Agricultural holdings –– Notice to quit –– Section 22(2)(d) of Agricultural Holdings (Scotland) Act 1991 –– Whether rent due for purposes of section 22(2)(d) where tenant has common law right of retention by reason of landlord’s material breach of repairing obligation –– Whether issue of landlord’s material breach a matter for arbitration under 1991 Act
In 1988 the respondent landlord acquired a holding that was occupied by the appellant tenant under a lease, originally granted by the landlord’s predecessor in title to the tenant’s brother, for a period of 21 years from Whitsunday 1963. The tenant had acquired the lease by assignment in 1969. Since Whitsunday 1984, the lease had been running on the statutory form of tacit relocation imposed by section 3 of the Agricultural Holdings (Scotland) Act 1949 and section 3 of the Agricultural Holdings (Scotland) Act 1991.
From Whitsunday 1992, the tenant withheld rent upon the basis that the landlord was in breach of its obligation to put the farm buildings into repair. The tenant did not comply with a demand made by the landlord on 24 April 1995 to pay arrears of rent, and so, in October 1995, the landlord served a notice to quit under section 22(2)(d) of the 1991 Act, requiring the tenant to remove by Whitsunday 1997*. An arbiter appointed by the parties, to whom they made a joint agreed submission of questions, made an interim award, holding that the tenant was entitled to withhold rent in the event of the landlord failing in its obligations. The arbiter also allowed proof on the question of whether there had been breaches of the landlord’s obligations.
Following a case stated by the landlord, the sheriff decided that, under the 1991 Act: the arbiter was not entitled to consider the tenant’s liability for rent; the wording of the joint submission to the arbiter did not allow such consideration; and, where a notice to quit was served under section 22(2)(d) of the 1991 Act, the tenant’s common law right of retention of rent where a landlord was in breach was no defence. The tenant appealed.
Held: The appeal was allowed. The case was remitted to the sheriff and then to the arbiter for proof upon the question of whether, at the date of the service of the demand to pay, the landlord was in material breach, entitling the tenant to withhold payment of rent. The issues raised by the tenant as to his liability to pay rent had, by reason of section 60(1) of the 1991 Act, to be resolved by arbitration. The word “due” in section 22(2)(d) means not simply that the due date for payment has passed, but that the rent is payable. If a landlord were in material breach of the obligation to repair, that breach would justify a tenant at common law in retaining rent. Rent is not due if a tenant is entitled to retain it. There is nothing in section 22(2)(d) incompatible with the common law principles governing the question of whether rent is due. A notice of demand of rent, and a notice to quit based upon such a notice, would be invalid if the tenant had a common law entitlement of retention. Graham v Wilson-Clarke 1963 SLT (Sh Ct) 2 overruled.
* Editor’s note: The equivalent provisions in England and Wales are section 26 of,
and Schedule 3 (case D) to, the Agricultural Holdings Act, 1986
The following cases are referred to in this report.
Bank of East Asia Ltd v Scottish Enterprise 1997 SLT
Borthwick v Scottish Widows’ Fund (1864) 2 M 595
Brodie v Ker 1952 SC 216; 1952 SLT 226
Fingland & Mitchell v Howie 1926 SC 319
Graham v Gordon (1843) 5 D 1207
Graham v Wilson-Clarke 1963 SLT (Sh Ct) 2
John Haig & Co Ltd v Boswall-Preston 1915 SC 339
McDonald v Kydd (1901) 3 F 923
Pickard v Bishop (1975) 31 P&CR 108; [1975] 2 EGLR 1; [1975] EGD 24; 235 EG 133, CA
Shepherd v Lomas [1963] 1 WLR 962; [1963] 2 All ER 902
Sloan Stanley Estate Trustees v Barribal [1994] 2 EGLR 8; [1994] 44 EG 237
Strathclyde Regional Council v Arneil 1987 SLCR 44
Turnbull v McLean & Co (1874) 1 R 730
This was an appeal by the tenant, William Mowat Alexander, from a decision of the sheriffdom of Grampian, Highland and Islands at Wick, following a case stated by the landlord, the Royal Hotel (Caithness) Ltd, from an interim award of an arbiter, Mr Malcolm Strang Steel WS.
Malcolm Thompson QC and Stuart Nicholl (instructed by Shepherd & Wedderburn WS, of Edinburgh, as agent for James Stewart & Co, of Inverness) appeared for the appellant; John G Reid QC and Graham Henderson (instructed by Alex Morison WS, of Edinburgh, as agent for Thorntons WS, of Forfar) represented the respondent.
Giving the first opinion, LORD CAMERON OF LOCHBROOM said: I have had the advantage of reading Lord Gill’s opinion in draft. For the reasons given by him, I agree that this appeal must succeed. In deference to the careful submissions of counsel, and also because I was initially attracted to the approach taken in the submissions for the respondent, I state briefly my reasons for concluding that the appellant’s submissions are to be preferred.
I gratefully adopt, without repeating it, the factual and legal background that is set out in Lord Gill’s opinion, while noting that counsel for the appellant tenant specifically disclaimed any intention to found upon failure by the landlord to carry out work on the farmhouse, such as described in one of the undertakings contained in the letter from the landlord to the tenant’s solicitors dated 31 July 1989, as justification for the right of retention claimed by the tenant.
