Payment clauses – still a feature of Scottish dilapidations

Payment clauses have been a regular feature of dilapidations disputes in Scotland over the last decade or so. They are a useful tool in the armoury of a landlord at the end of a lease, and a thorn in the side of tenants. As we act for both, we need to be ready to deploy both sides of the argument!

Last week, there was a recent Court of Session case involving a high-value dilapidations claim for a property in Glasgow involving HFD as landlord and the Student Loans Company as the tenant. 

The clause provided that the landlord could require the tenant “to pay” a sum certified by the landlord’s surveyor for the cost of carrying out the work to put the property into the required condition.  

What happened in this case?

In this case, the dispute was about what was covered, or not, by the payment clause and whether related elements (such as loss of rent) were also covered by the payment clause. The lesson from this case is that it is important to carefully consider the extent and limitation of payment clauses. The lease contained a restriction preventing the payment clause from being used where there was significant redevelopment. The landlord, it would seem trying to get round that restriction, sought to say that they did not have to use the payment clause and could seek to claim for each individual breach; whereas the tenant said it provided the landlord with one aggregated claim. In the end, the court held that this particular lease provided one aggregated claim for the cost of works affecting the condition/repair of the premises, but that the related elements (such as loss of rent) could be sought separately from the payment clause.  

Why do payment clauses matter? 

Payment clauses are hugely important as they generally give the landlord the upper hand. Without a payment clause, a landlord has to prove its ‘loss’ and not just the cost of repairs. The tenant can run arguments such as: (i) the landlord has no intention of carrying out the repairs; (ii) that the repairs being suggested will be superseded by the landlord’s proposed works; (iii) that the landlord has suffered no loss as a result of reletting the building; or (iv) that the true measure of loss should be via a different method, such as the drop in the property value (if any).  

Unless there is specific wording in the lease (as there was in the recent case), a payment clause allows the landlord to recover the sums even if they have no intention of carrying out the works, or even if they knock the building down!

What should tenants and landlords do?

The important thing, as ever, is the exact wording of the lease. In the wording of the lease in this recent case the landlord’s surveyor was to ‘act reasonably’ in the certification. When that appears the surveyor’s assessment, conduct and duties should be scrutinised. There may be challenges that could be made to their assessment, their impartiality and the certification process that was undertaken. The exact works which fall under the clause may be open to debate. 

Each lease will be worded differently, and the subtle differences can be important. Being forewarned is being forearmed and landlords should be careful to ensure that their claim properly falls within the terms of the payment clause and that the certification has been carried out carefully and in accordance with the lease. Tenants should be taking early advice on how they might mitigate their risk and prepare themselves to challenge the landlord’s position.  

If you are a tenant or a landlord who requires assistance, contact our real estate litigation experts to discuss your circumstances. 

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