Mon 23 Dec 2019

Dilapidations - the devil is in the drafting

Repair and dilapidation provisions in leases vary significantly and often the strength of the respective parties' positions can rest upon the precise wording used.

One clause which has seen a lot of attention over the last few years is the clause which at the end of the lease seeks to oblige the tenant to pay to the landlord a sum of money in lieu of dilapidations, irrespective of whether or not the repair works are actually carried out by the landlord. 

For a while it appeared that the courts were favouring a "fair" outcome and interpreting leases in order to arrive at an interpretation that accorded with business common sense. Caselaw took the line that if a tenant failed to keep let property in the appropriate condition, the landlord (at the end of the lease) could only recover its actual loss.  This meant that even if a lease provided otherwise, if a landlord planned to redevelop their property or had another tenant lined up who did not require any work to be done, they were not entitled to recover a windfall sum of money that far exceeded their loss. The express terminal dilapidation provisions in leases were seemingly being rewritten in the interests of fairness and the waters were muddy.

The tide turned in the case of @SIPP Pension Trustees v Insight Travel Services Limited where the court took a more literal interpretation of the lease and held that the landlord could recover a sum of money in excess of their loss.  The key factor was that the lease wording had been set up as a contractual obligation on the tenant, at the landlord's option, to pay a sum of money to the landlord instead of the landlord requiring the tenant to do the repair works. This contractual obligation to pay was critically different from the wording in the earlier cases which made the sum due a claim for damages for a tenant's breach of contract. Where the clause is a payment clause (rather than a damages clause) the sum due by the tenant does not depend on the loss suffered by the landlord.

A recent case, Drum Income Plus Limited v LS Buchanan Limited has followed suit. In this case the tenant had granted a licence to a third party who had adapted and was occupying the let premises. When the lease expired, a schedule of dilapidations was served on the tenant which included works to reinstate the premises to their original layout. Although the lease had ended, the licensee continued to occupy the premises under a new licence granted by the landlord. The landlord sued the tenant for payment of the costs of the repair works required to leave the premises in good repair and condition as required by the lease. The tenant argued that as the licensee was continuing to occupy the premises, the landlord was not going to carry out any of the works listed in the schedule of dilapidations and therefore they should not be entitled to recover the costs of doing so. The court held that the wording in this lease was very similar to that in the @SIPP case and was a payment clause rather than a damages clause. The sum due by the tenant did not therefore depend on the loss suffered by the landlord.

As in the @SIPP case, the court held that there was no ambiguity in the lease wording therefore there was no room for the court to apply the principles of common sense or fairness. The landlord was entitled to the payment even though they did not intend to carry out the work.

Although this perhaps seems an unfair result for the tenant, commercial contracts don't require to be fair.  As with most dilapidation cases, much consideration was given to the specific wording of the relevant clause of the lease highlighting the paramount importance of getting the detail of the drafting right.

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