As I understood the submissions on behalf of the landlord, it was fundamental to them that, in applying to section 22(2)(d) of the Agricultural Holdings (Scotland) Act 1991 (the 1991 Act), the landlord was not exercising a contractual right in terms of the lease, but was taking advantage of a statutory remedy. This remedy, it was said, had two stages. The first was a written demand for payment of the rent due in respect of the holding, requiring that such rent be paid within two months of service of the demand upon the tenant. The second was the giving of a notice to quit, upon the ground that, at the date of the giving of the notice, the tenant had failed to comply with the demand by way of payment. It was said that, because the notice to quit provisions under section 22(2)(d) for failure to pay the rent due applied only while the lease was running on tacit relocation, the prompt payment of the rent due was the condition upon which the tenant enjoyed security of tenure in terms of the Act. That is to say, the landlord’s continuing grant of possession of the holding was dependant upon prompt payment of the rent due when demanded in accordance with the terms of section 22(2)(d), while the tenant’s security of tenure was qualified by the statutory scheme for notice to quit. That scheme was distinct from irritancy, conventional or legal, as, for instance, the landlord’s right to remove a tenant for non-payment of rent, in terms of section 20 of the 1991 Act, when six months’ rent of an agricultural holding was due and unpaid. It was accepted that in the latter case, which could apply at any time, whether during the stipulated endurance of the lease or when the lease continued in force by tacit relocation, the tenant could advance a plea of retention based upon the principle of the mutuality of contractual obligations. But, it was said, no such defence was open in relation to a valid statutory notice to quit. The right to serve the notice did not arise out of mutuality of contract. There was no contractual right to demand payment of rent due within two months. Rent was that sum that was stipulated in the lease as being the sum to be paid for the
I pause to observe that:
the object of the Acts is to encourage the tenant to farm well and to make necessary improvements to his holding. This has been done by giving him substantial security of tenure and rights to compensation… The Acts make important provisions with regard to the terms of leases and the rights and obligations of landlords and tenants in regard to the maintenance and repair of buildings and equipment on farms.
(Connell on the Agricultural Holdings (Scotland) Acts (7th ed) p1).
The underlying principle of mutuality of obligations governs agricultural leases just as much as any other contract. But, at common law, the exception of retention has a limited effect. In his speech in the case of Bank of East Asia Ltd v Scottish Enterprise 1997 SLT 1213 at p1215, Lord Jauncey of Tullichettle cited the dictum of Lord Justice Clerk Inglis in Borthwick v Scottish Widows’ Fund (1864) 2 M 595 at p607:
Retention is a right to resist a demand for payment or performance till some counter obligation be paid or performed; and it has not the effect of extinguishing obligations as compensation has, but barely of suspending them, till the counter obligation be fulfilled –– (3 Ersk, 4.20). This right never can emerge or be available as a security until a demand for payment or performance be made upon the person who is to plead retention.
Lord Jauncey thereafter considered the well-known dictum of Clerk LJ in Turnbull v McLean & Co*, setting out the general principles as to the enforceability of stipulations in mutual contracts. At p1217, Lord Jauncey concluded that those principles did not produce the result that any claim under a mutual contract could be set against any other claim thereunder, howsoever or whenever such claim might arise. Thus, a breach of contract in relation to a particular obligation arising at a particular time would not give rise ex post facto to a right of retention in respect of obligations that had been duly performed.
* Editor’s note: Reported at (1874) 1 R 730
In Brodie v Ker*, the landlord purported to put a conventional irritancy into effect and to put an end to the lease. As the tenant did not remove, the landlord raised an action for declarator of the irritancy and for removal. The defences for the tenant admitted the retention and sought to justify it by an averment that the landlord had failed materially to fulfil his obligations under the lease as to necessary repairs to the farmhouse and steading and certain other undertakings he was said to have given. As appears in the opinion of the consulted judges at p226 of the report, consideration was given to what was meant by a “question or difference as to liability for rent” as it appeared in section 74 of the Agricultural Holdings (Scotland) Act 1949 (and now section 60 of the 1991 Act). In particular, the question arose as to whether such a question or difference was raised when a tenant claimed to retain rent admittedly due, either in security for performance of the landlord’s obligations or as a compulsitor upon the landlord to fulfil some obligation under the lease alleged to have been left unimplemented by him. It was there held that the phrase was to be confined to cases in which liability to pay the rent sued for was disputed upon grounds that, if sustained, extinguished “liability”; as, for instance, by payment in whole or in part or where any liability to pay had been otherwise discharged. On the other hand, a plea of retention involved an admission of liability. It was held that the statutory provisions for arbitration required that the issue be determined by arbitration. The action was accordingly remitted to the sheriff court with an instruction to sist, pending arbitration.
* Editor’s note: Reported at 1952 SLT 226
With respect to the present appeal, I consider that it was unfortunate that the sheriff was called upon to answer questions 1 and 2. It appears, from what is set out by the arbiter in the stated case, that these questions were posed in response to the request by the landlord that these and the remaining question should be included in the stated case. Both parties had joined in the submission to arbitration under the 1991 Act. At that time, they must have been at one that the principal issue that the arbiter was being called upon to determine was not concerned with a question or difference as to liability for rent, but with the separate and distinct question as to whether, in the circumstances of the case, the tenant had any right to retention. That that must have been so is apparent from the terms of the two questions and the order in which they are set out in the joint submission that the arbiter was originally invited to answer.
In the present case, the obligation of the landlord that is said to have been breached relates to a failure to put farm buildings into a state of repair, and derives from clause V of the lease. That clause states, among other things, that the landlord will provide:
in a thorough state of repair… the buildings and other fixed equipment as will enable the tenant… to maintain efficient production.
The averments for the tenant in the record of pleadings before the arbiter are that the breach antedated intimation given by the tenant to the landlord that he was withholding further payment of rent pending fulfilment by the landlord of the obligation. The tenant avers that the buildings on the farm remain in a derelict condition and have not been put into a state of repair sufficient to enable the tenant to carry out his obligations in terms of the lease so far as good husbandry is concerned. Clearly, the expectation of efficient production, arising from the provision by the landlord of buildings and other fixed equipment in a thorough state of repair, is one of the essential bases upon which the rent will be determined and agreed between the landlord and the tenant. To that extent, the obligation to pay rent is correlative with the landlord’s obligation to provide buildings and other fixed equipment to enable the tenant to carry out his obligations so far as good husbandry is concerned. The plea of retention is stated by the tenant in response to a demand that referred not merely to the latest but to all the termly payments, following intimation by the tenant of an intention to retain future payments of rent pending fulfilment of the landlord’s obligations. Accordingly, the right of retention is not being applied in circumstances in which it can be said that it is being extended ex post facto to obligations already fulfilled by the landlord.
