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Cite as: 2004 SCLR 899, [2004] ScotCS 104

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West Castle Properties v. Scottish Ministers [2004] ScotCS 104 (28 April 2004)

OUTER HOUSE, COURT OF SESSION

OPINION OF LORD MACKAY OF DRUMADOON

in the cause

WEST CASTLE PROPERTIES LIMITED, a company incorporated under the Companies Acts (Registered No. SC147942) having a place of business at 61 North Castle Street, Edinburgh

EH2 3LJ

Pursuers;

against

THE SCOTTISH MINISTERS, Office of the Solicitors to the Scottish Executive, Victoria Quay, Leith, Edinburgh

Defenders:

________________

Pursuers: Dean of Faculty (C M Campbell, QC), Webster; Shepherd & Wedderburn, W.S.

Defenders: Cullen, QC, Sheldon; R M Henderson, Solicitor to the Scottish Executive

28 April 2004

[1] The pursuers are the proprietors of the interests of the landlords under a Lease entered into between BSC Pension Fund Trustee Limited and the Secretary of State for the Environment on 27 October 1980 and 10 November 1982 ('the Lease'). The defenders, as the statutory successors to the Secretary of State for the Environment, in respect of his interests under the Lease, became the tenants under the Lease. The subjects of the Lease were premises known as St Margaret's House, London Road, Edinburgh ('the premises'). The period of the Lease was from 24 October 1977 until 28 November 2002. The premises were constructed shortly before the original tenant took entry in terms the Lease. The defenders and their statutory predecessor have been the only tenants of the premises.

[2] The Lease contains the following clauses:

"FOURTH

The Tenant HEREBY ACCEPTS by his execution hereof, the premises and the whole parts and pertinents thereof including without prejudice to that generality the whole electrical and heating systems and lifts, the roofs, floors, walls, drains, rhones, drain-pipes, water, gas, electric and all other supply pipes, waste pipes, windows, window glass, car parking area and car park spaces and surrounding ground, and the whole Landlords fittings and fixtures both internal and external as in good and tenantable condition and repair and BINDS HIMSELF at his sole expense during the currency of this Lease, to keep wind and water tight, and well and substantially to repair, maintain, renew, restore, cleanse and keep in the like good tenantable condition and repair the whole premises and the said parts and pertinents thereof and the said fittings and fixtures (including without prejudice to that generality, all unbuilt on and amenity areas); AND FURTHER the Tenant HEREBY UNDERTAKES that he will jointly (and that according to the respective rateable values) with the proprietors or tenants of the adjoining subjects lying to the East, uphold, maintain, repair and renew the access road shown hatched in blue on the Plan (which Plan forms the Second Schedule hereto) and the lighting thereof, drains, sewers, main gas, water electricity and other service cables and pipes and all others common to or used in common by the Tenant and the said other proprietors or tenants and in the event of the Landlords instructing any of such repairs or others, to free and relieve the Landlords of the share of any expense incurred by them in so doing attributable to the premises, DECLARING HOWEVER (Primo) that it is specifically agreed that the Landlords shall at their own expense replace, repair and make good or re-instate all damage, defects, omissions and want or repair which shall be due to faulty workmanship or the use of faulty materials in the construction and decoration of the building (specifically excluding any works or any description carried out by the Tenant, but including any partitioning or electrical or other works of fitting out the premises carried out by the Landlords on behalf of and on the instructions of the Tenant) as may appear during the period of twelve months occurring after the said date of entry, and (Secundo) in the event of any obligation binding on the Tenant under or by virtue of this Clause remaining unimplemented at the expiry or earlier termination of this Lease the Tenant shall, in the option of the Landlords, either implement such obligation or pay to the Landlords a sum equal to the cost of implementing the same; Provided always that this clause shall not apply if the implementation of such obligation would be unnecessary for the purposes of reletting the premises at the full rent which would have been obtainable if said obligation has been implemented.

FIFTH

SEVENTH

Without prejudice to any of the foregoing generalities the

Tenant hereby UNDERTAKES in every fourth year and in the last three months of said term to paint ....(the premises).... DECLARING HOWEVER that for as long as the premises remain in the occupation of the Crown the provisions of this Clause in so far as they impose upon the Tenant an obligation to paint every fourth year and in the last year of this Lease, shall not apply, but the Tenant shall be bound to keep all said internal and external parts of the premises in good condition and in good decorative order to the reasonable satisfaction of the Landlords throughout the term of this Lease and in the last year of this Lease (however determined) shall be bound to paint the same in the manner above described.

