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'Commercial common sense' cannot override natural meaning of property repair clause, says Scottish court

Out-Law News | 15 Dec 2015 | 4:07 pm | 3 min. read

It would be "a substantial and unjustified departure" from the wording of a dilapidations clause to allow a commercial property tenant to pay its former landlord the difference in value of the property at the end of the lease, rather than the cost of the repairs, a Scottish court has ruled.

Property law expert Katharine Hardie of Pinsent Masons, the law firm behind Out-Law.com, said that the judgment of the Inner House of the Court of Session would "swing the balance in dilapidations negotiations once more". It followed a string of recent decisions in which the Scottish courts had "seemed quite willing to depart from the natural and ordinary meaning of the language used if it did not accord with commercial common sense", she said.

Last year, the Outer House of the Court of Session ruled that a commercial tenant, Insight Travel Services Ltd, could compensate the landlord on the basis of the loss in property value rather than the cost of repairs after it vacated the property without repairing it as required in the lease. In his judgment, Lord Tyre relied on a previous Inner House judgment which appeared to favour a 'common commercial sense' approach to the settling of disputes over the interpretation of contractual provisions.

However, the Inner House's judgment in the Grove case "did not lay down any general rule ... that the landlord is, at termination, if repairs are outstanding only entitled to be compensated from capital loss actually suffered", said Lady Smith, finding in favour of @SIPP Pension Trustees in the landlord's appeal.

"Whatever drafting deficiencies there may be in [the lease] they are not, in our view, such as to entitle the court readily to depart from the natural meaning of the clause," she said in her judgment.

"[The tenant] accepts that one meaning of [the clause] is that for which [the landlord] contends … We would go further. We are satisfied that it is the only natural and ordinary meaning to be given to the terms of the clause. To do otherwise and entertain the meaning urged upon us by [the tenant] would do such violence to the clause as to produce an incomprehensible result," she said.

She added that the terms of the lease in the present case could "readily be distinguished" from those in the Grove case, where the relevant clause was based on the parties reaching a "financial settlement" and referred to "value" rather than "cost".

The dispute arose in relation to Insight's tenancy of an office block on an industrial estate in Port Glasgow, which came to an end on 31 May 2012. The landlord had valued the work required to put the property into "good and substantial repair and good decorative condition" at over £1 million. The tenant said that if it had carried out the work it accepted needed to be done then the property would have increased in value by £75,000; and that if it had carried out all the work deemed necessary by the landlord the property would only have increased in value by £175,000.

The appeal court ruled that it was "clear from the wording" of the lease that the parties "intended that if the subjects were not, at termination, in the condition in which they would have been if the tenant had complied with its repairing obligations then the landlord was to be entitled to payment of a sum equal to the cost of bringing them up to that standard".

The court also ruled that, on the wording of the lease, whether or not the landlord actually intended to use the money to carry out the necessary repair work was irrelevant.

Property law expert Katharine Hardie said that the appeal court's approach "actually gives landlords and tenants far greater certainty – they can read the lease to determine what their obligations are".

"If a tenant does not want to be liable for a dilapidations cost at lease expiry, it can negotiate that before signing the lease or comply with the repairing obligation during the lease," she said. "A landlord buying a property can determine the tenant's repairing liability by reading the lease - without being concerned whether a court might construe the dilapidations liability as being 'unreasonable'.

"Here, the court found the words used to be clear enough. The only natural and ordinary meaning of the words was that the tenant had to pay the landlord the cost of carrying out the repairs. There was no question of whether the landlord would in fact carry out the repairs or whether this reflected the damages suffered by the landlord. If the words are clear, you stop there," she said.