Grove Investments Limited V. Cape Building Products Limited
| Jurisdiction | Scotland |
| Judge | Lord Eassie,Lord Drummond Young,Lord Wheatley |
| Neutral Citation | [2014] CSIH 43 |
| Published date | 13 May 2014 |
| Date | 13 May 2014 |
| Court | Court of Session |
| Docket Number | XA73/13 |
| EXTRA DIVISION, INNER HOUSE, COURT OF SESSION | |
| [2014] CSIH 43 | |
| Lord Eassie Lord Drummond Young Lord Wheatley | XA73/13 OPINION OF THE COURT delivered by LORD DRUMMOND YOUNG in the cause GROVE INVESTMENTS LIMITED Pursuers and Respondents; against CAPE BUILDING PRODUCTS LIMITED Defenders and Appellants: _______________ |
Act (Appellants): Sandison, QC; Thomson; Brodies LLP
Alt (Respondents): Mure, QC; McMillan, Solicitor Advocate; Burness Paull
13 May 2014
[1] The parties are in dispute as to the construction of the dilapidations provisions that apply on the termination of a commercial lease. By a lease originally concluded in August 1986 and subsequently varied in certain respects, the appellants leased a unit on Germiston Industrial Estate, Glasgow, from the Scottish Development Agency. Ownership of the property and the landlord's interest under the lease were subsequently transferred to the respondents. The term of the lease expired on 15 May 2011. By then a number of defects and wants of repair or maintenance had developed in the premises. Surveyors acting for the landlords prepared a schedule of dilapidations in October 2007. This was served on the tenants on 19 September 2008 with a notice requiring them to carry out the works detailed in the schedule of dilapidations. The work so specified had not been performed by the tenants prior to the expiry of the lease in May 2011, and the landlords aver that that amounted to a breach of contract by the tenants. On that basis they claim damages amounting to £10,229,912. That is the figure brought out in the schedule of dilapidations as the total cost of remedying the defects that are said to exist in the premises.
[2] The obligation to make good dilapidations on the termination of the lease is found in article Twelfth, which provides as follows:
"The tenants bind themselves to flit and remove from the premises at the expiry or sooner termination of this lease..., to repair any damage done by the removal of fittings belonging to them and to pay to the landlords the total value of the Schedule of Dilapidations prepared by the landlords in respect of the tenants' obligations under Articles Fifth and Sixth hereof declaring that the landlords shall be free to expend all moneys recovered as dilapidations as they think fit and the tenants may, with the prior written agreement of the landlords, elect to carry out the whole or any part of the said Schedule of Dilapidations but that provided such work is completed to the landlords' reasonable satisfaction".
Article Twelfth makes reference to articles Fifth and Sixth of the lease. Article Fifth concerns alterations and additions made by the tenants, which are to be removed on the expiry of the lease and the premises made good by the tenants. Article Sixth deals with the tenants' obligation in respect of repair and maintenance. So far as material it provides as follows:
"... the tenants bind themselves to accept the premises... as in good and habitable condition and repair and to keep and maintain the same in like good and habitable condition and repair during the currency of this lease and to leave them in good and habitable condition and repair at the expiry or sooner termination thereof all to the sight and satisfaction of the landlords".
That obligation is then specified in greater detail, and thereafter the lease continues:
"Declaring further that in the event of the tenants (sic) failing to execute promptly any repairs and renewals to the premises which the landlords shall reasonably consider necessary or failing to observe or to perform any of the other obligations hereinbefore described and referred to in this Article the landlords shall be entitled, but shall not be bound, to execute or have executed the same as the case may be and the tenants shall be bound on demand by the landlords to repay to the landlords the amount or amounts disbursed or expended by the landlords in consequence of the same.... Further declaring that on expiry or earlier termination of this lease the landlords may require the tenants to make a financial settlement with the landlords in lieu of their obligations under this Article which the landlords consider to be outstanding at the date of expiry or earlier termination".