....

The Tenant shall keep the premises including the mechanical and electrical engineering services constantly insured against fire, explosion, storm, lightning, tempest, flood, thunderbolt, riot, civil commotion, labour disturbances, aircraft, or objects falling therefrom, malicious damage, bursting or overflowing or (sic) waterpipes, tanks or apparatus, earthquake, impact or inevitable accident and all other risks as shall from time to time be reasonably required by the Landlords at their full reinstatement value together with professional fees thereon (in accordance with the respective professional scales of charges in force from time to time) and for three years rent abortively incurred with an established Insurance Office in the name of the Landlords and shall do no act or permit any default whereby such insurance may be void or voidable and in the event of the destruction or partial destruction of or damage to the said premises including the mechanical and electrical engineering services the tenant shall, in supplement to his obligations under Clause Fourth hereof, rebuild, renew, reinstate and repair the said premises and the mechanical and electrical engineering services so far as destroyed and make good the damage thereby occasioned as soon as may be reasonably practical at his own expense and any deficiency between the cost of such repairing and making good and the sum recovered from the Insurance Office shall be met by the tenant and the rent payable hereunder shall continue to be so payable provided that whilst the Tenant is a Government Department or Agency the requirement to insure as set out in this Clause (but not the obligation to reinstate or the continuance of rent) shall be inoperative it being declared that this Lease shall continue in full force and effect notwithstanding damage to or destruction of the premises.

....

NINETEENTH

Removal of goods at end of Lease

The Tenant shall at the expiry or earlier termination of this Lease flit and remove himself, his sub-tenants and any other person deriving occupation from him and his and their goods, gear and effects furth of and from the premises without warning or process of law to that effect and shall be responsible for the cost of making good all damage to the premises consequent upon the removal and also (subject to the terms of Clause FOURTH hereof) for surrendering up the premises in a good and substantial repair and condition, and for restoring the premises to the condition they were in at the commencement of the Lease before any permitted additions, improvements or alterations were made thereto (if any) if required so to do by the Landlords and all at his own expense."

[3] By letter dated 7 May 2002, the defenders gave notice to the pursuers that they intended to vacate the premises on 28 November 2002. Subsequently, on 31 May 2002, the pursuers gave written notice to the defenders, in terms of Clause NINETEENTH of the Lease, to remove from the premises and to surrender the premises in good and substantial repair and condition, in accordance with the terms of the Lease.

[4] By letter dated 12 July 2002, solicitors acting for the pursuers intimated to the defenders a draft interim schedule of dilapidations relating to the premises. The defenders vacated the premises by 28 November 2002. On 29 November 2002 the pursuers' solicitors intimated to the defenders a draft final schedule of dilapidations (No.6/4 of Process) and, in terms of Clause EIGHTH of the Lease, gave notice to the defenders of the obligations they claimed were incumbent upon the defenders in respect of defects enumerated in that draft final schedule of dilapidations. The provisions of Clause EIGHTH of the Lease permit the landlords to execute any acts of maintenance or repair that are incumbent upon the tenant, pursuant to other provisions of the lease, and to recover the costs involved from the tenant.

[5] In the present action the pursuers conclude for payment of £3,917.709.10, with interest thereon at the rate of 8% per annum from 28 November 2002 until payment. In their pleadings the pursuers contend that the defenders failed to comply with their obligations in terms of Clauses FOURTH, FIFTH and NINETEENTH of the Lease. They aver that the cost to the pursuers of carrying out the works that are required to remedy the defenders' failure to comply with their obligations under the Lease will amount to £4,518,475.80. On 5 December 2002 the defenders paid the pursuers £650,000. The balance due to the pursuers is the sum concluded for. There is also a counterclaim to the action, in which the defenders seek recovery of said payment of £650,000. The counterclaim proceeds on a variety of alternative bases. For the purposes of this Opinion, it is unnecessary that I say anything further about the counterclaim.

[6] On the joint motion of the parties I allowed a proof on certain preliminary issues. When that proof was allowed, it was agreed that parties would adjust a set of questions relating to the correct construction of Clauses FOURTH and NINETEENTH. The original plan was that such questions would be the subject of agreement between the parties. In the event the parties were only able to reach agreement on the terms of one question, namely: "What is the proper construction of Clauses FOURTH and NINETEENTH of the Lease". Each party has, however, submitted a separate list of additional questions, which I have also answered.

