Outer House case concerning a lease of premises in Strathclyde Business Park in Bellshill.

The lease came to an end in September 2013 and the landlord argued that, in terms of the lease, the tenant was obliged to pay a sum equal to the cost of putting the premises into good and substantial condition.

The relevant clause provided that, at the end of the lease, if the premises were not in good and substantial repair and condition, the landlord had the option either to require the tenant to carry out repairs to put it into that condition or to demand a sum certified by the landlord as being equivalent to the cost of carrying out such work:

“Provided always that (a) if at such expiration or sooner determination the Premises shall not be in such good and substantial repair and condition then at the option of the Landlord either (i) the Tenant shall carry out at its entire cost the works necessary to put the Premises into such repair and condition or (ii) the Tenant shall pay to the Landlord the sum certified by the Landlord as being equal to the cost of carrying out such work..”

The landlord sought over £395k from the tenant in respect of the dilapidations said to exist at the end of the lease. The tenant argued that nothing was due in terms of the lease because the landlord had no intention or need to carry out the works listed in the schedule and the relevant clause in the lease did not entitle the landlord to a windfall profit. The tenant argued that the clause was neither a payment clause nor a liquidated damages clause but instead should have been read as clarifying and confirming the landlord’s common law right to damages (meaning that the landlord was only entitled to the loss actually suffered as a result of the tenant’s breach of its repairing obligations)[1].

Lord Doherty rejected those arguments. Following the approach taken in @SIPP (Pension Trustees) Limited v. Insight Travel Services Limited, Lord Doherty found that the ordinary and natural meaning of the clause provided the landlord with the option of certifying a sum equal to the cost of the works necessary to put the premises into the condition in which they would have been in at the end of the lease if the tenant had complied with its repairing obligations. The tenant’s contention that the clause should be interpreted as only allowing common law damages was found not to be a possible interpretation of the clause.

The full judgement is available from Scottish Courts here.

 All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

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[1] The tenant referred to Mapeley Acquisition Co (3) Ltd (In Receivership) v City of Edinburgh Council and Grove Investments Limited v. Cape Building Products Limited in support of its arguments.

Background
Inner House case relating to the lease of commercial premises in Port Glasgow. @SIPP were the landlords and Insight, the tenants. @SIPP argued that, when the lease came to an end, the premises were not in good and substantial condition and a dispute arose as to the extent of the tenants repairing obligations under the lease.

The issues
There were two issues for the court to decide.

• Whether the tenants’ obligation on termination of the lease was limited to putting the premises into the condition in which they were accepted by it at the commencement of the lease.
• Whether the landlord 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.

Outer House decision
In the Outer House Lord Tyre found in favour of the tenants on both issues holding:

•  that the obligation to keep the premises in good and substantial repair did not necessarily import an obligation to put the premises in that condition regardless of its condition at the commencement of the lease and that the tenants’ obligation was referable to the condition in which the premises were accepted at the commencement of the lease; and
• that the tenant’s obligation to make payment for the cost of the works was conditional on the landlords intending to carry out the repair works and was not as a liquidate damages provision. (Lord Tyre was persuaded that this was the interpretation which best accorded with commercial common sense as he found that very clear wording would be required before it could be concluded that a tenant had entered into an obligation to pay a sum which might bear no relation to the loss actually suffered by the landlord –in this case the estimated cost of the works required was over £1m whereas the tenant argued that, even if it had carried out all of the works, the capital value of the premises would only have increased by £175k.)

Inner House decision
The Inner House have allowed an appeal.

Putting and keeping
The repairing obligation including the following wording: (obliging the tenant)

“To accept the leased subjects in their present condition and at their own cost and expense to repair and keep in good and substantial repair and maintained, paved, heated, aired and cleansed in every respect all to the satisfaction of the Landlord and to replace or renew or rebuild whenever necessary the leased subjects and all additions thereto….. in at least as good condition as they are accepted by the Tenant all to the satisfaction of the Landlord and that regardless of the age or state of the dilapidation…”

The court came to the conclusion that the natural meaning of the clause was clear and, if the premises were not in good and substantial repair at the beginning of the lease, the tenant was required to repair them in such a way as to achieve that standard. The court took the view that the obligation “to repair” of itself was indicative of that but, if there were any doubt, previous cases support the argument that an obligation to keep property in good and substantial repair carries with it an obligation to put them in that condition[1].