The purpose of a notice to quit is to enable the landlord to resume possession of the holding. At first blush, it would seem paradoxical that parliament is to be held as having given the landlord a statutory remedy that could be founded upon by the landlord without the limitation by way of the common law plea of retention, such as would apply in the case of an attempted exercise of the legal irritancy or of a conventional irritancy (except where parties had agreed that the plea of retention should not be available to the tenant to a demand for payment of rent). Counsel for the landlord founded for the proposition that the common law plea was excluded upon the case of Graham v Wilson-Clarke*. I do not find the reasoning in that case compelling. It was said that the common law principle of mutuality of contract was not easy to apply to the relationship of landlord and tenant. However, the decision in Graham v Wilson-Clarke concerned the second case in what is now section 22(2)(d), namely failure by a tenant within a reasonable time to remedy a breach capable of being remedied. The sheriff principal appears to have proceeded upon the basis that, because it was statutory procedure with which the case was concerned, rather than the position at common law, and because there was no mention of the landlord’s obligations, or of their fulfilment before a landlord was entitled to invoke the statutory procedure, it was to be assumed that the common law had no place in any issue to which arbitration might be directed under the statute. Thus, if the sheriff principal is correct in what he said, the tenant could not found upon a failure by the landlord to perform
* Editor’s note: Reported at 1963 SLT (Sh Ct) 2
† Editor’s note: Reported at [1963] 1 WLR 962
I therefore agree with the arbiter in his view that the word “due” in section 22(2)(d) is to be interpreted as meaning not simply that the due date for payment of the rent has passed, but that it must then be payable. I am fortified in this opinion by a further consideration. Section 21(6) of the 1991 Act preserves the landlord’s right to enforce an irritancy and thus bypass the notice to quit provisions of the Act. I cannot think that parliament intended that a defence that was available to a tenant in response to a proposed irritancy should not be available also in regard to the notice to quit provisions of the Act, whether or not the notice to quit required the consent of the Land Court. I do not consider that, properly speaking, the provisions of section 22 are to be regarded as a statutory remedy distinct from the common law, as the sheriff principal in Graham considered them to be. Rather, the provisions operate as restrictions upon the operation of notices to quit, within the general provision in section 21 that a tenancy of an agricultural holding shall not come to an end except by operation of a notice that complies with subsection (1), notwithstanding any agreement or any provision in the lease to the contrary. The demand for rent due, and, hence, the notice to quit, must operate within the terms of the lease itself.
The sheriff based his decision upon the authority of Graham. He also found support for his decision in the case of Pickard v Bishop*, in the passage from the judgment of Lord Denning MR cited by him. But, in my opinion, that passage is of no assistance to the landlord. It was directed to the question of late payment in relation to the demand for payment and the subsequent issue of the notice to quit. There was no suggestion that the tenant had any defence to the demand for payment in the sense of a right to retain. The defence was simply that the failure to make payment timeously was de minimis. It failed in the lower court and the point was not argued again on appeal. But I note that in the same passage Lord Denning was careful to refer to a “proper demand”. Later in his judgment, he pointed out that, in construing the subsection in the English legislation analogous to section 22(2)(d) of the 1991 Act, it was to be recognised as a provision that enabled the landlord to forfeit the tenant’s interest and obtain possession, to the great advantage of the landlord and great loss of the tenant. Such a forfeiture clause was to be construed strictly. In my opinion, a proper demand for payment requires that the landlord should not, at the time of its issue, be in breach of those of his obligations such as give rise to a right, on the tenant’s part, to retain rent in security of their fulfilment and hold the payment in suspense in security of the fulfilment of those obligations by the landlord. I would add that I do not think that any assistance is to be found in the case of Sloan Stanley Estate Trustees v Barribal†. It was concerned not with a right of retention, as understood in Scots law, but with a question as to the existence of an equitable right of set-off against payment of the full sum demanded of the tenant.
* Editor’s note: Reported at [1975] 2 EGLR 1
† Editor’s note: Reported at [1994] 2 EGLR 8
So far as the present appeal is concerned, no argument for the landlord was directed to the relevancy of the averments of the tenant as being insufficient, even if proved, to justify retention. The arbiter found that they were relevant. He allowed a proof on the issue as to whether the tenant was entitled to withhold the rent that was demanded of him.
I propose, therefore, to your lordships that it is unnecessary to answer questions 1 and 2, but that question 3 be answered in the affirmative and the case be remitted back to the sheriff to proceed as accords. The case will thus be returned to the arbiter for proof on the issues underlying the question of the validity and enforceability of the notice to quit.
Giving the second opinion, LORD GILL said:
Introduction
This is an appeal from the decision of the sheriff at Wick on a case stated to him by an arbiter appointed under Schedule 7 to the Agricultural Holdings (Scotland) Act 1991 (the 1991 Act). The appellant and the respondent are respectively the tenant and the landlord of Pennyland Farm, Thurso.
The questions in the stated case relate to the validity and effectiveness of a notice to quit served by the landlord on the tenant. Almost five years have elapsed since the notice to quit was served, and the proceedings are still concerned with preliminary questions of relevancy.
Lease
The present landlord is the successor in title to Mark Stepney Murray Thriepland. Mr Thriepland let the farm to Donald Rosie Alexander junior, the present tenant’s brother, for a period of 21 years from Whitsunday 1963. The tenant assigned his interest under the lease to another brother, George Alexander, in 1966. George Alexander assigned his interest to the present tenant in 1969. Mr Thriepland sold the farm to the respondent in 1988.