[7] At the outset of the proof, a Joint Minute was lodged. This set out an agreed chronology of events. Helpfully, it also referred to a number of the productions, the contents of which were of some relevance to the questions placed before me. I was informed that having regard to the lodging of the Joint Minute, neither party intended to lead any evidence.

[8] Before the submissions got underway, however, the Dean of Faculty, who appeared on behalf of the pursuers, raised the possibility of his seeking leave to amend the conclusions of the summons to include a conclusion for declarator. He also suggested that I need only answer the one question whose terms had been the subject of agreement between the parties. After further discussion between the parties, however, it was agreed that the proof should proceed, as originally planned, on the basis that I would receive submissions in respect of all of the questions that had been placed before. Some of these submissions had been prepared in written form and were available to me at the start of the hearing. I also heard oral submissions from senior and junior counsel on behalf of both parties.

[9] At this stage, I should record that it was a matter of agreement before me that the provisions of Clause NINETEENTH added nothing to the obligations on the defenders that are to be found in Clause FOURTH. Likewise it was a matter of agreement that the detail of the provisions of Clause FIFTH was not relevant to the questions I was invited to consider.

[10] During his submissions the Dean of Faculty tendered a written formulation as to how Clause FOURTH should be construed. Subsequently, when I was being addressed by senior counsel for the defenders, he also submitted a written formulation as to the correct construction of Clause FOURTH.

[11] The written formulation, as to the correct construction of Clause FOURTH, placed before me by the Dean of Faculty, was in the following terms:-

"Under explanation that there is no obligation to alter the nature or character of the premises as leased in 1977, the defenders are obliged to keep and leave the premises in such condition that, if being re-let on the same terms as the 1977 lease (subject to an up-to-date full rental for premises of this character, locality and age as at the date of assessment of the rent), they are reasonably fit for the requirements of a reasonably-minded tenant taking under the hypothesised new lease".

The pursuers' formulation is, of course, subject to the qualification that the hypothetical reasonably-minded tenant would pay an up-to-date rent, determined in light of the character, locality and age of the premises, as at the date the rent fell to be assessed.

[12] The written formulation submitted by senior counsel for defenders was in the following terms:-

" 'Good tenantable condition and repair' means such condition that the premises could be let, on terms appropriate in view of the age, character and quality of the premises, to a reasonably-minded commercial tenant on the assumption that all of the needful and necessary repairs had been carried out by the time of the expiry of the lease."

I will return to the detail of those written formulations in due course.

[13] Before I turn to deal with the questions that the parties have posed, it is important to stress that I am being invited to answer those questions without my having heard any evidence. Under reference to certain of the productions in the case, I was given some indication as to the areas of dispute between the parties, in particular as to (i) the nature of the alleged defects in the premises, as at 28 November 2002, the date by which the defenders vacated the premises, and (ii) the extent to which the defenders are alleged to have been in breach of their obligations under the Lease, as at that date. Those productions contain, in summary form, the parties' respective contentions about the alleged defects in the premises, how the alleged defects might be remedied and the costs that would be involved in doing so. Certain of the entries to which I was referred, by way of example, relate to disputes as to whether, as at 28 November 2002, (i) areas of asphalt roof required to be removed and replaced, (ii) the lift installation require to be completely refurbished and (iii) the low temperature hot water heating system required to be replaced. In each instance, the pursuers contend that extensive works, involving replacement, were required, as at 28 November 2002, whilst the defenders contend that no such works were necessary.

[14] I have not, however, heard any evidence about the nature, extent and causes of the alleged defects or as to whether they arise by reason of any breach by the defenders of their obligations under the Lease. Nor do I have before me a report from an independent arbiter or reporter, as to the facts of the disputes between the parties. In those respects, I am in a different position from many of the judges to whose Judgments and Opinions I was referred, during the course of the submissions by counsel. Furthermore, I am not being asked to sustain or to repel any pleas-in-law at this stage in the action.

[15] The questions before me have been posed by the parties in the hope that my answers to those questions may assist the parties to negotiate an overall settlement of the dispute between them. From time to time, that is a procedure that is adopted in commercial causes. It is a procedure which, on occasion, assists in bringing about settlement. On other occasions, however, the procedure is less productive, not least of all because, in advance of a hearing taking place, it may be difficult to frame the most relevant questions for the Court to answer.

