Commercial property - dilapidations at termination of a lease

Commercial property - dilapidations at termination of a lease

Published:

Author: Graham Reid

Applies to: Scotland

The extent to which the tenant of a commercial property requires to maintain and repair the premises will invariably be regulated by the terms of the written lease.

When the lease expires the landlord will often pursue a claim for damages against the tenant based on the cost of repairs that the landlord says would not have existed had the tenant complied with their contractual obligations.

During the last year, there have been three notable cases in the Scottish courts dealing with such situations. The most recent of these is Mapeley Acquisition Co (3) Limited (In Receivership) v. City of Edinburgh Council [2015] CSOH 29. The landlords were claiming damages of approximately £8m.

The legal debate involved two principal issues:

  1. Whether, on a proper interpretation of the lease, 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 intend to carry out that work; and
  2. Whether the tenant was obliged to replace all items of plant and equipment which were on the premises at the date of entry, whatever the condition of those items; or whether the tenant's obligation was restricted to replacing only such items that were missing, broken, worn, damaged or destroyed.

The judge acknowledged that certain aspects of the relevant wording in the lease could be interpreted in more than one way. In finding both questions in favour of the tenant, the judge relied on the following principles:

  • Where a contractual provision is capable of more than one meaning, the court should adopt that which best accords with commercial common sense
  • Since a contract is a co-operative enterprise entered into by the parties for their mutual benefit, it should normally be interpreted in such a way that the benefits that may reasonably be expected from the contract accrue to both parties, and so that the results are not objectively excessive or disproportionate judged by the expectations of reasonable parties in the particular contractual context
  • There should be no arbitrary or unpredictable burdens, impositions or benefits
  • If a construction of a contract achieves a result that is radically different from what would be expected under the common law (ie the result being in accordance with commercial common sense) then that is a factor that may in some circumstances indicate that the interpretation used is commercially unreasonable

In taking this approach, the judge followed the principals laid down and adopted in the two earlier cases Grove Investments Limited v. Cape Building Products Limited [2014] CSIH43, and @SIPP (Pension Trustees) Limited v. Insight Travel Services Limited [2014] CSOH137.

Conclusion

While each case will turn on its own particular facts and circumstances, and in particular on the wording used in the lease, it is clear that the Scottish courts will generally take the approach that unreasonable or disproportionate 'windfalls' are in general not to be awarded to landlords.

For further advice on property or other commercial contract disputes in Scotland, please contact Graham Reid who is a commercial litigation and dispute resolution partner in our Edinburgh office.

Disclaimer

This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.