In coming to that conclusion the court noted:

 “the repeated references to “the satisfaction of the landlord” not only supports the above construction and confirms that “good and substantial repair” is to be assessed by reference to the landlord’s interest in the subjects being maintained to and being delivered up in at least tenantable standard.  Further, the phrase “regardless of the age or state of dilapidation of the buildings” confirms that the tenant is not to be excused of its obligation to repair, maintain and renew etc to at least “good and substantial repair” standard by reason of them being below that standard at the commencement of the lease or, indeed, them falling below that standard during it.  The absence of a schedule or other record of condition provides further cogent support for that construction.”

Payment of sum in lieu of repairs
A further clause made provision to the effect that, at the expiry/termination of the lease, the tenant was required to carry out repairs and surrender the premises to the landlord in a state complying with the repairing obligation. However, the clause also included the following proviso:

“Provided Always that if the Landlord shall so desire at the expiry or sooner termination of the foregoing Lease they may call upon the Tenant, by notice in writing (in which event the Tenant shall be bound), to pay to the Landlord at the determination date… a sum equal to the amount required to put the leased subjects into good and substantial repair… in accordance with the obligations and conditions on the part of the Tenant herein contained in lieu of requiring the Tenant himself to carry out the work.”

The Inner House took the view that the only natural and ordinary meaning which could be given to the clause was that it was a payment clause (and not a damages clause) meaning that the sum due by the tenant did not depend on loss suffered by the landlord. Consequently, the fact that the cost of carrying out the repairs may have been disproportionately more than any increase in capital value of the premises achieved as a result was irrelevant. As such, the Inner House determined that there was no potential for interpreting the clause so as to mean that payment for the cost of the works was dependent on the landlord’s intention to carry out the works.

In coming to its conclusion, the Inner House contrasted the wording used in this case with that in Grove Investments Ltd v Cape Building Products Ltd[2] on which Lord Tyre had relied when reaching his decision in the Outer House.

The provisions in this case contained a procedure (not included in the lease in Grove) under which the Landlord made an election and served a notice on the tenant requiring the tenant to make the payment in lieu of carrying out the repairs which the court found to be significant in suggesting that the landlord’s right was to a contractual payment rather than a payment of damages.

Also, the wording used in Grove made reference to the landlord and tenant reaching a settlement based on the value of a schedule of dilapidations rather than making reference to the cost of making the repairs which the court interpreted as being analogous to a damages clause.

Ultimately the differentiating factor was that the wording in this case was interpreted as including a landlord’s right to demand a contractual payment unrelated to loss whereas the wording in Grove was not.

Some general principles
The Inner House stated:

“Care must also be taken to avoid reading anything said in Grove as being to the effect that the court can correct a bad bargain or even an unfair one; there is no general rule that a commercial contract requires to be fair”.

 And:

“it is not legitimate to re‑write parties’ agreement because it was unwise of one party to gamble on future outcomes;  the question is not whether a reasonable tenant would have entered into the obligation”

 Further:

“it is important to note that Grove did not lay down any general rule to the effect that the landlord in a commercial lease is, at termination, if repairs are outstanding only entitled to be compensated for capital loss actually suffered.”

 The full judgement is available from Scottish Courts here.

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[1] Albeit it was noted that a different conclusion may be appropriate where no obligation to renew or replace or rebuild as necessary is included.

[2][2014] CSIH 43

Outer House case considering the lease of an office building in South Gyle Business Park in Edinburgh. The lease was one of 15 years in duration and was supplemented with two licence agreements authorising tenant’s alterations to the premises.

Background
Two weeks before the end of the lease the landlord (PDPF) served a lengthy schedule of dilapidations on the tenant (Santander) which sought removal of the tenant’s alterations and replacement of the floor coverings. The tenant refused to carry out the works as it said that it had not received enough notice. The landlord raised an action to recover the cost relating to the necessary works and preparation of the schedule of dilapidations (amounting to a total of over £755k).

The lease contained a clause obliging the tenant to keep the premises in good and substantial repair during the currency of the lease (paragraph 3), a clause obliging the tenant to leave the premises in good condition and to replace the floor coverings at the end of the lease (paragraph 28) and also a clause obliging the tenant to carry out any works contained in a notice served on it by the landlord within 3 months (paragraph 8).

There were 3 questions for the court to decide:

1. whether the lease stipulated that the landlord had to provide at least 3 months’ notice prior to its expiry;
2. whether a term of reasonable notice should be implied into the two licence agreements; and
3. whether the schedule of dilapidations constituted a valid notice.