[16] During the course of the submissions I was referred to a number of authorities, which included:- Proudfoot v Hart [1890] 25 QBD 42, Davidson v Logan 1908 SC 350, In re Corporation of London v Great Western and Metropolitan Railways [1910] 2 Ch. 315, Lurcott v Wakely & Wheeler [1911] 1 KB 905, Anstruther-Gough-Calthorpe v McOscar [1924] KB 716, House of Fraser Plc v Prudential Assurance Co Ltd 1992 SCLR 883 and 1993 SCLR 793, Crédit Suisse v Beegas Nominees Limited [1994] 4 All E R 803, Taylor Woodrow Property Company Limited v Strathclyde Regional Council, Outer House, Lord Penrose, 15 December 1995, Unreported, Helen Lowe v Quayle Munro Limited 1997 SC 346, McCall's Entertainments (Ayr) Limited v South Ayrshire Council (No 2) 1998 SLT 1421 and Scottish Mutual Assurance Plc v Jardine Public Relations Limited [1999] ECGS 43. Both parties also referred to various paragraphs from Dilapidations: The Modern Law and Practice (Second Edition) Dowding and Reynolds, in particular Paras. 9-06, 9-07, 9-08, 9-11, 9-12, 9-15 and 9-28.
[17] Having regard to the terms of Clauses FOURTH and the agreed history of events, as set out in the written pleadings and the Joint Minute, it appears that the points of particular assistance, in the construction of Clause FOURTH, which fall to be drawn from those authorities, include:

(i) the need to give full effect to every word in a covenant such as Clause FOURTH;

(ii) that the scope of the term "repair", in such a covenant, is not normally synonymous with that of a term such as "keep in good and tenantable condition and repair";

that a term such as "good and tenantable condition and repair", in such a covenant, has commonly been construed under reference to such condition as one would have expected to find the subjects of the lease had they been managed by a reasonably-minded owner;
that a term such as "good and tenantable condition and repair", in such a covenant, has also commonly been construed under reference to such condition, having regard to the age, character and locality of the subjects of the lease, as would make those subjects reasonably fit for occupation by a reasonably-minded tenant of the class who would be likely to take those subjects on a lease;
that when the condition, in which the subjects of a lease require to be maintained, is assessed by reference to the requirements, as of a hypothetical reasonably-minded tenant belonging to the class who would be likely to take the subjects of the lease, those requirements fall be determined as at the time the lease was entered into;
that the condition, in which the subjects of such a lease require to be maintained, in order to remain in "good and tenantable condition and repair", is not lowered by reason of any reduction in the expectations or requirements of the hypothetical reasonably-minded tenant, arising as a consequence of any deterioration, alteration or restriction in the class of tenants likely to take the subjects, that may have occurred since the commencement of the lease; and
that when considering whether the subjects of a lease are in fact in the condition in which they required to have been maintained, it is necessary to have regard to their age, character and locality.

[18] The terms of Clause FOURTH deal with a number of matters. In the first place, they record the tenant's acceptance that at the commencement of the Lease, the premises were "in good tenantable condition and repair". However those particular words falls to be construed, there was no suggestion, on the part of either party, that St Margaret's House did not fall within that description when the Lease commenced on 24 October 1977.

[19] Secondly, Clause FOURTH placed an obligation on the tenant to keep the premises wind and watertight. Again neither party has suggested that there is any dispute as to what that particular part of Clause FOURTH required of the defenders.

[20] Clause FOURTH then continues:-

"... and well and substantially to repair, maintain, renew, restore, cleanse and keep in the like good tenantable condition and repair the whole premises and the said parts and pertinents thereof and the said fittings and fixtures, (including without prejudice to that generality, all unbuilt on and amenity areas)."

[21] Those particular provisions include the words "repair" and "the like good tenantable condition and repair". As was acknowledged by Lindsay J. in Crédit Suisse v Beegas Nominees Ltd, at p. 821b, and by Lord Penrose in Taylor Woodrow Property Co. Ltd v Strathclyde Regional Council, at p. 22, the courts have consistently recognised that the extent of an obligation to keep premises in "good and substantial repair" or in "good tenantable condition and repair" may be wider than that of the obligation to repair. That was not disputed by counsel for the defenders. Where the dispute between the parties lies is in relation to the full scope of the obligation to keep the premises in "the like good and tenantable condition and repair". To that extent, that there was no dispute that the premises had been in "good tenantable condition and repair" at the outset of the lease, the introduction of the word 'like' adds nothing to the obligation that was on the tenant at the commencement of the lease.