[3] The landlords' argument is that under article Twelfth of the lease the tenants are obliged to make payment of a sum representing the total value brought out in the schedule of dilapidations, subject only to any challenge by the tenants as to the proper ascertainment of that value. They have a further argument based on reparation for breach of the tenants' obligation to keep the premises in good repair, but that is not relevant for the purposes of the present opinion. On the first of these arguments, the critical averments by the landlords are as follows:
"[P]roperly construed Clause TWELFTH is a payment clause which binds the [tenants] on the expiry of the lease to pay to the [landlords] the value of a schedule of dilapidations duly prepared in accordance with the terms of the lease. The clause does not have the effect so as to oblige the [tenants] to make payment to the [landlords] of whatever sum happens to be a total value of the schedule of dilapidations produced by the [landlords]. Rather, the clause obliges the [tenants] to pay the total value of a schedule of dilapidations duly prepared in accordance with the terms of the lease. The [tenants] would be entitled to challenge that total value if they believe that it had not been so duly prepared. Clause TWELFTH reflects the parties' agreement that a duly prepared schedule of dilapidations based on the 'cost of repairs' measure of loss would be used to calculate the monetary value of compensation for damages caused by the [tenants'] failure to comply with the repairing and maintenance obligations under the lease. It does not matter whether the 'cost of repairs' measure of loss accurately reflects the [landlords'] true loss or would be disproportionate. There is nothing unusual about agreeing such a method of calculation. Clause TWELFTH provides for payment of liquidated damages by the defenders on the expiry of the lease. It is not a penalty. It does not amount to the payment of money as stipulated in terrorem of the [tenants], nor is it extravagant and unconscionable in amount by comparison with the greatest loss that could conceivably be proved to have been suffered by the [landlords] in consequence of the [tenants'] breach. On the contrary, the total value of a schedule of dilapidations duly prepared in accordance with the tenant's obligations under a lease is a genuine covenanted pre-estimate of damage, and is an appropriate and not uncommon method of fixing the monetary recompense to flow from a tenant's failure to comply with its repairing and maintenance obligations under a lease.... With reference to the [tenants'] averments anent construing the provisions of clause TWELFTH as reflecting and reinforcing the common law, to construe the clause as merely reflecting the common law would render much of the wording otiose".
[4] The tenants, by contrast, submit that on its proper construction article Twelfth meant that the tenants were only obliged to make payment to the landlords of the loss actually suffered by them in consequence of the tenants' failure to implement their repair and maintenance obligations under article Sixth and their obligation to make good the removal of any alterations and additions under article Fifth. To construe the clause in the manner contended for by the landlords might result in a recovery that bore no relation to any loss in fact suffered by the landlords as a result of the failure of the tenants to comply with their repairing and redding up obligations under the lease. Consequently the tenants were not obliged to make payment to the landlords of whatever sum happened to be the total of the various cost estimates contained in the schedule of dilapidations produced on behalf of the landlords. Instead, the clause was intended to reflect and reinforce the common law, under which the landlords would be entitled to the actual loss sustained by them, which might be calculated using a number of different methods. The critical averments for the tenants are as follows:
"[P]roperly construed, the passage within clause 12 of the lease condescended on by the [landlords] does not have effect so as to oblige the [tenants] to make payment to the [landlords] of whatever sum happens to be the total of the various cost estimates contained in the Schedule of Dilapidations produced by or on behalf of the [landlords]. A total of the various cost estimates contained in a schedule of dilapidations might or might not represent the true loss actually suffered by a landlord as a result of a breach of repairing obligations by a tenant. That would have been known to and in the contemplation of parties entering into a lease such as the Lease. Such parties would not sensibly have agreed that, come what may, the [landlords] would be entitled to payment of the total of the various cost estimates contained in the Schedule of Dilapidations. Such a construction would not give to the lease the business common sense which the parties must be taken to have intended that it should have. Rather, on a proper construction of the Lease, and that part of Clause 12 founded on by the [landlords], provision was simply made to reflect and reinforce the fact that, on the basis of the law as it stood at the date of execution of the lease, the landlord... would probably not be entitled, at the expiry or earlier termination of the Lease, to insist upon specific implement of any outstanding repairing obligations and that, instead, the appropriate remedy would be a claim for damages. Moreover, on a proper construction of the relevant contractual provisions, the landlord... would be entitled to seek payment of the total of the various cost estimates...
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