Decision
3 months’ notice?
After considering the relevant terms of the lease, Lord Woolman (approaching the question by considering the view of a reasonable person with all the relevant background knowledge) found that the obligations contained in paragraphs 3 and 28 were independent of the obligation requiring notice contained in paragraph 8 (the fact that only one of the clauses contained a time limit suggested that the others should not be qualified in the same way). As such, the landlord did not have to provide at least 3 months’ notice to carry out the works.

Reasonable notice implied into licence agreements
Lord Woolman also rejected the fall back argument that a reasonable notice period of 10 weeks should be implied into the licences finding that the introduction of implied terms would be warranted where such a term was required to spell out what a reasonable person would understand the licence agreements to mean. That was not the case here where the implied term would be inconsistent with the parties express stipulation that the landlord could issue its requirement on the termination of the lease.

Valid notice constituted by schedule of dilapidations
The tenant sought to argue that the service of the schedule of dilapidations was simply an assertion of the tenant’s existing repairing obligations under the lease and did not provide adequate notice in terms of removal of the works carried out under the licence agreements. This argument was also rejected by Lord Woolman who noted that the removal of licensed works requires no formality and that, at the time the notice to quit is served, the tenant can ask whether the Landlord insists on removal of the tenant’s alterations.

The full judgement is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

Background
Outer House case relating to the lease of commercial premises in Port Glasgow. @SIPP were the landlords and Insight, the tenants. @SIPP argued that, when the lease came to an end, the premises were not in good and substantial condition and a dispute arose as to the extent of the tenants repairing obligations under the lease.

There were two issues for the court to decide.

• Whether the tenants’ obligation on termination of the lease was limited to putting the premises into the condition in which they were accepted by it at the commencement of the lease.
• Whether the landlord 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.

Decision
Putting and keeping
Lord Tyre began by rejecting @SIPP’s contention[1] that an obligation to keep the premises in good and substantial repair necessarily imports an obligation to put the premises in that condition regardless of its condition at the commencement of the lease. Then, taking a modern approach (which requires the court to consider what a reasonable person would have understood the parties to have meant by the language they used, rather than necessarily imposing interpretation which is grammatical result of the language used) to construction of the relevant clause, Lord Tyre found that the tenant’s obligation was referable to the condition in which they were accepted at the commencement of the lease (and not the condition in which they were deemed to have been accepted).

Remedy for breach of the repairing obligation
Where a tenant breaches its obligation to return the premises to the condition specified in the lease at the end of the term, the landlord is entitled to common law damages for the loss sustained. The landlord will normally argue that that loss amounts to the cost required to put the premises into the specified condition. However, that will not be the measure of the loss in all cases. In some cases the proper measure of loss may be the diminution in the capital value of the subjects[2] and in some cases, for example where the building is to be demolished (for reasons unconnected with the tenant’s breach), the landlord may be unable to show any loss at all.

In this case @SIPP argued that the relevant clause in the lease provided an express right to payment of a sum equivalent to the cost required to put the premises into good and substantial repair and that in exercising that contractual right it was not making a claim for damages for its loss.

However, Lord Tyre found that there was nothing in the relevant clause compelling the interpretation favoured by @SIPP. In the view of Lord Tyre, a lease would require very clear wording to allow a conclusion that the tenant had to pay a sum which bore no relation to that required to compensate the landlord for the loss actually sustained as a result of a breach of the repairing obligation.

As such, Insight were entitled to prove that @SIPP’s loss was equivalent something other than the cost of repair and the case was put out by order for discussion as to further procedure[3].

The full judgement is available from Scottish Courts here

(NB see appeal to Inner House appeal here)

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

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[1] This argument was based on the judgment of the Supreme Court in L Batley Pet Products Ltd v North Lanarkshire Council[2014] UKSC 27, however, Lord Tyre found that the reference to putting/keeping the property in good condition related to a commentary on the particular clause used in that case rather than making a general statement/change as to the law.

[2] In this case the estimated cost of the works required was over £1m whereas Insight argued that even if it had carried out all of the works in the schedule of dilapidations, the capital value of the premises would only have increased by £175k.

[3]The question of whether @SIPP would be entitled to recover the cost of the repairs if it could prove an intention to carry out the repairs regardless of the extent to which the cost of the repairs would exceed the increase in capital value of the subjects was left open.

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.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

Outer House case in which Fordell sought £338k from Deloitte it said was due under an alleged agreement relating to a dilapidations claim in respect of a lease of property at 18 Charlotte Square and 4 Charlotte Lane in Edinburgh.