[22] It was stressed on behalf of the pursuers that it was not being contended that the provisions of Clause FOURTH placed any obligation on the defenders to alter the nature or quality of the premises. Counsel for the pursuers also stressed that it was not being argued that there had been any obligation on the defenders to return the premises to the pursuers in "new" or "as new" condition. The pursuers also acknowledged that it fell on them to meet the costs of any avoidable or unavoidable betterment.

[23] It was submitted on behalf of the pursuers, however, that Clause FOURTH had placed an obligation on the defenders to leave the premises, at the end of the 25 year period of the Lease, in a condition that would make the premises reasonably fit for the requirements of a reasonably-minded tenant taking the premises on the same conditions, including a 25 year term, as the defenders' statutory predecessor had done, when he had leased the premises back in 1977 (see Para. 9.06 of Dowding & Reynolds). Looked at in the most general of terms, the case for the pursuers is that the premises have been allowed to deteriorate to such an extent that they were not, as at 28 November 2002, in "good and tenantable condition and repair" and suitable for a new lease on the same terms that had been agreed in 1977. The pursuers contend that, throughout duration of the Lease, the premises should have been maintained in a condition that made them suitable for re-letting as office premises on such a basis. The pursuers also contend that the defenders' predecessor, the original tenant, agreed to hand back the premises in such a condition.

[24] It was submitted that the pursuers' approach to the construction of Clause FOURTH constituted an objective standard, which could be used for identifying and assessing whether the premises had been restored to the pursuers in the condition required by the Lease. Whether the premises could now be re-let as office premises, even if they were restored to such a condition, was a separate factual issue, with which the Court was not concerned.

[25] In seeking to focus the practical implications of the difference between the parties, as to the correct construction of Clause FOURTH, I raised with the Dean of Faculty the hypothetical situation in which a component part of the premises, such as a lift or a boiler, had been in a condition, as at the date of termination of the Lease, in which it did not require repair and would have remained usable for at least a further 5 years, whereas at the commencement of the Lease the same part would have had a longer life span of say 10, 15 or 20 years. The Dean of Faculty acknowledged that example illustrated the difference between the respective approaches of the parties to the construction of Clause FOURTH. The pursuers contend that, in such circumstances, the condition of the lift or boiler would place the defenders in breach of Clause FOURTH. The defenders argue that it would not. Founding in particular on the decision of Eve J. in In re London Corporation v Westminster Corporation, the Dean of Faculty submitted that the fact that the premises may have remained useable, by a commercial tenant, as at the date of termination of the Lease in 2002, did not by itself mean that the defenders had fulfilled all of their obligations under the Lease.

[26] Criticising the defenders' approach to the construction of Clause FOURTH, the Dean posed the question of how one could possibly determine what required to be done by the tenants, by reference to a test as to whether the premises could be re-let to a commercial tenant, when none of the terms of any subsequent lease had been pre-determined. He argued that the focus should not be on the identity of any subsequent tenant or on what the actual terms of any subsequent lease might be. Such an approach to the construction of Clause FOURTH would rob that clause of any real content. On the contrary, the focus should be on the requirements of the reasonably-minded tenant, viewed as at the commencement of the Lease in 1977.

[27] The Dean of Faculty founded on the proviso at the end of Clause FOURTH as supporting the existence of the obligations on the defenders of the nature he had construed within the earlier provisions of Clause FOURTH. He relied on Clause SEVENTH of the Lease as providing further indication that the Lease had placed on the tenant the burdens of maintenance, renewal and rebuilding of the premises, with the overall intention of protecting the landlords' investment and income stream.

[28] During his submissions, the Dean of Faculty also stressed (i) that it was necessary to give content to the full obligations on the defenders, in terms of the Lease, (ii) that the nature of those obligations had been determined in 1977, but (iii) that what required to be done to fulfil those obligations might vary from time to time, on account of the condition of the premises. However he argued that meeting the terms of Clause FOURTH, as construed by the pursuers, was not impossible. The pursuers were not seeking to keep the premises in an identical position to that which they had been in 1977. On the other hand, the whole purpose of Clause FOURTH had been to transfer to the tenant the whole burden of the landlords' responsibilities for repairing and maintaining the premises. Such a purpose was entirely consistent with the landlords' desire to maintain the value of their investment and their income stream and to place upon the tenant the expense involved in doing so.

