in relation to contracts with third parties, the effect of a change in the constitution of a partnership by death depended on whether it was intended, when the contract with the partnership was entered into, that it was to be (a) only with the partnership as then constituted or (b) with the partnership as an ongoing entity, regardless of who the partners were at any particular time (in other words with “the “house”). He accepted on the facts of that case that the death of Sir Frederick Bell had not resulted in the dissolution of the partnership. But he did not accept the next stage of the defenders’ argument (see foot of page 96 and top of page 97) which was, in effect, that since the partnership continued it remained entitled to the lease. In doing so he said this:

“The implications of the argument are that the character of the tenant as affecting the duration of the lease depends upon the precise words of the partnership agreement to which the landlord is not a party and the effect of those words in relation to the somewhat obscure distinction between continuance without dissolution and dissolution followed by reconstitution. Moreover, as this case demonstrates, if the defenders’ argument is correct, the character of the tenant as affecting the duration of the lease can be altered after the lease is entered into by the partners changing the precise words of the partnership agreement in a deed which may never come to the notice of the landlord. I do not believe that this is the law.”

And, further down page 97, this:

“I am of the opinion that, in relation to contracts with third parties, the effect of a change in constitution of the partnership by death depends upon whether, as [a] matter of construction of the contract with the third party, it was intended to be a contract with the partnership as constituted at the time of that contract or a contract with the ‘house’.”

[22] At page 98 his Lordship says that an agricultural lease excluding assignees obviously has a strong element of delectus personae (the choice of a particular person for reasons personal to him or her). At common law every lease of agricultural subjects contains an implied condition excluding assignation (Gill, The Law of Agricultural Holdings in Scotland, 3rd ed., page 328), so, although express exclusion states it more strongly, Lord Maxwell’s comment also applies to such a case as the present, where there is no written lease.

[23] That case was decided in 1973. It was not referred to in the case upon which Mr Watt founded, William S Gordon & Co Ltd v Mrs Mary Thomson Partnership, decided in 1984. That was a decision of the Inner House. It involved the lease of a farm by a partnership and the death of one of the partners. As here, the landlords were seeking the removal of the remaining partners. So it is, on its facts, very similar to the present case. The legal arguments were, however, different. In particular it was not argued by the landlords that this was not a lease to the “house” (although the case of IRC v Graham’s Trs was referred to) and that, for that reason, it ended with the death of one of the partners of the partnership as constituted when the lease was granted. Instead, as summarised by Lord Hunter at page 124 “Counsel for the parties were in agreement that, if the partnership was dissolved by the death, the pursuers were entitled to decree of removing, whereas if the partnership was not so dissolved but subsisted and continued notwithstanding the death, decree should be refused”. The court held that, on a proper construction of the partnership agreement, the partnership had not come to an end and that the landlords were not entitled to have the remaining partners removed.

[24] The next case is Moray Estates Development Co v Butler, on which Mr Lean relied. It was an Outer House case, decided by Lord Hamilton in 1999. It also concerned the lease of a farm to a partnership, Messrs Grigor Butler & Son. The original partners were Mr Butler, his wife and their son. The lease had been granted in 1964. In 1980 the partnership agreement had been amended to provide that the partnership would not be ended by the death of one of the partners but would subsist while two of the partners remained. In 1988 Mrs Butler died and two new partners were assumed. In 1997 Mr Butler died, leaving only one of the original partners and the two assumed partners. In those circumstances the landlords raised an action for declarator, in effect, that the lease had come to an end. The defenders, being the existing partners, argued that it had not because the lease had been to the “house” of Grigor Butler & Son howsoever constituted, or, at the very least, that the lease continued in force while one of the original partners remained. Lord Hamilton rejected these propositions, saying (at page 1344G-H) that there was an absence of indicia which one might have expected if a lease to a house had been intended and concluding (at page 1345B-C):

“In the whole circumstances I am satisfied that, as a matter of interpretation of the lease, the tenant entitled to possession under it did not include a partnership into which there had been assumed persons who were not partners as at 1964. The circumstance that the partners in fact assumed were themselves related, by marriage or by blood, to the original partners does not, in my view, affect that conclusion; nor does the circumstance that one of the original partners is a partner in the presently constituted form.

In these circumstances I reject the submission made by counsel for the defenders in both its alternatives. It is unnecessary for the purposes of this case to decide whether the lease determined on the death of Mrs Dorothea Butler in 1988, though I am of the view that it did. If it survived that death, it determined on the death of Mr Grigor Butler (if not earlier on the assumption of the new partners).”

[25] A case which was not referred to in argument but which we should mention for completeness is the case of Carter & MacIver v Kenneth MacIver and Philip MacIver, a decision of this court reported at 2010 SLCR 13. It concerned an unwritten lease to a partnership comprising three partners. The lease commenced in 1995. In 2006 the partnership agreement was varied to the effect that the partnership would not come to an end on the death, resignation or expulsion of any partner. When one of the partners died and the remaining partners refused to remove from the farm the landlords sought an order for their removal on the basis that the lease had ended on the death of the partner who had died. The court found in their favour on the basis of the approach taken in IRC v Graham, Jardine-Paterson v Fraser & Ors and Moray Estates Development Company v Butler.