When the lease was entered into, it was governed by the Agricultural Holdings (Scotland) Act 1949 (the 1949 Act). It is now governed by the consolidating Act of 1991. Since Whitsunday 1984, the lease has been running on the statutory form of tacit relocation imposed by section 3 of the 1949 Act and by section 3 of the 1991 Act.
The lease incorporates conditions of let. Condition IV obliges the tenant to reside at the farmhouse and to keep the holding fully stocked. Condition V specifies the landlord’s obligations in respect of the fixed equipment. It simply echoes the wording of section 5(2)(a) of the 1949 Act, which is now repeated in section 5(2)(a) of the 1991 Act. I shall discuss this provision later.
1989 agreement
In 1989 the landlord proposed to sell 10ha of the holding to Caithness District Council for development. The tenant agreed to the landlord’s resuming this land on terms that were set out in a letter from the landlord to the tenant’s solicitors dated 31 July 1989. This letter referred, per incuriam, to Mr and Mrs William Alexander as the “tenants” of the holding. The terms of the agreement included the following:
1. That the rental of Pennyland Farm by the tenants to the owners remain static for five years at the present price less £1,000 per annum.
2. That the owners will put into a state of repair the farm buildings during 1989.
1. That the Farm House will be externally coated with Everseal as per the tender price from Canadian Paint & Chemicals Ltd during 1989.
2. That the above in no way affects the terms of the lease between the owners and tenants…
A further letter dated 5 August 1989, from the landlord to the tenant’s solicitors, stated, inter alia:
As we are now most anxious to complete our negotiations with Highland Regional Council and Caithness District Council regarding the enquiry in September and the completion of the sale of 10 hectares of land to Caithness District Council, we would hope that you will accept our sincere intentions to repair the farm buildings and Everseal the dwelling house at the earliest possible opportunity…
Neither party has taken any point as to the legal significance of the 1989 agreement. Both sides presented their arguments upon the basis that the landlord’s obligations in relation to the buildings were derived from the lease. I think that that is the correct approach. These obligations would have continued to apply even if the 1989 agreement had not been concluded. In my view, the significance of the 1989 agreement and the letter of 5 August 1989 is that they are adminicles of evidence that, by 1989, certain of the landlord’s obligations remained unfulfilled.
Legal background
To set the scene for the subsequent events, it is convenient, at this stage, to review the relevant statutory provisions, and the remedies available to an agricultural tenant where the landlord is in breach of his obligations.
Statutory provisions
1. Parties’ obligations in respect of the fixed equipment
Section 5(2) of the 1991 Act provides as follows:
There shall be deemed to be incorporated in every lease of an agricultural holding to which this section applies ––
a. an undertaking by the landlord that, at the commencement of the tenancy or as soon as is reasonably practicable thereafter, he will put the fixed equipment on the holding into a thorough state of repair, and will provide such buildings and other fixed equipment as will enable an occupier reasonably skilled in husbandry to maintain efficient production as respects both ––
(i) the kind of produce specified in the lease, or (failing such specification) in use to be produced on the holding, and
(ii) the quality and quantity thereof,
and that he will during the tenancy effect such replacement or renewal of the buildings or other fixed equipment as may be rendered necessary by natural decay or by fair wear and tear; and
b. a provision that the liability of the tenant in relation to the maintenance of the fixed equipment shall extend only to a liability to maintain the fixed equipment on the holding in as good a state of repair (natural decay and fair wear and tear excepted) as it was in ––
(i) immediately after it was put in repair as aforesaid, or
(ii) in the case of equipment provided, improved, replaced or renewed during the tenancy, immediately after it was so provided, improved, replaced or renewed.
The landlord’s obligations under section 5(2)(a) are fundamental obligations of the lease. They have three aspects. The landlord must, at the outset, provide an appropriate array of buildings and other fixed equipment; he must put all of that equipment into a thorough state of repair, and, throughout the currency of the lease, he must effect replacement or renewal of any item of fixed equipment wherever that is necessitated by natural decay or fair wear and tear. These obligations remain enforceable throughout the lease. They are expressly related to the tenant’s ability to maintain efficient production. The landlord’s performance of these obligations may have a direct bearing upon the tenant’s ability to pay his rent. It may also have a direct bearing upon the tenant’s ability to fulfil certain of his contractual obligations; for example, his obligations to reside at the farmhouse and to keep the holding fully stocked.
2. Incontestable notices to quit
Section 22(1) of the 1991 Act provides that a tenant upon whom the landlord serves notice to quit is entitled to serve a counternotice. The effect of a counternotice is to make the operation of the notice to quit conditional upon the consent of the Scottish Land Court.
Section 22(2) sets out seven cases in which the tenant is not entitled to serve counternotice. In each of these cases, the notice, if it is correctly drafted and validly served, has inevitable effect. This appeal concerns one of these cases, namely section 22(2)(d).
Section 22(2)(d) provides as follows:
(2) Subsection (1) above shall not apply where ––
…
(d) at the date of the giving of the notice to quit the tenant had failed to comply with a demand in writing served on him by the landlord requiring him within two months from the service thereof to pay any rent due in respect of the holding, or within a reasonable time to remedy any breach by the tenant, which was capable of being remedied, of any term or condition of his tenancy which
Section 22(2) further provides that, in this case, among others, if the notice to quit is to be incontestable, the ground upon which it proceeds must be stated in the notice.
If the notice to quit takes effect under section 22(2)(d), section 43(2) and section 54(1)(a), which I need not quote, have the further consequence that the tenant is not entitled at his waygoing to disturbance compensation or to an additional payment for reorganisation.
3. Arbitration under the 1991 Act
Section 60 of the 1991 Act re-enacts section 74 of the 1949 Act. It provides, inter alia, as follows:
(1) Subject to subsection (2) below and except where this Act makes express provision to the contrary, any question or difference between the landlord and the tenant of an agricultural holding arising out of the tenancy or in connection with the holding (not being a question or difference as to liability for rent) shall, whether such question or difference arises during the currency or on the termination of the tenancy, be determined by arbitration.