[29] In responding to those submissions, senior counsel for the defenders made clear that the defenders did not dispute that throughout the term of the Lease they had been under an obligation to carry out any "needful and necessary repairs" and that if such repairs had not been carried out by them, as at 28 November 2002, they were now liable to meet the costs of such repairs. It was accepted, on behalf of the defenders, that particular obligation had also required the defenders to replace and renew component parts of the premises, in order to keep the premises as a whole in the required condition. It was submitted, however, that the defenders' formulation was of assistance in determining the extent of the obligations on the defenders in terms of Clause FOURTH, not merely to repair the premises, but to "keep (the premises) in the like good tenantable condition and repair".

[30] Senior counsel for the defenders explained that words "needful and necessary" had been used by the arbitrator in Anstruther-Gough-Calthorpe v McOscar. That case was decided by the Court of Appeal following upon that court's earlier decision of Proudfoot v Hart. As counsel for both parties referred to these two authorities during the course of their submissions and I have found those authorities to have been of assistance in considering the questions place before me, it would be sensible to consider the terms of the covenants with which those cases were concerned and look briefly at how these covenants were construed by the members of the Court of Appeal.

[31] Proudfoot v Hart concerned the lease of a house for three years, in which the tenant had agreed that during the term of the lease he would "keep the premises in good tenantable repair, and so leave the same at the expiration thereof". The Judgment of Lord Esher, M.R. in Proudfoot v Hart, at pp. 52 -53, contains the following passage:-

".... but the age of the house is very material with respect to the obligation both to keep and to leave it in tenentable repair. It is obvious that the obligation is very different when the house is fifty years older than it was when the tenancy began. Lopes L.J. has drawn up a definition of the term 'tenantable repair' with which I entirely agree. It is this: '"Good tenantable repair" is such repair as, having regard to the age, character, and locality of the house, would make it reasonably fit for the occupation of a reasonably-minded tenant of the class who would be likely to take it." The age of the house must be taken into account because nobody could reasonably expect that a house 200 years old should be in the same condition of repair as a house lately built; the character of the house must be taken into account, because the same class of repairs as would be necessary to a palace would be wholly unnecessary to a cottage; and the locality of the house must be taken into account, because the state of repair necessary for a house in Grosvenor Square would be wholly different from the state of repair necessary for a house in Spitalfields. The house need not be put into the same condition as when the tenant took it; it need not be put into perfect repair; it need only be put into such a state of repair as renders it reasonably fit for the occupation of a reasonably-minded tenant of the class who would be likely to take it."

It is of importance to note the terms in which the last sentence of that passage is couched.

[32] The facts of Anstruther-Gough-Calthorpe v McOscar were slightly more complicated. A lease of three newly erected houses, made in 1825 for a term of 95 years, contained a covenant by the lessee in very wide terms, the effect of which was, put shortly, that the lessee would, during the term of the lease, well and sufficiently repair the premises with all manner of necessary reparations and would yield the premises up at the end of the term "in all things well and sufficiently repaired".

[33] 95 years later, disputes arose between the landlord and the tenants as to the condition of the premises at the end of the lease and as to how the damages payable by the tenants fell to be assessed. At the beginning of the term, the houses had been country houses. At the end of the term, the only tenants likely to have occupied the houses were tenants on short terms.

[34] The dispute between the parties went to arbitration. The arbitrator assessed damages at two alternative sums:

"(1) The higher sum in my award is my estimate of the cost of doing all needful and necessary acts well and sufficiently to repair, etc., the premises in the words of the covenant, which I took generally to mean the cost of putting the premises -

into such a condition as I should have expected to find them had they been managed by a reasonably minded owner, having full regard to the age of the buildings, the locality, the class of tenant likely to occupy them and the maintenance of the property in such a way that only an average amount of annual repair would be necessary in the future; or
in such state of repair as would satisfy the requirements of reasonably minded persons who would be prepared to take on lease the houses either singly or as a block upon similar repairing covenants to those contained in the expired lease and on such conditions as to rent as would presume the premises being put at the commencement of the term free of expense to the lessee as would render only an average amount of annual expenditure necessary during the term.

(2) The lower sum is my estimate of the cost of such repairs as would satisfy the literal requirements of reasonably minded tenants of the class now likely to occupy the premises who would not accept any repairing obligations, with such additions as would be necessary to avoid the receipt of notices from the local authorities......".

