Landlords succeed in dilapidations valuation appeal
Landlords under a commercial lease have successfully appealed a decision restricting their right to recover dilapidations from their tenants.
Three judges in the Inner House reversed a decision by Lord Tyre (click here for report) that the loss of capital value rather than the cost of the required repairs, the measure provided for in the lease, was a relevant alternative measure of loss.
The landlords, @SIPP (Pension Trustees), claimed £1,051,086, including professional fees, plus VAT, for works which they considered were required to put the subjects into good and substantial repair and good decorative condition. The tenants, Insight Travel Services Ltd, averred that if they had carried out the works they accepted ought to have been carried out before the termination date, the capital value of the subjects would have increased by £75,000, and even if they had carried out all the works in the pursuers' schedule of dilapidations, the capital value would only have increased by £175,000. No reasonable landlord would carry out these works and it was believed and averred that the pursuers did not intend to do so.
Giving the opinion of the court, Lady Smith, who sat with Lord Menzies and Lady Clark of Calton, applied principles stated by Lord Neuberger in the UK Supreme Court case of Arnold v Britton (2015), including that "although commercial common sense is very important the court should be slow to reject the natural meaning of a provision as correct simply because it seems to be a very imprudent term for one of the parties to have agreed, the purpose of interpretation being not to identify what the court thinks that parties ought to have agreed but what they have in fact agreed".
She added: "Whatever drafting deficiencies there may be in clause 3(a) they are not, in our view, such as to entitle the court readily to depart from the natural meaning of the clause."
The balance of authority supported the conclusion that an obligation to keep subjects in good and substantial repair carried an obligation to put them into that state of repair. "If there is no obligation to renew, replace and rebuild as necessary... a different conclusion might be drawn, but such an obligation was clearly stated in the present case."
Regrading the tenants' obligations at the termination of the lease, the court disagreed with the Lord Ordinary that the relevant clause could be read as a payment or a damages clause. The "only and natural meaning", Lady Smith said, was that it was a payment clause: the tenants' contention "would do such violence to the clause as to produce an incomprehensible result namely that, despite wording which provides only for the sum due to be measured in terms of repair costs and despite the requirement for the landlord to elect and notify, parties could be taken to have intended nothing more than that the landlord’s claim be restricted to damages for breach of contract".
Commenting on the decision last year in Grove Investments Ltd v Cape Building Products, which found for the tenants, Lady Smith observed: "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."
Ewen Brown, head of disputes at Morisons, solicitors, who acted for the landlords, welcomed the judgment, saying: “The case is one of a handful of recent cases where similarly worded clauses have come under the spotlight. The decision should bring comfort to commercial landlords that the courts will uphold clauses in leases which make it clear that the landlord is entitled to have its claim for dilapidations quantified by reference to the cost of the repairs.”