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Formal assignation required before new partners can become liable under a lease, court finds

The right to occupy property under a lease in Scotland. does not automatically transfer to new parties to a partnership agreement, even if the lease contains a provision allowing it to be assigned without the landlord's consent, a court has ruled.03 Aug 2012

The Court of Session said that without formal, documented assignation of the lease, a GP practice which was not a party to the original rental agreement had no right to occupy the property – regardless of the fact that the practice, Terra Nova Medical Group, had been paying rent which had been accepted by the landlords.

In his judgment, Lord Woolman said that although the lease contained special provisions tailored to suit the "continuous cycle of change" resulting from the use of the property as a doctors' surgery, it still bore "many of the hallmarks of a standard commercial lease". Although the consent of the landlords was not necessary before rights under the lease could be assigned from doctors leaving or retiring from the practice to new doctors joining the partnership, the landlord had "retained the general prohibition against any form of transfer or shared occupancy", he said.

"The fact that [the lease] allows tenancy rights and obligations to be transferred with minimum formality should not obscure an important point - the conditions in the clause have to be met," he said. "[The lease] defines 'the Tenant' to include 'in substitution ... the tenant's successors in title and assignees'. No mention is made of any other occupancy right."

The original lease had been granted to a number of GPs who operated as two practices, in the form of partnerships, within the building. There were a number of changes in the composition of those partnerships over the years, culminating in their merger to form Terra Nova in 2008. By 2009 only one of the tenants under the original lease remained in the property, however he chose not to become involved in the case.

When a lease is formally assigned, the outgoing tenant loses all continuing obligations under the lease while the incoming tenant acquires all of its rights and obligations. The judge said that this had "important legal consequences" - for example, if the Terra Nova Group suddenly stopped paying rent the landlords' claim would be against the original occupants of the property, not the current occupiers.

In Scotland, any transfer of a right to occupy or use land must be made in writing. Because there was no evidence of "any document in support of [Terra Nova's] claim", Lord Woolman said, it did not matter that "both the tenants and the landlord [were] aware of the position" and "the landlord tacitly [accepted] the Practice's right to be there".

"Even if such an agreement could be established by actings, many questions would arise about the contours of the agreement," he said. "The complete absence of specification on these points is in my view unsurprising. It demonstrates that there was no such agreement."

Property law expert Russell Munro of Pinsent Masons, the law firm behind, said that the partners in Terra Nova "may well have thought" that the landlord's acceptance of their rent payments had entitled them to occupy the property, or even that they had somehow become the tenants. However, this assumption was at odds with the law.

"This case is a stark reminder that where partnerships are tenants of a property it is vital to keep the lease in line with changes in the partnership," he said. "If there is a change, former partners are not automatically released and new partners are not automatically liable for the tenant's obligations. Where a lease has lain dormant for a while, this could cause significant problems – it's entirely possible that none of the partners named on the lease are in the current partnership, so the current partnership could have no right to occupy the property." 

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