[35] The Court of Appeal held, unanimously, that second alternative was not the proper measure of liability and that the former tenants were liable for the cost of doing all necessary acts well and sufficiently to repair the premises and of putting them into a state of repair in which they would have been found if they had been managed by a reasonably minded owner. The arbitrator's first alternative met with the approval of all members of the Court (per Banks L.J. at p.728, Scrutton L.J. at p.731 and Atkin L.J. at p.734). It is particularly instructive to consider what was said by Atkin L.J at pp. 733 -734:

"For my own part I should be very reluctant to introduce into convenants in leases considerations of fitness for a particular purpose which cause much difficulty in contracts of a different kind. Unguided I should have thought that the original and proper sense of 'tenantable' was fit to be tenanted, that is, occupied, and that the word meant no more than, if it meant as much as, 'habitable'. But Proudfoot v Hart binds me to hold that in a three years' agreement it has reference to the reasonable requirements of a tenant of the class who would be likely to take it. Accepting that construction I have no doubt that the requirements of such a tenant are deemed to continue the same during the term, or if not, are to be estimated by the requirements of such a tenant as would be likely to take the premises at the commencement of the term.

Once one is extricated from the clutch of the hypothetical tenant I do not think there is much difficulty in construing the covenant in this case to 'well and sufficiently repair .... maintain .... paint, pave .... amend and keep' the premises 'in by and with all and all manner of needful and necessary reparations and amendments whatsoever, and .... so .... amended and kept .... yield up.' There is a very full discussion of what is meant by 'repair' in the judgments of Fletcher Moulton and Buckley L.J.J. in Lurcott v Wakely (1) with which I respectfully concur. Repair is not confined to houses; it applies to chattels, and it connotes the idea of making good damage so as to leave the subject so far as possible as though it had not been damaged. It involves renewal of subsidiary parts; it does not involve renewal of the whole. Time must be taken into account; an old article is not to be made new; but so far as repair can make good, or protect against the ravages of time and the elements, it must be undertaken. Speaking generally, I have not seen a better statement of the duties of a tenant under such a covenant as this than the statement in the present case by the arbitrator of the principles on which he proceeded in arriving at the high sum, which has been read by my Lord. It is true that he refers to the class of tenant likely to occupy them as being one of the matters a prudent owner would have regard to, but I gather from the whole report that he does not regard this consideration as involving a fluctuating standard. I would myself prefer to eliminate the possible tenant, and would be content with the arbitrator's earlier test when he is dealing with the pointing as being 'needful and necessary for the maintenance of the structure so that it may be expected to last for its normal life if properly kept in repair."

[36] It is interesting to note that in the judgments in Anstruther-Gough-Calthorpe, no mention made of In re London Corporation v Great Western and Metropolitan Railway, although that case does appear to have been referred to during the course of argument.

[37] Senior counsel for the defenders submitted that the fallacy of the pursuers' approach was that it made no real allowance for the age of the premises, in assessing what required to be done to fulfil the covenant to be found in Clause FOURTH. In his submission, it was appropriate to have regard to the age of the building, at the time the question was asked, when one considered what needed to be done to comply with the covenant. Such an approach found support in the passages from the Judgments of Lord Esher, M.R. and Atkin L.J, which I have just quoted, and in Paras. 9-06, 9-11 and 9-12 of Dowding & Reynolds.

[38] The written formulations, which the parties submitted to me, illustrate how both parties sought to make use, albeit to different effect, of what had been said in the Judgments in Proudfoot v Hart and Anstruther-Gough-Colthorpe v McOscar. The pursuers now seek to define or constitute the class, within which the hypothetical tenant requires to be found, by reference to the premises being let to that hypothetical tenant on the same terms (apart from rent) as the Lease in 1977. That is a narrower position than was originally adopted by them, in their Revised Note of Argument and Proposed Answers, which were lodged in the run up to the proof. That narrower position reflects and appears to be based on a passage in Para. 9-06 of Dowding & Reynolds, in which the authors suggest that when applying the test involving the reasonably-minded tenant of the class likely to occupy the premises, it must be assumed that the premises are being let on the same terms as the actual lease and at the going rate for similar premises of that age and class in the same area. The defenders, for their part, offered no suggestions as to how the class of tenants might be defined, beyond that of including commercial tenants "likely to take" the premises on a commercial lease.

