Tue 15 Dec 2015

Terminal dilapidations - Landlord can (sometimes) demand payment in lieu

Recent caselaw had taken the line that if a tenant failed to keep the let property in the appropriate condition, the landlord (at the end of a lease) could only recover its actual loss resulting from that tenant breach. This principle had been applied even if the lease expressly allowed the landlord to require the tenant to pay to the landlord the estimated cost of the repair works, as set out in a terminal schedule of dilapidations, in lieu of the tenant doing the repair works. 

The courts had said that very clear wording to the contrary would be required to enable a landlord to recover a sum of money that might be well in excess of its actual loss. Until last week, the courts had not considered that such clear wording to the contrary had been put to them.

That position changed with the publication, on 11 December 2015, of the (appeal) decision in @SIPP Pension Trustees v Insight Travel Services Limited. The key issue in that case 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 earlier cases (e.g the 2014 Grove Investments Limited v Cape Building Products Limited case) which made the sum due a claim for damages for a tenant's breach of contract.

Key differences in lease wording

When the @SIPP case first came to court, the Outer House considered that the wording in its lease was indistinguishable from that in the Grove case, and the case was therefore decided on the same basis as Grove.  On appeal (@SIPP's reclaiming motion), the Inner House disagreed: In their view there was a crucial difference in the wording between the two leases.

In the Grove case, the lease required the tenant, at lease expiry, to:

  • pay to the landlord the total value of any schedule of dilapidations and noted that the landlord would be free to expend all monies recovered as dilapidations as the landlord saw fit and
  • make a financial settlement with the landlord in lieu of the tenant's repair obligations.

In the @SIPP case, the lease included this proviso:

"Provided always that if the Landlord shall so desire at the expiry… of the..Lease, [the Landlord] may call upon the Tenant, by notice..(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 and in good decorative order in accordance with the obligations and conditions on the part of the Tenant [contained in the Lease] in lieu of requiring the Tenant himself to carry out the work."

Crucial importance of wording being a contractual obligation to pay

The decisions in the Grove case and the Outer House @SIPP case had been that the lease wording amounted to a landlord's entitlement to recover damages for a breach of contract - and that, in the absence of clear wording to the contrary, such a damages claim should not entitle the landlord to recover a sum that could substantially exceed its actual loss that resulted from the breach of contract. The point made was that, whilst a landlord might use the money recovered to enable it to do the works, there are occasions when this would not be done e.g the landlord might be carrying out a major refurbishment or demolishing to redevelop or an incoming tenant might not require some or all of the work to be done.

Such considerations are irrelevant if the obligation is not to pay damages for breach of contract, but simply to pay a sum of money due in terms of the lease.

Courts not there to re-write bad bargains

This @SIPP decision is another in a line of recent decisions which sees the Scottish courts interpreting what a contract actually says, rather than trying to find an ambiguity which would allow them then to apply business common sense or principles of fairness.  The Inner House confirmed that commercial contracts can be hard fought with each party intent on securing their own particular objective. They also noted that care should be taken to avoid reading anything said in the Grove case as being to the effect that the court can correct a bad bargain or even an unfair one - and that there was no general rule that a commercial contract requires to be fair.

Following on from this decision, we might begin to see the terminal dilapidations provisions in style leases being adjusted so that any entitlement to recover cash in lieu of dilapidations is set up as a contractual obligation to pay, and not as a claim for damages for breach of contract.

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