Scottish court: tenant in breach of restatement obligations could compensate for loss in value, rather than repair costs

Out-Law News | 09 Sep 2014 | 10:05 am | 2 min. read

A commercial tenant of premises which had not been repaired as required in the lease was entitled to argue that compensation to the landlord should be paid on the basis of the loss in property value, rather than the cost of those repairs, a Scottish court has ruled.

The Outer House of the Court of Session also found that the lease in question did not require the tenant, Insight Travel Services Ltd, to restore the property to a better condition than it had been at the start of the lease. The landlord, @SIPP Pension Trustees Ltd, had argued that the fact that the lease contained the words "regardless of the age or state of dilapidation" meant that the condition of the property when the lease began was irrelevant.

In his judgment, Lord Tyre said that although the cost of repair would normally be the proper measure of damages in cases like these, it was not the only possible measure.

"Where, for example, the landlord has no intention of carrying out repairs to the building because it is to be extensively renovated, the cost of repairs may not provide a satisfactory measure of loss," he said. "Indeed, where the subjects are to be demolished to make way for a new building, for reasons unconnected with the tenant's breach, the landlord may be unable to prove any loss at all."

"[In this case], I am satisfied that [the tenant's] construction [of the terms of the lease] accords best with commercial common sense. It would, in my view, require very clear wording in order to conclude that a tenant had entered into an agreement which might have the consequence of it having to pay a sum which bore no relation to what was required to compensate the landlord for loss (if any) actually sustained as a result of the tenant's breach of its repairing obligation," he said.

The landlord had valued the work required to put the property "into good and substantial repair and good decorative condition" at over £1 million, plus VAT. 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.

In reaching his decision, Lord Tyre referred to the Inner House's judgment in a similar case in May, in which Scotland's highest appeal court similarly favoured a 'common commercial sense' approach to the settling of disputes over the interpretation of contractual provisions. In this case, which involved a schedule of dilapidations worth around £10m, Lord Drummond Young said that it could not be presumed that the parties had contracted out of the landlord's common law right to damages reflecting actual loss without "definite indications to that effect".

"Dilapidations claims are often strongly resisted by tenants, notwithstanding they may accept that they are in breach of their obligations under the lease, and this case – combined with the Grove Investments decision in May - continues to make it hard for landlords to recover the cost    of repairs if they have not actually done all the work for which they are claiming," said litigation expert Heidi Archibald of Pinsent Masons, the law firm behind Out-Law.com.

Lord Tyre also took a "commercially sensible" approach to the interpretation of the repair clause itself. He said that the tenant's obligations in the lease were qualified by the phrase "in at least as good condition as they are accepted by the tenant", which meant that the tenant was not under any obligation to improve the condition of the property.

"It is not, in my opinion, possible to identify any construction of this clause, let alone a commercially sensible one, which gives effect to every word in it in the order in which they appear," he said.

"In any event, the modern approach to the construction of commercial contracts requires the court to ascertain what a reasonable person would have understood the parties to have meant by the language they used, rather than to impose upon them an interpretation which, although not necessarily the commercially sensible one, appears to the court to be the grammatical result of the language they have chosen to use," he said.