Inner House case concerning the interpretation of a dilapidations provision contained in a lease of premises at Germiston Industrial Estate in Glasgow.

Surveyors acting for Grove (the landlord) served a schedule of dilapidations on Cape (the tenant). However, the works specified in the schedule had not been carried out by Cape by the expiry of the lease .

The lease provided an obligation on the tenant “to pay to the landlords the total value of the Schedule of Dilapidations [prepared in respect of the tenant’s repairing obligations]”. Grove argued that this obliged Cape to pay the total value as shown in the schedule. On the other hand, Cape argued that they were only obliged to make payment to Grove of the loss actually suffered as a result of the failure to comply with the repairing obligations. Both the sheriff and the sheriff principal agreed with Grove’s arguments and Cape appealed to the Inner House.

Before considering the lease, the court noted that the provisions of a contract must be construed in context and in accordance with the purposes that the contract is intended to achieve and that, where a contractual provision is capable of more than one meaning, the court should adopt the meaning that best accords with commercial common sense.  Adopting this approach, the Inner House allowed the appeal for the following reasons.

1. The contractual context was the termination of a lease where the tenants had not fulfilled their repairing obligations. The most natural way of providing a remedy for the tenant’s breach of contract would be to compensate the landlords for their loss (which would involve a remedy akin to damages).
2. In a case where the landlords intended to reinstate premises in full, Cape’s construction of the clause would allow for full recovery of the costs of reinstatement. (The amount due being calculated after the works had been carried out). On Grove’s suggested interpretation, the sum payable by the tenants would be based on an estimated value before the works were carried out.
3. In cases where the landlords did not intend to reinstate the property, Grove’s construction of the clause would mean that the landlord could recover very much more than the actual loss sustained by them through the tenant’s breach of contract. (The effect being that the amount recovered would essentially be arbitrary and unrelated to the tenants’ breach of contract)
4. Cape’s proposed interpretation of the clause provided full compensation to the landlords for the loss ultimately suffered by them. In the court’s opinion that was in accordance with commercial common sense and satisfied the important requirements of proportionality and predictability.

The full judgement is available from Scottish Courts here.

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