When is a renunciation not a renunciation?

It is a general rule that the acceptance by a landlord of a renunciation of the lease by a tenant implies a discharge of all claims against him. It may therefore be a cause of some confusion, if the parties both agree to a renunciation but subsequently also commence proceedings in respect of a claim. The recent Scottish case of Midlothian Innovation and Technology Trust v. Robert William Ferguson considers the effect of renunciation on an arbitration arising out of the same lease.

7th February 2013

It is a general rule that the acceptance by a landlord of a renunciation of the lease by a tenant implies a discharge of all claims against him. It may therefore be a cause of some confusion, if the parties both agree to a renunciation but subsequently also commence proceedings in respect of a claim. The recent Scottish case of Midlothian Innovation and Technology Trust v. Robert William Ferguson [2012] CSOH 189 considers the effect of renunciation on an arbitration arising out of the same lease.

Mr Ferguson was a partner of a firm which let subjects to Midlothian Innovation and Technology Trust (MITT) for a five year period with an option to purchase at the end of the lease. If this option was exercised, a renunciation of the lease was to be granted. MITT exercised the option in 2007 and a deed of renunciation was signed by both parties.

Arbitration subsequent to renunciation

However, a joint application form requesting nomination of an arbitrator was subsequently submitted by both parties alleging that the other had breached its repairing obligations, and arbitration proceeded, albeit slowly, for almost four years. Then, in 2011 Mr Ferguson suddenly changed approach and challenged the competence of the arbitrator to make an award, given the prior existence of the renunciation.

Protective court action raised

Although the arbitrator rejected Mr Ferguson’s argument, MITT raised an action to preserve its position in case the arbitration was found to be invalid. Mr Ferguson counter-claimed that there was “no arbitrable dispute between the parties in respect of the Lease” and he also sought unsuccessfully to interdict MITT from progressing the arbitration further.

Clear agreement to enter into arbitration

The Court considered both the proper construction of the deed of renunciation, and the effect of the reference to arbitration, and ultimately concluded that the parties had properly referred their dispute to arbitration, that the arbitrator had jurisdiction and the Court therefore should not interrupt the arbitration process. Since signing of the renunciation took place only a few weeks before the application for arbitration, it is unlikely that the parties would have overlooked its existence at the time that they made the application for arbitration. And each party sought to claim against the other, clearly indicating the intention of both of them to enter into the arbitration. Indeed, Mr Ferguson’s initial conduct implied that he consented to the arbitration, as he participated fully in the process and even secured an award of expenses against MITT. Moreover, the parties had freedom of contract, and were entitled to agree that they had a dispute that they wished to resolve by arbitration.

Be clear about what the renunciation means

Two important lessons can be taken from the court’s decision on this case.

First, when entering into a renunciation, you must ensure that the renunciation is clear about the extent to which each party’s liability is consequently discharged. Second, all conduct after that needs to be consistent with the terms of the renunciation.

We recommend using the style produced by the Property Standardisation Group (see www.psglegal.co.uk) as it is provides for wording that is crystal clear about the effect of renunciation and prompts the parties to tailor wording specific to the circumstances, particularly in relation to any continuing liabilities post-renunciation, which would avoid the type of confusion that arose in this case.

You can read the decision in Midlothian Innovation and Technology Trust v. Robert William Ferguson on the Scottish Courts website.