Tenant’s remedies for the landlord’s breach of the lease
If the landlord is in material breach of his obligations under the lease, the tenant may treat the breach as fundamental and renounce the lease: Rankine on Leases (3rd ed) p245. This self-destructive act would normally be the last thing to which the tenant would wish to resort.
The tenant may also demand arbitration, under section 60(1), upon the question of whether the landlord is in breach of his obligations. An arbitration of this nature is often lengthy, and its progress may be further delayed by a stated case, and perhaps by an appeal to this court. In such an arbitration, the arbiter has no power to make any order against the landlord ad factum praestandum. At the conclusion of the arbitration, a finding by the arbiter in the tenant’s favour can be made effective only by an action in the civil courts for decree conform. This time-consuming procedure is of little practical value to the tenant. Until the question in the arbitration is finally resolved, the tenant has to make the best of things. If the question relates to the landlord’s obligations of replacement and renewal, practical considerations may, in the interim, force the tenant to incur expense for which he is not legally responsible.
If a rent review should take place while the question remains unresolved, the amount of the revised rent may be moderated on account of the existence of the dispute; but that is an inadequate relief for the tenant. The arbiter cannot make a binding decision on the question of whether the landlord is in breach, because that is not the question remitted to him. At most, he can make an allowance for the effect that the uncertainty on the matter would have on the amount of the hypothetical offer: cf Strathclyde Regional Council v Arneil 1987 SLCR 44. There are obvious practical difficulties for the tenant in trying to establish such a point in the context of a rent review.
The tenant’s only effective remedy to enforce the landlord’s compliance with the terms of the lease is to retain his rent. It is not disputed in this case that the tenant is entitled to do so at common law where the landlord is in material breach of his obligations: Rankine, op cit p236. The tenant’s entitlement to retain rent in such a case is based upon the principle of mutuality of obligations. The right of retention may not be available to the tenant in respect of every breach by the landlord of the terms of the lease. It may be a matter of circumstances in the individual case: cf Bank of East Asia Ltd v Scottish Enterprise, 1997 SLT 1213 at pp1216-1217; Rankine, op cit p328.
History of the dispute
1. Tenant’s retention of rent
The tenant paid rent in terms of the 1989 agreement up to and including Whitsunday 1992. Thereafter, he withheld all payments of rent. He did so upon the basis that the landlord was in breach of its obligation to put the farm buildings into repair. Whether or not the landlord is in breach remains a matter of dispute.
2. Demand to pay
On 24 April 1995 the landlord’s factor served a demand in writing on the tenant requiring him within two months from that date to pay arrears of rent amounting to £8,750. The tenant did not comply with the demand.
3. Notice to quit
The landlord next served on the tenant a notice to quit dated 11 October 1995, requiring him to remove from the holding at Whitsunday 1997. The notice was served under section 22(2)(d). The parties agree that the notice to quit was technically correct in form and that it was validly served.
4. Arbitration proceedings
The tenant required that the question of his entitlement to retain rent and the question of the validity of the notice to quit should be referred to arbitration. In lieu of a statutory appointment by the Secretary of State, the parties agreed to appoint Mr Malcolm Strang Steel WS as arbiter.
The terms of the reference to arbiter are set out in a joint submission dated 8 April and 6 May 1997. The material terms are as follows:
(FIRST) As to whether the Tenant is entitled to withhold payment of rent in the event of the Landlord failing to implement obligations imposed upon the Landlord under the said Lease of the Holding;
(SECOND) The validity of and enforceability of the Notice to Quit served on the Tenant following the Tenant’s failure to comply with the demand for payment of outstanding rent served on the Tenant in terms of Section 22(2)(d) of the Agricultural Holdings (Scotland) Act 1991…
The arbiter held a hearing on these questions. On 24 October 1997 he issued an interim award in draft. He answered the first question in the affirmative. He deferred his answer on the second question. He held that the tenant’s averments as to the landlord’s alleged breaches of the lease were relevant, and he allowed a proof on the question of whether these breaches had occurred.
5. Stated case
The landlord requested the arbiter, under para 20 of Schedule 7 to the 1991 Act, to state a case to the sheriff on the following questions:
1. Is the arbiter entitled in terms of the [1991 Act] to consider the question or difference as to the tenant’s liability for rent?
2. Does the wording of the joint submission to arbitration allow the arbiter to consider this matter?
3. Has the tenant relevantly averred in his submissions that rent is not due?
The sheriff answered all three questions submitted to him in the negative.
On the first question, the sheriff relied upon the terms of section 60(1) of the 1991 Act. He held that the section excluded the question from arbitration.
On the second question, he held that the joint submission was concerned merely with the implications of retention of rent and not with the separate matter of liability for rent.
On the third question, the sheriff held that where a notice to quit is served under section 22(2)(d), based upon a failure to comply with a statutory demand to pay rent, the tenant’s common law right of retention of rent is no defence. He considered that the operation of the statutory provision left no room for considerations of equity. In reaching this decision, the sheriff founded upon Graha v Wilson-Clarke 1963 SLT (Sh Ct) 2. That was a decision of a sheriff principal on the forerunner of section 22(2)(d), namely section 25(2)(e) of the 1949 Act. It related to the tenant’s failure to comply with a demand to remedy fixed equipment where the landlord was himself in breach of his obligations in relation to certain of the fixed equipment. The sheriff principal held that while the principle of mutuality applied at common law, the landlord’s own breaches of the lease were no defence to a notice to quit based upon the tenant’s failure to comply with the demand, the question under section 22(2)(d) being one of statutory procedure.
