Commercial property - Dilapidations at termination of a lease

Commercial property - Dilapidations at termination of a lease


Author: Graham Reid

Damages recoverable from a tenant: the differences in England and Scotland

The English position

In England, when a tenant fails to keep a property in the appropriate state of repair, its landlord can recover damages. Damages are, in principle, limited by statute so that they cannot exceed the amount (if any) by which the value of the reversion is reduced by reason of the breach of the repairing covenant. So, where the reduction in value is lower than the cost of the repair works, the landlord's claim may be restricted to the lower amount.

There is no similar statutory provision in Scotland. In recent years there has been some discussion as to whether a similar approach should apply, particularly in the light of depressed commercial property values during the recession.

The Scottish position

In Scotland, the general rule is that the true value of loss should try to be ascertained and that a number of different approaches and measures of the loss will often be appropriate.

Earlier this year, in the case of Grove Investments Limited v Cape Building Products Limited [2014] CSIH 43, the Inner House of the Court of Session considered the effect of a clause in a lease that required the tenants 'to pay to the landlords the total value of the schedule of dilapidations prepared by the landlords'. The clause also stated that 'the landlord shall be free to expend all monies recovered as dilapidations as they think fit'.

The key issue was whether, after expiry of the lease, those provisions meant that the landlords were not required to either a) actually carry out the works before recovery of the monies or at least b) establish that they were going to carry out the works and that the costs were accurate and legally binding estimates, before being entitled to demand payment of the value reflected in the schedule.

In finding in favour of the tenants, the court made the following observations: -

  • as with all commercial contracts, the lease must be construed in the context in which it has been entered into.
  • where essential clauses can be interpreted to have two alternative meanings, the Court is entitled to prefer that which is consistent with business common sense
  • in the circumstances of the lease under consideration, the contractual right of the landlords was to recover damages but that these were limited to the actual loss sustained by the landlords
  • if the landlords had decided that the most economically advantageous course was to demolish the buildings or carry out substantial reconstruction or alterations, then the actual losses sustained by the breach of the tenants repairing obligations might be non existent (in the case of demolition) or substantially reduced (in the case of a reconstruction or alteration)
  • if the landlords were entitled to obtain damages based only on the estimated value of a Schedule of Dilapidations, the recovery would be arbitrary and disproportionate and not related to the loss sustained and thus contrary to commercial common sense

Those principles were largely followed in another recent decision: @SIPP (Pension Trustees) Limited v Insight Travel Services Limited [2014] CSOH 137.

In @SIPP, the court held that in the absence of clear and express wording in the lease to the contrary, an obligation on the tenant to maintain and repair premises does not impose an obligation to make any improvements and the tenant will not be required to execute what are known in Scotland as "extraordinary" repairs.

The future

In light of the above cases, it appears that commercial landlords in Scotland will be free to formulate claims for damages against former tenants in such manner as they consider appropriate.

Landlords be warned: if the claim is challenged, the courts will take the whole circumstances of the case into account, including the landlords' future intentions for the property and the specific wording of the lease. Any award made will reflect the court's assessment of the landlords' actual loss as opposed to any formulaic assessment. In order to have any possibility of pursuing a claim on any contrary basis, landlords should ensure that a very clear and unambiguous entitlement for damages is included in the lease.

For further advice on property or other commercial contract disputes in Scotland, please get in touch with Graham Reid in our Edinburgh office.

Email: [email protected]