Clarify Your Requirements To Avoid Turbulence

Any contract for the sale of land or for the grant of a lease for more than a year must, under the Requirements of Writing (Scotland) Act 1995, be in writing and signed by the granter.

This would seem to be relatively straightforward. However, what kind of writing effectively creates a contract? If there is no contract in writing creating a lease for more than a year, a lease for less than 12 months may be unintentionally created.

Before the Act, with a few exceptions, contracts for the sale and lease of land had to be in formal writing with conditions about the mode of signature. However, we now run the risk that informal letters exchanged between parties containing the basic terms of the contract will be sufficient to create a lease or sale agreement. It has become common practice to include wording making it clear that the agreement is still subject to a formal contract.

In Scotland, we seem to be going in the opposite direction from England, where all letters used to be headed "Subject to Contract". Since the Law of Property (Miscellaneous Provisions) Act 1989, however, all contracts for the sale of land and for leases of three or more years south of the border must be in writing and signed by, or on behalf of, each party to the contract. They must also incorporate all the terms, either setting these out or referring to another document. It is therefore, much harder for a contract to be created by informal correspondence.

In Scotland, the question of whether a contract has been created was the subject of litigation in the case of Caterleisure v Glasgow Prestwick International Airport. In 1999, the airport started negotiating with Caterleisure, to provide bar and catering services. By the end of 2000 a draft Licence Agreement for a period of 12 years with a commencement date of 8 January 2001, along with a draft management agreement to run the shop airside, was passing back and forth between the two parties.

Caterleisure sent in an opening team on January 2 to carry out a stock take in preparation to start trading on the 8^th. Revised documents were e-mailed to the airport on the 7^th its managing director and Caterleisure’s Chairman agreed the final points of the contract by phone. Caterleisure opened for business at 6am on the 8^th but the managing director phoned company’s chairman at 3.40pm that day to tell him Prestwick had new owners who didn’t want to enter into a contract.

Caterleisure pulled out of the premises immediately but took the airport to court, claiming damages for a breach of contract. It claimed the deal had been concluded orally in the phone call between its chairman and the airport’s managing director.

When the case came to the Court of Session late last year, the airport argued it should be dismissed on the grounds that there was no contract. It said both sides agreed the licence agreement granted Caterleisure use of the licensed bar and catering area and so was effectively a grant of a lease. For that, an oral contract and draft documents were not enough under the 1995 Act as the proposed licence was for a period of 12 years.

Not so, said Caterleisure, and the judge agreed, allowing the case to go forward. While the draft licence stipulated that it was not a tenancy and payment was not of rent but a "licence fee", the judge said he would have put it in the same category as a lease as it contained the usual protections for a landlord regarding tenant breach.

It also included a clause giving the airport the right to terminate the licence at any time, subject to four months’ notice (increased to six months during the phone conversation). The judge decided this meant that the licence might run for less than a year and so Caterleisure was not being granted a right to land that had to meet the requirements of the Act.

The judge also said that he would still not dismiss the case even if the contract had to be in writing because the Act also provides that, where a contract requires to be constituted in a written document but is not, one party still cannot withdraw if the other has relied on the verbal contract and would be affected to a material extent.

The case re-emphasises the importance of not unwittingly finding yourself legally bound by an agreement when you intend to be subject to a formal document, agreed and signed by you or your solicitor.