On this third question, the sheriff referred also to Pickard v Bishop (1975) 31 P&CR 108. That was a case under the corresponding English provision where the tenant failed to pay in time on a demand to pay that was issued in the name of the former landlord. In my view, that case is of no assistance in the present appeal, and we need not consider it further.
Submissions for the parties
For the appellant
Counsel for the tenant submitted that the sheriff erred in his answers to all three questions. They argued that: the notice to quit was invalid if the demand to pay was invalid; the demand to pay was invalid if the rent was not due at the date of the demand; and the rent was not due if the landlord was not entitled to enforce payment of it. The landlord could not enforce payment if the tenant had a right to retain the rent. In that event, the landlord’s claim for the rent was not liquid. Whether or not the tenant had a right to retain the rent in this case was a matter for proof. All three questions in the stated case should be answered in the affirmative, and the case should be returned to the arbiter for a proof on the question of whether the notice to quit was valid.
For the respondent
Counsel for the landlord submitted that: section 22(2)(d) provided a statutory remedy independent of the common law principle of mutuality; the tenant’s obligation to pay rent corresponded with the landlord’s obligation to give possession of the holding; subject to the agreed resumption, the landlord had given the tenant uninterrupted possession of the holding as the counterpart of his paying rent; the tenant therefore had no right to retain rent; and it had been decided, in Brodie v Ker 1952 SC 216, that where rent was retained, it was none the less admittedly due. Graham (supra) was correctly decided and applied to this case. It was supported by the general view of the writers. The only way in which the tenant could have avoided the operation of section 22(2)(d) in this case would have been to comply with the statutory demand, regardless.
Decision
I think that the first two questions put to the sheriff missed the point. The only question in this case is whether the tenant is entitled to challenge the notice to quit, and the demand to pay upon which it proceeds, on the basis that, at the time of the demand, he had a valid right of retention.
Question (1)
This question assumes that the question or difference in this case is a question or difference as to the tenant’s liability for rent. If it were, the answer to the question would inevitably be in the negative.
However, the true question here is whether the tenant’s entitlement to retain the rent, in the face of a demand to pay served under section 22(2)(d), is a question or difference as to liability for rent. If it is not, section 60(1) (supra) requires that the issue should be determined by arbitration.
The point arose in Brodie v Ker (supra) under the identical wording of section 74 of the 1949 Act. In that case, the consulted judges said at pp226-227 that it was:
necessary to consider what is meant by a “question or difference as to liability for rent”, and in particular whether such a question or difference is raised when a tenant claims to retain rent admittedly due either in security for performance of the landlord’s obligations, or as a compulsitor upon the landlord to fulfil some obligation under the lease alleged to have been left unimplemented by him… In our view the words require to be given a more exact significance and to be confined to cases in which liability to pay the rent sued for is disputed upon grounds which, if sustained, in law extinguish “liability,” eg, where it is asserted that the rent has in fact been paid in whole or in part, perhaps to an agent or factor held out by the landlord as entitled to receive payment, or where it is asserted that liability for the sums sued for has been discharged by some transaction personal to the parties and wholly extraneous to the lease and to the relationship of landlord and tenant. But when the tenant defends an action for payment of rent by asserting a right of retention, his “liability” for payment of the rent is not in issue but is on the contrary admitted. All that he is doing is inviting the court to exercise in his favour the discretionary equitable power, which the court has long asserted in dealing with reciprocal obligations arising under mutual contracts, of permitting one party to withhold in whole or in part performance of his obligations until the other party has performed his… It follows that where a tenant pleads in defence to an action for payment of rent that he is entitled to retain the rent in security for the performance of some obligation arising under the lease which has not been implemented, or as a compulsitor to force implement of that obligation, the resulting question or difference is not a question or difference as to “liability” for rent, and being covered by the main enacting provisions of section 74 [sc of the 1949 Act] and not by this second exception, falls to be determined by arbitration.
It follows from this that, by reason of section 60(1), the questions raised by the tenant in this case must be resolved by arbitration.
The sheriff referred to section 60(1) and to Brodie v Ker, but he reached the opposite conclusion. In my opinion, the sheriff erred. I think that he may have been misled by the inappropriate terms of the question that was put to him.
Question (2)
This question simply repeats the problem raised by question 1 and is equally misconceived. For the reasons that I have given in discussing question 1, I think that the joint submission empowers the arbiter to deal with the issues raised in the tenant’s statement of case.
Question (3)
This is the central issue in this appeal. It falls to be decided on the pleadings, the tenant’s averments being taken at this stage pro veritate. In my opinion, it turns on the question of whether the rent demanded was “due”, in terms of section 22(2)(d), even if a breach by the landlord of its obligations entitled the tenant at common law to retain it.
The submission for the landlord is that section 22(2)(d) disarms the tenant of his common law remedy of retention and, in effect, obliges him, come what may, to comply with the demand to pay on pain of his being removed by an incontestable notice to quit, and deprived of certain compensations, if he should fail to do so. On the face of it, this seems to be an unfair result.
If the submission for the landlord were correct, the tenant’s failure in this case to pay the rent timeously and in full would have the consequence that the tenant would lose his tenancy, even if a breach of the lease on the landlord’s part had made the tenant’s farming enterprise uneconomic and thereby prejudiced his ability to pay the rent.
There would also be the further, and, to my mind, surprising, consequence that if the tenant refused to comply with the demand to pay, he would be defenceless to a notice to quit, but would have a conclusive defence if the landlord thereafter sued to recover the unpaid rent. On that view, a landlord in a case such as this, who was in material, and even admitted, breach of his obligations, could always use the threat of section 22(2)(d) to secure payment of rent that he could not hope to recover judicially.
In my view, a true interpretation of the subsection does not have these consequences.
