Landlord and tenant – Commercial lease – Dilapidations – Landlord contending that relevant clause of lease obliging tenant to make payment of sum representing total value brought out in schedule of dilapidations – Tenant contending that clause intended to reflect and reinforce common law, under which landlord would be entitled to actual loss they sustained, which might be calculated using a number of different methods – Which of two constructions according best with commercial common sense – Appeal allowed
The defendant company leased premises on the Germiston Industrial Estate, Glasgow, from the Scottish Development Agency in August 1986. By the time the lease expired on 15 May 2011, the claimant company had become the landlord and a number of defects and wants of repair or maintenance had developed in the premises. Surveyors acting for the claimant prepared a schedule of dilapidations, which was served on the tenants in September 2008 with a notice requiring them to carry out the works specified. When the defendant failed to carry out the works, the claimant commenced proceedings for breach of contract and sought damages amounting to the total cost of remedying the alleged defects in the schedule of dilapidations.
The claimant argued that, under the terms of the lease, the defendant was obliged to pay the total value in the schedule of dilapidations, subject only to any challenge as to the proper ascertainment of that value. The defendant contended that, on its proper construction relevant provision required the defendant to pay only for the actual loss suffered by the claimant in consequence of its failure to implement its repair and maintenance obligations.
At first instance, the court found in favour of the claimant that the clause should be construed as effecting a broad transfer of common law risk from landlord to tenant. The Court of Session upheld that decision, but the defendant appealed to the Extra Division of the Inner House of the Court of Session.
Held: The appeal was allowed.
The lease imposed three obligations on the defendant tenant: (i) to remove from the premises; (ii) to repair any damage caused by the removal of fittings; and (iii) “to pay to the landlords the total value of the Schedule of Dilapidations prepared by the landlords in respect of the tenants’ obligations …”. Both constructions of the relevant clause were possible when read in context and neither could be described as unreasonable, or manifestly contrary to the wording that was used in the clause. Therefore, it was necessary to decide which of the two constructions accorded best with commercial common sense.
On that basis, the defendant’s construction of the clause was to be preferred. The contractual context was the termination of a lease where the tenant had not fulfilled obligations of repair, maintenance and reinstatement imposed under other provisions of the lease. That was obviously a breach of contract and the function of the clause was on any view to provide the landlord with contractual rights in respect of that breach of contract. The most natural way of providing such a remedy was to compensate the landlord for its loss as a result of that breach which involved a remedy akin to damages. In a case where the landlord intended to reinstate premises in full, such a construction provided full recovery for the costs of reinstatement. The amount due would usually be calculated after the works had been carried out because that was the point when the true financial cost of the tenant’s breach of contract was known. If, as the claimant contended, the sum payable by the defendant was based on the estimated costs in a schedule of dilapidations, it would not be known with any precision what the true costs were, as the schedule had to be prepared before the remedial work was carried out. Furthermore, in cases where the landlord did not intend to reinstate the property, the result of the claimant’s construction would be that they might recover very much more than the actual loss they sustained through the defendant’s breach of contract. The effect of the claimant’s construction would be a level of recovery that was arbitrary and disproportionate, not related to any loss sustained. That in itself appeared contrary to commercial common sense.
Wherever possible a contract had to be construed so as to avoid results that were arbitrary or disproportionate, whether by way of benefit or burden. The defendant’s construction provided full compensation to the claimant for the loss that it had ultimately suffered which was in accordance with commercial common sense as it satisfied the important requirements of proportionality and predictability. Furthermore, it furthered the fundamental commercial purposes of the lease in a much more effective manner than the claimant’s construction. The fundamental purposes of the lease, common to both parties, were that the tenant should have possession of the subjects for the term of the lease and thereafter should return the subjects to the landlord in such a condition that the landlord could then relet them (or sell them if so advised). If the subjects were returned in a defective condition, the harm done to the claimant depended on what it then intended to do. The defendant’s construction gave the claimant compensation for the true financial consequences of the defendant’s breach of contract: Duke of Portland v Wood’s Trustees 1926 SC 640, Credential Bath Street Ltd v Venture Investment Placement Ltd [2007] CSOH 208, Rainy Sky SA v Kookmin Bank [2011] UKSC 50 and Barclays Bank plc v HHY Luxembourg SARL [2011] BCLC 336 applied.
Craig RK Sandison QC and David Thomson (instructed by Brodies LLP) appeared for the claimant; James Mure QC and Alan McMillan (Solicitor Advocate) (instructed by Burness Paull LLP) appeared for the defendant.
Eileen O’Grady, barrister
