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Scottish court upholds landlord's claim for full cost of repairs despite re-let of property

A commercial tenant in breach of a repair clause at the end of a lease has been ordered to pay its former landlord's claim for the cost of those repairs in full by a Scottish court, even though the landlord was able to re-let the property in its current condition.06 Oct 2016

Lord Doherty ruled that the "ordinary and natural meaning" of the relevant clause in the lease gave the landlord "the option of certifying a sum equal to the cost of the works necessary to put the premises into the condition in which they ought to have been … had the tenant duly performed its obligations under the lease" at the date that it vacated the property.

The case is "the latest shot in an increasingly ferocious battle between landlords and tenants" on the interpretation of so-called dilapidations clauses, according to litigation expert Craig Connal QC of Pinsent Masons, the law firm behind Out-Law.com.

"It is also part of the potential swing away from starting with 'commercial common sense' when reading documents towards a more literal approach," he said.

"No longer is it a question of whether the tenant would have agreed to a provision in which the landlord gets a major windfall on termination of the lease. Rather, the question is what the words of the contract actually say, and what the parties have actually agreed," he said.

Although future disputes would turn on their own facts and the wording of the underlying leases, Connal gave a "real-life" example of where this could be an issue.

"A tenant fails to do everything necessary to maintain an office block which, if it was to be brought up to scratch, would cost £x million," he said. "In the meantime, the market has shifted and there is now money in residential property, so the landlord intends to and does demolish the building completely. On the logic of clauses such as this, the tenant would be due to pay the landlord £x million regardless."

“A question for another case may yet be the place of good faith in such issues, for example whether a similar provision can in good faith be deployed to set out ‘repair’ costs when it is known repairs will never be incurred," said Connal.

The dispute arose in relation to commercial premises at a business park just outside of Glasgow, ownership of which was taken over by the Tonsley Trust in 2012. The tenant, Scottish Enterprise, was already in place but left the property in September 2013, as provided for by the lease.

The lease contained certain repairing and maintenance obligations, which Scottish Enterprise admitted to being in breach of at termination. Tonsley claimed just under £400,000, plus interest; an amount which it said was equal to the cost of carrying out the repairs required on termination. Ultimately, it carried out repairs at a cost of less than half this amount, before entering into a full repairing and insuring (FRI) lease with a third company, Critiqom.

Scottish Enterprise argued that at the point that Tonsley entered into the FRI lease, it no longer had any intention of or need to carry out the itemised repairs that it had claimed from its former tenant. That money would instead become a "windfall payment" for work that the landlord had not carried out and never would carry out, and to which it was not entitled under proper construction of the lease.

The court disagreed.

In his judgment, Lord Doherty referred back to the @SIPP case decided by the Inner House at the end of last year. In this case, the court overturned a decision by the Outer House in which the lower court had opted for an interpretation of the lease based on commercial common sense rather than the language actually used. The disputed provision in the present case was worded in a similar way to that in the @SIPP case, Lord Doherty said.

"The decision and reasoning in @SIPP provide important guidance," the judge said.

"I am mindful that it is the language of the present lease which the court requires to construe, but I am not persuaded that there is any sound basis for distinguishing @SIPP, or for otherwise holding the guidance contained in it to be inapplicable to the present case. On the contrary, I am clear that it is my duty as an Outer House judge to follow it," he said, in a ruling which suggests that courts are now clear how they will interpret FRI leases.

The judge also dismissed a claim by Scottish Enterprise that the landlord had incorrectly certified the necessary repairs, which Scottish Enterprise argued made its claim for the costs of those repairs invalid.