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Dilapidations And Contract Terms: The Goalposts Moved (Back)

Dilapidations And Contract Terms: The Goalposts Moved (Back)

Today’s Inner House decision in @SIPP Pension Trustees v Insight Travel Services Limited has realigned the law in Scotland on contractual interpretation, particularly in dilapidations disputes relating to commercial leases. 

Power is given back to the expert drafters and enforcers, to draft and enforce for the gain of their client. 

This is because simply applying the wording of a lease clause is back with increasing force. This is in line with the recent English UK Supreme Court case of Arnold v Britton

In a decision of the 3-judge appeal court in Edinburgh today, the goalposts appear to have been “moved back” to where they were before the decision of Grove –v- Cape had taken us down some interesting, if troubling, contractual paths.

Dilapidations and payment clause

With dilapidations cases ambiguity was being said to occur with how to interpret “payment clauses”.  

At the end of the lease the landlord can sue for payment of the cost of carrying out repairs to put the property back into the condition it was supposed to be in under the lease. Such a case could be met with various defences from tenants, including that the cost of repairs did not represent the landlord’s true loss. To counter this, landlords may seek to add another weapon to their armoury – a payment clause.  If that works, a landlord was entitled under the contract to payment of the cost of repairs (rather than having a claim in damages).  The tenant would not have the defences open to it that it would otherwise have.  

Following Grove and subsequent cases the courts appeared to be saying that such payment clauses were not likely to be enforceable.  

However the Inner House has now put any such perception right and confirmed that Grove was peculiar to its own facts, stating:

“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”.

Goalposts back – courts will not get in the way if clearly drafted

Whilst these cases deal with the enforcement of “payment” clauses in commercial leases relating to repairing clauses in Scotland, the comments have much wider application: the case affects almost all commercial contracts in Scotland. 

In addition to some interesting comments on how to interpret aspects of the repairing clause, the case has at least two important points to be taken from it: 

  • If you give good advice and draft a clause well in a commercial lease contract, as a landlord you can find that the tenant is liable for the cost of the works whether or not they are going to be done; and 
  • The court moved contract law in Scotland away from the idea that the courts may well not simply enforce the contract according to its terms.  So, if your contract says X, you can, once again, reasonably expect that to be enforced without any search for ‘drafting infelicities’ to allow the court then to apply ‘commercial common sense’ instead. 

What does this mean in practice?

  • Landlords can now expect to be able to enforce these clauses.  For landlords this can mean that they may be receiving large payments without ever having to contemplate undertaking the works.  For tenants, they will want to be careful about what they are signing up to, and be clear of the consequences.  
  • Taking expert advice at the point of drafting a commercial lease, and also enforcing it, really is critical. There can be significant amounts of money at stake, and the drafting and enforcement really matter in financial terms. Landlords and tenants can maximise their position by doing this (as well as avoiding expensive mistakes). At the time of entering into a lease it may not be obvious, but the amounts of money at stake can really matter to a business at lease end. 
  • Working with people who really know the area, and know what they are doing when it comes to drafting and enforcement can make the difference.  This involves the use of experienced surveyors and lawyers. The court was clear that there is very much a place for “hard bargaining”, and they should not be construing contracts on the basis that one side will not have managed to strike a really tough bargain.  So, a green light for some tough bargaining which will be enforced by the courts. 

Specifically for landlords: 

This is good news for landlords.  It means that landlords can (depending on the wording of their lease) rely on payment clauses – meaning the tenant has to pay up, and they won’t have arguments open to them to limit the landlord’s claim to losses actually incurred or for works actually done.  

And for tenants: 

Tenants may have greater problems defending large dilapidations claims, as they may not be able to argue against the notional ‘cost of works’ as the correct way of measuring the claim.  However, that does not mean that there are not ways to limit a landlord’s claim.

Alan McMillan
Partner

LChalmers