Background
Inner House case relating to the lease of commercial premises in Port Glasgow. @SIPP were the landlords and Insight, the tenants. @SIPP argued that, when the lease came to an end, the premises were not in good and substantial condition and a dispute arose as to the extent of the tenants repairing obligations under the lease.

The issues
There were two issues for the court to decide.

• Whether the tenants’ obligation on termination of the lease was limited to putting the premises into the condition in which they were accepted by it at the commencement of the lease.
• Whether the landlord was entitled to payment of a sum equal to the cost of putting the premises into the relevant state of repair, regardless of whether it actually intended to carry out any such work.

Outer House decision
In the Outer House Lord Tyre found in favour of the tenants on both issues holding:

•  that the obligation to keep the premises in good and substantial repair did not necessarily import an obligation to put the premises in that condition regardless of its condition at the commencement of the lease and that the tenants’ obligation was referable to the condition in which the premises were accepted at the commencement of the lease; and
• that the tenant’s obligation to make payment for the cost of the works was conditional on the landlords intending to carry out the repair works and was not as a liquidate damages provision. (Lord Tyre was persuaded that this was the interpretation which best accorded with commercial common sense as he found that very clear wording would be required before it could be concluded that a tenant had entered into an obligation to pay a sum which might bear no relation to the loss actually suffered by the landlord –in this case the estimated cost of the works required was over £1m whereas the tenant argued that, even if it had carried out all of the works, the capital value of the premises would only have increased by £175k.)

Inner House decision
The Inner House have allowed an appeal.

Putting and keeping
The repairing obligation including the following wording: (obliging the tenant)

“To accept the leased subjects in their present condition and at their own cost and expense to repair and keep in good and substantial repair and maintained, paved, heated, aired and cleansed in every respect all to the satisfaction of the Landlord and to replace or renew or rebuild whenever necessary the leased subjects and all additions thereto….. in at least as good condition as they are accepted by the Tenant all to the satisfaction of the Landlord and that regardless of the age or state of the dilapidation…”

The court came to the conclusion that the natural meaning of the clause was clear and, if the premises were not in good and substantial repair at the beginning of the lease, the tenant was required to repair them in such a way as to achieve that standard. The court took the view that the obligation “to repair” of itself was indicative of that but, if there were any doubt, previous cases support the argument that an obligation to keep property in good and substantial repair carries with it an obligation to put them in that condition[1].

In coming to that conclusion the court noted:

 “the repeated references to “the satisfaction of the landlord” not only supports the above construction and confirms that “good and substantial repair” is to be assessed by reference to the landlord’s interest in the subjects being maintained to and being delivered up in at least tenantable standard.  Further, the phrase “regardless of the age or state of dilapidation of the buildings” confirms that the tenant is not to be excused of its obligation to repair, maintain and renew etc to at least “good and substantial repair” standard by reason of them being below that standard at the commencement of the lease or, indeed, them falling below that standard during it.  The absence of a schedule or other record of condition provides further cogent support for that construction.”

Payment of sum in lieu of repairs
A further clause made provision to the effect that, at the expiry/termination of the lease, the tenant was required to carry out repairs and surrender the premises to the landlord in a state complying with the repairing obligation. However, the clause also included the following proviso:

“Provided Always that if the Landlord shall so desire at the expiry or sooner termination of the foregoing Lease they may call upon the Tenant, by notice in writing (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… in accordance with the obligations and conditions on the part of the Tenant herein contained in lieu of requiring the Tenant himself to carry out the work.”

The Inner House took the view that the only natural and ordinary meaning which could be given to the clause was that it was a payment clause (and not a damages clause) meaning that the sum due by the tenant did not depend on loss suffered by the landlord. Consequently, the fact that the cost of carrying out the repairs may have been disproportionately more than any increase in capital value of the premises achieved as a result was irrelevant. As such, the Inner House determined that there was no potential for interpreting the clause so as to mean that payment for the cost of the works was dependent on the landlord’s intention to carry out the works.

In coming to its conclusion, the Inner House contrasted the wording used in this case with that in Grove Investments Ltd v Cape Building Products Ltd[2] on which Lord Tyre had relied when reaching his decision in the Outer House.

The provisions in this case contained a procedure (not included in the lease in Grove) under which the Landlord made an election and served a notice on the tenant requiring the tenant to make the payment in lieu of carrying out the repairs which the court found to be significant in suggesting that the landlord’s right was to a contractual payment rather than a payment of damages.

Also, the wording used in Grove made reference to the landlord and tenant reaching a settlement based on the value of a schedule of dilapidations rather than making reference to the cost of making the repairs which the court interpreted as being analogous to a damages clause.

Ultimately the differentiating factor was that the wording in this case was interpreted as including a landlord’s right to demand a contractual payment unrelated to loss whereas the wording in Grove was not.

Some general principles
The Inner House stated:

“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”.

 And:

“it is not legitimate to re‑write parties’ agreement because it was unwise of one party to gamble on future outcomes;  the question is not whether a reasonable tenant would have entered into the obligation”

 Further:

“it is important to note that Grove did not lay down any general rule to the effect that the landlord in a commercial lease is, at termination, if repairs are outstanding only entitled to be compensated for capital loss actually suffered.”

 The full judgement is available from Scottish Courts here.

__________________________________

[1] Albeit it was noted that a different conclusion may be appropriate where no obligation to renew or replace or rebuild as necessary is included.

[2][2014] CSIH 43