I should say at the outset that I do not accept the proposition of counsel for the landlord that the correlative obligation with that of paying rent is the obligation to give peaceful possession, which has been admittedly fulfilled, and that the tenant can therefore have no right to retain rent in this case. The obligation to pay rent is related to a whole complex of obligations on the landlord’s part, and not least, for the reasons that I have given, to his obligations under section 5(2)(a). The authorities establish that if the landlord were proved to be in material breach of the obligation to put the fixed equipment into a proper state of repair, that breach would justify the tenant at common law in retaining rent: cf John Haig & Co Ltd v Boswall-Preston 1915 SC 339 and McDonald v Kydd (1901) 3 F 923.
In the interpretation of section 22(2)(d), the starting point is that before the landlord can serve a valid demand to pay, the rent must be due. In my opinion, common law principles have a bearing upon this question, and upon the question arising under the other limb of this provision, namely whether the landlord is entitled to demand that the tenant should remedy a breach of his obligations.
In my opinion, rent is not due if the tenant is entitled to retain it. A sum of money can be said to be due only if the debtor is under an enforceable obligation to pay it. The logic behind the service of a statutory demand to pay a sum of rent is that, at the date of the demand, the landlord is entitled to recover that sum by legal proceedings if it is not paid. If the landlord is in material breach of his obligations, his claim for rent is not liquid: Fingland & Mitchell v Howie 1926 SC 319 and Graham v Gordon (1843) 5 D 1207. In such a case, the tenant is not obliged to pay: Rankine, op cit p327. Therefore, in my view, the rent cannot be said to be due.
I therefore agree with the arbiter that the rent cannot be said to be due for the purposes of this provision merely because the contractual date for payment has come and gone.
The result for which the landlord contends is not expressly provided for in the subsection, and, in my view, it is not necessarily to be implied. There is nothing in section 22(2)(d) that is incompatible with the common law principles governing the question of whether rent is due.
In this respect, this case may be contrasted with Stobbs & Son v Hislop 1948 SC 216, to which the sheriff has referred. In that case, the Rent Acts allowed, in certain circumstances, for a percentage increase on the standard rent. If the dwelling-house was in an unsatisfactory condition, the tenant was entitled to withhold the percentage increase: ibid at p224. The incompatibility of that provision with the exercise of a common law right of retention of the whole rent was held to imply that the common law right was excluded.
Counsel for the landlord founded upon the statement in Brodie v Ker (supra) that I have quoted. They argued that this demonstrated that, notwithstanding the tenant’s entitlement to retain it, the rent was none the less due. In my view, that statement is not decisive of this appeal. In Brodie v Ker, the landlord sought to enforce a conventional irritancy for non-payment of rent. The tenant defended the action on the basis that he was entitled to retain the rent. One of the issues was whether that defence raised a question as to liability for rent. The consulted judges referred to the case where a tenant claims to retain rent “admittedly due”, and said that when a tenant defended an action for payment of rent by asserting such a right, his liability for payment of the rent was not in issue, but was, on the contrary, admitted. In the context of section 74 of the 1949 Act, now section 60(1) of the 1991 Act, that statement seems to me to be quite straightforward. It means that, in such a case, liability to pay is admitted because the lease provides for it, but that if the tenant is held to have a right of retention, he can be relieved of his obligation to pay. In my view, that statement cannot be wrested from its context to support the proposition that, on the facts that we must at present assume, the rent in this case was due in terms of section 22(2)(d).
That leaves the decision of the sheriff principal in Graham (supra), upon which the sheriff in this case relied. In Graham, the landlord served a demand to remedy certain alleged breaches by the tenant in relation to the maintenance of the fixed equipment. The tenant failed to remedy some of the breaches. The landlord served a notice to quit. The arbiter found that the landlord was in breach of his own obligations in respect of some items of the fixed equipment. He held that the landlord could not, therefore, enforce the demand to remedy and the ensuing notice to quit.
The sheriff principal held that the arbiter had misdirected himself. The ratio of his decision was as follows at p3:
If a landlord is in breach the tenant continues a tenant. I think the tenant’s remedy is to withhold rent pro tanto or to terminate the lease. In the present case, however, we are not dealing with the position at common law, but with statutory procedure. The Act says that, if a tenant fails within a reasonable time to remedy a breach capable of being remedied, the security of tenure given by section 25(1) shall not apply. There is no mention of the landlord’s obligations. Had Parliament intended that a landlord must have fulfilled all his obligations before invoking subsection (2)(e), it could easily have said so.
This statement is the source of the extreme submission for the landlord in this case that, in the operation of the entire subsection, the concept of mutuality has no place.
Counsel for the tenant in this case argued before the arbiter and before the sheriff that Graham (supra) was distinguishable, in that it related to the second limb of section 22(2)(d), whereas this case related to the first. But, at the hearing of this appeal, counsel for the tenant accepted, rightly in my view, that it was indistinguishable. The concluding remarks of the sheriff principal in Graham show that his reasoning applied to both limbs of the provision.
When one examines the ratio of the case, it is fairly clear where the fallacy lies. Section 22(2) provides the landlord with a specific statutory remedy that he can invoke when any of its seven cases applies. In each of those cases, the landlord’s right to serve an incontestable notice to quit emerges upon the occurrence of a defined event. If that event occurs, the principle of mutuality has no place. For example, if planning consent is obtained (section 22(2)(b)), or if the tenant becomes apparently insolvent (section 22(2)(f)), the mere occurrence of that event triggers the landlord’s statutory remedy. At that stage, the question of the landlord’s being in breach of the lease is neither here nor there. For this reason, I reject the argument of counsel for the landlord that to admit the principle of mutuality would disrupt the operation of the entire subsection.
But in this case, as in Graham, we are dealing with the logically prior question of whether the defined event under para (d) has occurred at all. That depends upon whether the tenant has failed to comply with a statutory demand of a specified kind. That, in turn, depends upon whether the demand was one that the landlord could validly make; that is to say whether, as in this case, the rent demanded was due, or whether, as in Graham, the tenant was under an enforceable obligation to remedy the breach to which the demand to remedy related.
