It is a recognised principle of Scottish property law that a person transacting with heritable property is entitled to do so on the faith of what is contained in the public records, and will not be bound by any agreement of which he does not have notice. In this principle, real rights (or rights in or to use the property itself) beat personal rights (or rights to require another to do something, or refrain from doing something in relation to that property). There is a well established exception to this rule however, where the transacting person knows of the existence of a prior agreement relating to the property between the owner of the property and some third party. But how far does this knowledge have to extend? And does the nature of the prior agreement make a difference?
The "offside goals rule"
The validity of a subsequent transaction may be at risk, if the transacting party knows of a pre-existing personal agreement between the owner of the property and a third party. If the transacting party ignores the existence of the pre-existing agreement and makes little or no inquiry into its terms, his resultant bad faith may mean that he is bound to implement the prior arrangement, or have his real right reduced. This concept, known to Scots law for centuries, now bears the modern title of the "offside goals rule".
Although it is a rule that is well known however, the extent of its application is less clear. Typically it has been described as only applying in situations where the pre-existing right, being a personal one, was nevertheless one which was "capable of being made real".
What is a personal right capable of being made real?
In a number of cases in the latter part of the 20th century, this test appeared to be borne out. Starting with the leading case in 1950, of Rodger (Builders) Limited v Fawdry and Others, earlier missives of sale of which the transacting party had been made aware, were upheld at the expense of the transacting party's recorded title to the same property, due to his bad faith arising from knowledge of the prior contract. Subsequent cases developed the approach that the personal right had to be one capable of being made real. Missives would give the prospective purchaser under them a personal right (the contract) to acquire a real right (title to the property) whereas a personal licence to occupy property, for example, was not and never would be a real right.
Options to purchase
While the position may be said to be reasonably settled in relation to missives of sale and purchase, can the same be said of options to purchase? Does there need to be an immediate entitlement to make real a personal right, which arguably, unless and until an option is exercised, does not exist, or does mere knowledge of the existence of any personal right relating to the property automatically denote bad faith?
In a decision in the Outer House of the Court of Session earlier this month in the case of Gibson v Royal Bank of Scotland plc, which concerned a debate on the legal issues in advance of a proof on the facts of the case, Lord Emslie has taken time to set out some observations on the principle, which lie somewhere between the two polarised positions.
Competing rights - The Security and The Option
Mr and Mrs Gibson had an arrangement with Mr McAlister, the owner of a house in St Andrews, which gave the Gibsons an option to purchase the house within a two-year period, and in the meantime they leased the property. Not long after entering into this arrangement, the Gibsons intimated their intention to exercise the option and a date for completion was agreed. In the interim period however, shortly before the completion date under the option, Mr McAlister granted a standard security over the property to the Royal Bank, who recorded it in the property Register only two days before the completion date for the option.
It remains a matter for the proof whether the Royal Bank knew of the prior arrangement and could thus be said to be in bad faith. But if they were, it was Lord Emslie's view that the personal right to which the Gibsons were entitled under the option would fall within the category of rights to which the offside goals rule applied.
Looking at the relevant case law as a whole, it seems that the bad faith exception to the principle could be applied in a broad range of circumstances, and is not as limited as some of the individual decisions would appear to indicate. While in this case, the subsequent right (the security) had been obtained after the Gibsons had intimated their intention to exercise the option and a completion date for implementation had been set, making their rights under the option more analogous to a purchaser's rights under missives, Lord Emslie indicated that he would still have entertained the claim by the Gibsons if they had not exercised the option before the security was taken. The proposition that the bad faith exception could apply to options and to rights of pre-emption in general could not at this stage be regarded as unsound, and that such rights ought therefore to qualify for the category of rights capable of being made real.
To read Lord Emslie's opinion in the case of Gibson v Royal Bank of Scotland plc click here