The lease came to an end in March 2012 and before that a schedule of dilapidations was served. A dispute then took place as to the scope and cost of the remedial works required following which surveyors liaised on behalf of each of the parties with a view to reaching a negotiated agreement.

Fordell argued that a binding agreement had been reached between the parties that Deloitte would pay £338k in full and final settlement of the claim. Deloitte argued that there had been no concluded contract because:

1.     the communications did not record an intention to be bound by the exchange of emails;
2.     there was no evidence that Fordell would use the money for the dilapidations works;
3.     the phrase “without prejudice” was used in Deloitte’s surveyor’s emails;
4.     there was a need for a formal legal document; and
5.     there was no agreement on a date for payment.

After considering the authorities[1] Lord Malcolm found that the proper approach in such cases was well settled:

“In summary, both parties must have manifested an intention to be immediately bound to all the legally essential elements of the bargain. In assessing this, the court adopts an objective approach, based upon what an informed reasonable person would have understood by the words and conduct of the parties or their agents.”

Lord Malcolm held that the negotiations had not resulted in a concluded contract between the parties. One of Deloitte’s emails contained a condition that Fordell would use the money for the dilapidations works which was not withdrawn and remained unmet. An email which Fordell argued had concluded the bargain did not waive or abandon that requirement. Fordell contended Deloitte were not entitled to require such evidence. However, Lord Malcolm took the view that, whatever the law on dilapidations claims, Deloitte were entitled to insist on such evidence as they wished, and to make it a condition for payment.

Lord Malcolm also took the view that the use of the words “without prejudice” and the need for a formal agreement reflected a shared understanding that neither of the surveyors could bind the parties. That was made clear in the correspondence. At each stage, before making a binding offer, or counter offer, the surveyors had required direct instructions from their respective clients and the words “without prejudice” required to be seen in that context[2]. Lord Malcolm described the lack of agreement regarding a date for payment as a “loose end” but saw it as further demonstration that the parties’ minds had not met on the key aspects of the deal.

Fordell’s claim for payment was dismissed.

The full judgement is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.

Case considering a tenant’s liability for extraordinary repairs under a lease. Co-operative Insurance were the landlords and Fife Council were the tenants under a 25 year lease of the Unicorn house at the Kingdom Centre in Glenrothes. The Co-op claimed that the Council had breached their repairing obligations under the lease and sought damages of more than £1.3m. The matter for the court to decide was the relevancy of the Council’s argument that they were not liable for “extraordinary repairs” under the lease

The repairing clause contained the following:

“At their own cost and expense to repair and keep in good and substantial repair and maintained, renewed and cleansedin every respect all to the satisfaction of the Landlords the leased subjects”

The Co-op accepted that at common law a tenant is only liable for “ordinary repairs” and the responsibility for “extraordinary repairs” (such as the rebuilding or renewal of the subjects and making them wind and watertight) is normally that of the landlord. To make it the responsibility of the tenant would require clear stipulation or necessary inference. However, they argued that in this case the lease did make it clear that the tenant was liable for extraordinary repairs. The Co-op relied on the extent of the subjects included in the lease (which comprised the whole of the external walls and roof) and the fact that the repairing clause included an obligation to “renew” as well as to “repair”.

On the other hand, the Council contended that many of the repairs identified by the Co-op arose as a result of the impending expiry of lifespan of component parts of the property and both parties would have been aware that the lifespan of the parts in question was not much greater than the length of the lease. If it had been intended that the Council were to replace all such parts at the end of the lease it would have been made unambiguously clear.

Lord Glennie was not persuaded that the lease imposed liability on the tenants for extraordinary repairs. Indeed the clause did not go beyond the common law position. To argue that use of the word “renewed” meant that the tenants had assumed responsibility for “extraordinary repairs” put too much emphasis on the word renewed. As part of an obligation to repair the tenant may be obliged to renew certain elements in the structure but that is part of the repairing obligation.

If the Co-op’s arguments had been correct the lease would also have obliged the Council to give the property back at the end of the lease in as good condition as it had been 25 years earlier. They would have been obliged to renew parts even though they were not in need of repair. Whilst Lord Glennie agreed that it was possible to impose such an obligation, the intention would have to be made clear.

Although there were provisions in the lease which appeared to place responsibility on the tenants for structure that did not alter Lord Glennie’s opinion that the lease did not make the tenant liable for “extraordinary repairs”.

The full judgement is available from Scottish Courts here.

All of our property and conveyancing case summaries are contained in the LKS Property and Conveyancing Casebook here.