At this earlier stage in the argument, in my view, the common law principle of mutuality is relevant. If the landlord is in material breach of his obligations, the principle of mutuality may have the result that he is not entitled to serve a demand to pay or a demand to remedy, as the case may be. In that event, the qualifying condition for the service of an incontestable notice is not made out. On the other hand, if the qualifying condition is made out, for example because the tenant has failed to pay the rent due in full, the principle of mutuality will provide no defence to the ensuing notice to quit. In Graham, this distinction was not explored.
The approach that I take to this question is, I think, consistent with cases such as Shepherd v Lomas [1963] 1 WLR 962. That was a case under the corresponding English provision where the notice to quit was based upon the tenant’s breach of a demand to remedy. In relation to certain of the remedial work demanded, the landlord was in breach of an obligation to provide the necessary materials. If the notice had related only to the tenant’s failure to remedy those breaches, the tenant would have had a complete defence to the notice: cf Lord Denning MR at pp968-969 and p971.
The view that I have taken has some support in an obiter dictum of Balcombe LJ in Sloan Stanley Estate Trustees v Barribal [1994] 2 EGLR 8. That was a case under the current English provision corresponding with section 22(2)(d), namely Case D (Agricultural Holdings Act 1984, section 26(2), Schedule 3, Part I, Case D). In that case, the tenant failed to comply in full with the demand to pay. He deducted a sum representing the owner’s drainage rate, which, if he paid it, he was statutorily entitled to deduct from any rent payable by him. At the date of payment, the tenant had not paid the rate to the drainage board. Therefore, the sum demanded by the landlord was due in full by the tenant at the date of payment. It was held that the tenant had no equitable set-off in respect of the owner’s drainage rate. Balcombe LJ expressed the view at p11J-K that it is possible in English law to set off against rent, I infer in the context of Case D, if the tenant has an existing debt “or at least a claim which sounds in possibly unliquidated damages”. That dictum raises specialties of English law, but it is plainly incompatible with the idea that, whatever the circumstances, the landlord is entitled to serve a demand under section 22(2)(d) for the rent payable under the lease whenever the date of payment has come and gone.
In Graham, the demand to remedy covered a number of items of fixed equipment in respect of which the landlord was in material breach of his own obligations. In my view, the sheriff principal should have held that while the landlord was in material breach of his obligations to renew, he was not entitled to enforce the tenant’s performance of his obligations to repair, and, accordingly, that the demand to remedy was not one that the landlord was entitled to serve. One of the items in the demand was the repair of a fence that had been wrecked by windblown and felled timber. This fence, as the arbiter found, was one that the landlord was obliged to replace. If the sheriff principal was right, and if the argument for the present landlord is right, the tenant in that case had no alternative but to reinstate the fence, notwithstanding the express terms of section 5(2)(a) of the 1949 Act. That seems to me to be an illogical result.
Although Graham has been on the books for nearly 40 years, this is the first opportunity that the Inner House has had to examine it. So far as I know, it has not been considered in the English courts in connection with the corresponding English provision.
Counsel for the landlord pointed out that the decision in Graham is noted without adverse comment in Gill on The Law of Agricultural Holdings in Scotland (3rd ed) paras 17-12 and 17-15; in the commentary on the Act by Mr AGM Duncan WS (The Agricultural Holdings (Scotland) Act 1991 p55-56); in the article on agricultural holdings by Professor John Murray QC in the Stair Memorial Encyclopaedia (vol 1, para 754), and in Connell on The Agricultural Holdings (Scotland) Acts (7th ed) p158. This is not a strong point for the landlord. The writers have simply recorded the only case law that there has been on the point hitherto and have stated the law as it appeared to be. None of them has examined the decision critically, as we have been able to do with the benefit of counsel’s arguments in this appeal.
The leading English textbook, Muir Watt and Moss on Agricultural Holdings (14th ed), does not refer to the case, but the learned editors say that “if any element of over-demand in the Case D notice to pay rent is sufficient to vitiate it and unliquidated damages can be set off the availability of Case D may be restricted almost to vanishing point”. They add in a footnote that: “There must be hardly a farm in England and Wales where no landlord’s disrepair is to be found” (para 12-58). Any such disrepair would, of course, be significant only if it constituted a material breach by the landlord. These comments do not relate directly to the Scottish principle of mutuality that underlies the tenant’s right of retention in this case. They provide little support for the landlord’s submission.
In my view, Graham was wrongly decided and should be overruled. In relying upon it in this case, the sheriff erred in denying the tenant the opportunity to prove that the landlord’s own breaches of the lease were such that the rent was not due at the date of the demand to pay and, consequently, that the notice to quit was invalid.
Disposal of the appeal
In my view, we should decline to answer questions 1 and 2. We should answer the question upon which the case depends, namely question 3, in the affirmative and remit to the sheriff to proceed as accords. The case will then be returned to the arbiter for a proof on the question of whether, at the date of service of the demand to pay, the landlord was in a material breach entitling the tenant to withhold payment of the rent.
Giving the third opinion, LORD DAWSON said: I have had the opportunity to read the opinion of Lord Gill and I agree with it fully.
It is my opinion also that a right of retention of rent exists in our law when a landlord is in material breach of his obligations. The alleged breach in this case can properly, in my view, be said to be material. Therefore, it cannot be said that, at common law, the payments of rent claimed in the demand to pay are actually “due” in the sense of properly and immediately prestigible.
The question, therefore, for us to consider is whether the Agricultural Holdings (Scotland) Act 1991 in any way changes that position. I, too, have come to the view that there is nothing in the wording of the relevant sections, or in the scheme of the Act itself, to indicate that parliament intended that any different interpretation should be applied to the crucial concept of rent “due”.
For these reasons, I too would return the case to the arbiter for further proof.
Appeal allowed.
