Landlord and tenant – Commercial lease – Dilapidations – Landlord contending that tenant obliged to pay sum representing total cost in schedule of dilapidations – Whether defendant’s obligation at termination limited to putting premises into condition accepted at commencement of lease – Whether claimant entitled to sum equal to cost of repairing premises whether or not intending to carry out work – Judgment in favour defendant
The claimant owned a commercial building in Port Glasgow. The defendant was the former tenant of the property under a lease granted in 2005 for a period of five years to 31 December 2009, which was renewed until 31 May 2012 when the defendant gave up possession. The claimant argued that, at the termination of the lease, the property was not in good and substantial repair. A dispute arose as to the nature and extent of the defendant’s obligations under the lease.
The claimant produced a schedule of dilapidations listing the works required to put the property into good and substantial repair and good decorative condition. The total estimated cost of those works was £1,051,086.25 plus VAT. The claimant contended that it was entitled, in accordance with a proviso to the tenant’s obligations, to payment of that sum. The defendant argued that if it had carried out works, which it accepted ought to have been carried out before the termination date, the capital value of the property would have increased by £75,000, and that, even if it had carried out all the works in the schedule of dilapidations, the capital value would only have increased by £175,000. It argued that no reasonable landlord would carry out those works and that the claimant did not intend to do so. Accordingly, the claimant’s claim should be quantified by reference to diminution in capital value and not the cost of carrying out the works.
The court was asked to determine: (i) whether, on a proper construction of the lease, the defendant’s obligation at termination was limited to putting the premises into the condition in which they were accepted by it at the commencement of the lease; and (ii) whether the claimant was entitled to payment of a sum equal to the cost of putting the premises into the relevant state of repair, regardless of whether it actually intended to carry out any such work.
Held: Judgment was given in favour of the defendant.
(1) When the court was asked to construe a modern commercial lease, its terms would be regarded as more important than the underlying common law of liability for what Scots law had traditionally categorised as extraordinary repairs. Where the parties had addressed in detail the issue of liability for putting and/or keeping the premises in good and substantial repair, the common law distinction between ordinary and extraordinary repairs might well become irrelevant. If the Supreme Court in L Batley Pet Products Ltd v North Lanarkshire Council [2014] UKSC 27; [2014] PLSCS 140 had intended to overrule the long-standing distinction made at common law in Scotland between ordinary and extraordinary repairs, as the claimant had submitted, one would have expected it to say so. Therefore, in construing the relevant clause in the lease in the present case, the court was not bound by authority to hold that an obligation to keep premises in good and substantial repair necessarily imported an obligation to put it into that condition, regardless of its condition at the commencement of the lease: Post Office v Aquarius Properties Ltd [1987] 1 All ER 1055, Credit Suisse v Beegas Nominees Ltd [1994] 1 EGLR 76; [1994] 11 EG 151; [1994] 12 EG 189, Taylor Woodrow Property Co v Strathclyde Regional Council (15 December 1995, unreported), McCall’s Entertainments (Ayr) Ltd v South Ayrshire Council (No 2) 1998 SLT 1421 and Westbury Estates v Royal Bank of Scotland plc [2006] CSOH 177; [2006] PLSCS 243 considered.
Reading the clause as a whole, seeking an interpretation which gave content to all of its provisions but with less priority being given to the order in which the words appeared, the clause imposed three obligations in relation to the property: (i) to repair; (ii) to keep in good and substantial repair and maintained, paved, heated, aired and cleansed; and (iii) to replace or renew or rebuild whenever necessary. There was no commercially sensible reason to construe the words “in at least as good condition as they are accepted by the tenant” as applying only to the third of those obligations. It would make little commercial sense to construe the lease as requiring necessary rebuilding works to be carried out to a standard referable to the condition of the premises at commencement of the lease, while requiring repair and maintenance works to be carried out to a different and higher standard. The inclusion of those words excluded any obligation to leave the premises in a state of improvement from their condition at commencement of the lease. McCall’s Entertainments (Ayr) Ltd v South Ayrshire Council (No 2) 1998 SLT 1421 followed.
(2) The usual consequence of a breach by a tenant of its obligations to return the property to the landlord in a specified condition was to entitle the landlord to claim damages for the loss sustained. However, the reasoning of the Inner House of the Court of Session in Grove Investments Ltd v Cape Building Products Ltd [2014] CSIH 43; [2014] PLSCS 250, preferring the tenant’s construction of the clause in question, allowing for calculation of the sum due to the landlord in a manner other than by reference to the cost of repair, fell to be applied in the present case unless the two cases were distinguishable by virtue of differences in the terms of the respective leases.
There was nothing in the relevant clause of the present lease that compelled the construction favoured by the claimant. The final words of the clause, i.e. “in lieu of requiring the tenant himself to carry out the work” afforded a clear indication that the payment obligation contained in the clause was activated only if the defendant intended to carry out the work required to put the property into the condition in which they ought to have been left at termination of the lease. That accorded best with commercial common sense. It would require very clear wording to conclude that a tenant had entered into an agreement which might have the consequence of it having to pay a sum which bore no relation to what was required to compensate the landlord for loss (if any) actually sustained as a result of the tenant’s breach of its repairing obligation. It followed that the defendant was not precluded from offering to prove that the appropriate measure of the claimant’s loss was something other than the cost of repair.
J Gordon Reid QC and Jonathan A Brown (instructed by McClure Naismith LLP) appeared for the claimant; Craig RK Sandison QC (instructed by Brodies LLP) appeared for the defendant.
Eileen O’Grady, barrister