[26] The case of William S Gordon & Co Ltd v Mrs Mary Thomson Partnership was not cited in Carter & MacIver v MacIver. It was referred to by counsel for the defenders in Moray Estates Development Co v Butler (see page 1341F) but is not further commented on. It is different from Moray Estates on its facts because it did not involve the assumption of new trustees and on the law because no argument was presented by the landlords that the lease was only to the partnership as originally constituted. It is different from the present case in the same respects and we have no doubt that we must follow the same line of authority as we followed in Carter & MacIver in this case. Accordingly we hold that both the lease which was in existence when Mrs Mary Helen Watt died and the one which was in existence when her husband died both terminated with their deaths. Since, following the death of Mr J M Watt, the landlords have refused to accept a partnership comprising only Mr Michael Watt and Mrs Gerardine Watt as tenant, it follows that there is no lease in their favour over the land in question and the applicants are entitled to the declarator they seek.

(iii) The nature of the lease following Mrs Watt’s death

[27] It is clear that the surviving partners held a lease of some sort following Mrs Watt’s death. Rent was accepted from them and nothing much changed until Mr Watt’s death. What was the nature of that lease?

[28] It could not have been a 1991 Act tenancy because by then the 2003 Act was in force and 1991 Act tenancies could only be created as provided for in sec 1(2) of the 2003 Act. The lease being from year to year, it was a lease for a term of not more than five years and, accordingly, a short limited duration tenancy in terms of sec 4(1) of the 2003 Act. Having endured longer than a year it became a tenancy for five years in terms of subsec (3) of sec 4. That period would have commenced on Mrs Watt’s death in January 2007 and expired in January 2012. Beyond that, subsec (5) of sec 4 and subsec (3) of sec 5 (as amended) would have combined to convert the tenancy to a limited duration tenancy of 10 years from January 2007. We agree, therefore, with Mr Lean that the lease in existence at the time of Mr Watt’s death was a limited duration tenancy.

(iv) Whether the respondents’ claim for compensation for improvements is time-barred

[29] Section 45(1) of the 2003 Act allows a tenant under a short limited duration tenancy or a limited duration tenancy to claim compensation for improvements on quitting the land on termination of the tenancy. As Mr Lean set out, sec 80 of the 2003 Act applies sec 62 of the 1991 Act to claims under the 2003 Act. Section 62(2) provides that “Without prejudice to any other provision of this Act, no claim to which this section applies shall be enforceable unless before the expiry of 2 months after the termination of the tenancy the claimant has given notice in writing to his landlord or his tenant, as the case may be, of his intention to make the claim”.

[30] It seems clear, therefore, that although the entitlement to compensation for improvements arises only “on quitting the land on termination of the tenancy” in terms of sec 45(1), notice of an intention to make the claim must be given not within two months of quitting the land but within two months of termination of the tenancy. This is made clearer by the existence of an exception contained in subsec (6) of sec 62 of the 1991 Act which provides that “Where a tenant lawfully remains in occupation of part of an agricultural holding after the termination of a tenancy, references in subsections (2) and (4) above to the termination of the tenancy thereof shall be construed as references to the termination of the occupation”.

[31] Although the surviving partners of a partnership are empowered to go on acting so far as necessary to wind up the affairs of the partnership (Partnership Act 1890, sec 38) and can thus pursue a claim for compensation arising at the termination of a tenancy it appears to us that they cannot rely on this exception because they do not come within the definition of “tenant” contained in sec 93 of the 2003 Act which defines tenant as “the holder of land under a tenancy constituted by a lease and includes the executor, assignee, legatee, disponee, guardian, legal representative (within the meaning of Part I of the Children (Scotland) Act 1995) or permanent or interim trustee (within the meaning of the Bankruptcy (Scotland) Act 1985), of a tenant”. The absence of surviving partners of a partnership from a similar definition in sec 93 of the Agricultural Holdings (Scotland) Act 1949 and the difference to which it gave rise between the executor of an individual as tenant and the surviving partners of a partnership was noted by Lord Fraser, in a different context, in IRC v Graham’s Trustees at page 12.

[32] This conclusion can lead to injustice where the surviving partners realise that the lease has terminated only when it is already too late to intimate a claim. In the present case, since things had gone on as before notwithstanding the death of Mrs Watt, the surviving partners had no reason to think the landlords were regarding the lease as at an end until they received either return of the uncashed rent cheque for Whitsunday 2014 or the letter of 30 July, 2014. It is not clear when the rent cheque was returned but the letter was certainly too late to afford Mr & Mrs Watt the opportunity of intimating a timeous claim. We have no basis for saying that this is a situation deliberately brought about by the landlords and we do not say that; we are only making the point that the state of the law can give rise to injustice. The moral is that partners in partnership tenancies should be very alert to the possible effects of the death of a partner on the continuation of the tenancy and to the possible need to intimate claims for compensation within two months thereof. Letting time pass in the hope that the landlord does nothing is understandable but not without its risks.

[33] It does not seem to us that there is any answer to the applicants’ time-bar plea and we have, therefore, with great reluctance, given effect to it by repelling the respondents’ counterclaim.

[34] The only consolation for the respondents will be that they have had rent-free occupation of the land since Mr James Watt’s death.

Order for removal

[35] It follows from the decision we have taken on the respondents’ answers that we will have to pronounce an order for removal of the respondents from the land. This court is always anxious to allow a tenant reasonable time to remove and we have accordingly allowed 28 days for written submissions from both parties about that.

Expenses

[36] At the close of his submissions Mr Lean moved for an award of expenses against the respondents. Since he has won he would normally be entitled to such an award but we have allowed the respondents an opportunity to have their say, again within 28 days.