[39] None of the authorities to which I have referred define the class of tenants in such a narrow way as the pursuers now seek to do, by limiting its membership to those commercial tenants prepared to take the premises on a lease of precisely the same terms and of precisely the same duration of the original lease. In my opinion, it is a question of fact how the class of reasonably-minded tenants, likely to have taken a particular set of premises at a particular time, is defined or constituted. In particular, looking back to 1977, which is the date on which the pursuers focus, it is a question of fact whether the members of the class at that time would fall to be limited to potential tenants, who would be interested in a 25 year lease of the premises. The class may have been limited to those prepared to take a 25 year lease. It may not have been. Likewise, it is a question of fact whether 25 years ago commercial tenants would have been likely to have leased the premises on the same, as opposed to similar, terms as those to be found in the Lease. Indeed, had I been persuaded that the pursuers' contentions as to how Clause FOURTH falls to be construed were entirely correct, it might have been a very interesting question of fact as to whether any other tenant would have been likely to have taken the premises on lease, in 1977, on the same terms as those of the Lease. Whilst that particular question may not require to be answered, posing it does illustrate how there is insufficient evidence before me to enable me to decide how the relevant class of reasonably minded tenants would have been constituted in 1977. Accordingly, there are a number of issues on which further evidence would be required, if the parties remain in dispute as to how the class of tenants, which would have been likely to take the premises in 1977, falls to be defined or should be deemed to have been constituted.

[40] The possible duration of any lease, on which a reasonably-minded tenant would have been likely to have taken the premises, is relevant to the next point of difference between the parties that emerged during the course of the debate. The pursuers contend that the condition into which the premises should have been restored, as at 28 November 2002, ought to have been such that any new tenants commencing a 25 year lease, on that date, would have faced virtually the same prospects of requiring to repair and maintain the premises, as the defenders' predecessor as tenant had faced when the Lease commenced in 1977. In other words, the programmes and timescale for repair, renovation, renewal and replacement of component parts and equipment, insofar as they could be foreseen, should be the same as those the defenders' predecessor had faced back in 1977. On that approach, the defenders would be liable to meet the costs of repairing and/or replacing component parts of the premises and equipment that were still functional, but which did not have the anticipated life spans that they had back in 1977. Putting it another way, the works, which the defenders has allegedly failed to carry out, are not restricted to repairs that were 'needful and necessary'. Those works include works that were required to restore the premises, as near as possible and for all practical purposes, into the condition they had been in back in 1977.

[41] The defenders, for their part, argued that their obligations under Clause FOURTH were met if they carried out all "needful and necessary repairs". Their principal obligation had been to keep the premises, throughout the duration of the lease, in "good tenantable condition and repair". In addition to their duty to repair the premises, they had been under the duty to renew and restore component parts of the premises, when necessary to fulfil that principal obligation.. That particular concession on the part of the defenders, which was in my opinion correctly made, means that it is unnecessary for me to deal with the question of the distinction between "ordinary" and "extraordinary" repairs that was discussed in cases such as House of Fraser plc v Prudential Assurance Co. Ltd.

[42] During the course of their submissions, counsel for the defenders placed reliance on what was said by the Lord Ordinary, Lord Ardwell, in Davidson v Logan, in a passage at p. 359 of the report. That case concerned an agricultural tenancy. During the proof before the Lord Ordinary, it was established that, according to the custom of the country and the understanding of the landlords and the tenants, the words 'tenantable condition' and 'repair' represented two different things, when used, on the one hand, in relation to the obligations on the landlord to an incoming tenant, and, on the other hand, in relation to the obligations of an outgoing tenant to the landlord or an incoming tenant, at the close of a lease. Bearing those factors in mind, I have not found that particular authority to be of assistance in the present case.

[43] As far as the other Scottish authorities to which I was referred are concerned, it is correct, as Lord Hamilton observed in McCalls Entertainments v South Ayrshire Council (No.20), at p.1427G, that the common law of England is not identical to the common law of Scotland in this field and that English authority should be used with caution. Nevertheless, none of the Scottish authorities placed before me have suggested that the passages in English authorities, which I have found to be of assistance, are not consistent with the law of Scotland.

[44] Having considered the various submissions, I neither accept nor reject in its entirety either of the parties written formulation as to the correct construction of Clause FOURTH. In my opinion, the pursuer's formulation seeks to impose too extensive an obligation on the defenders. On the other hand, the defenders' formulation does not appear to me to encompass all the duties that were incumbent on the tenants throughout the duration of the lease. For my part, I do not consider that it would be sensible for me to attempt to frame a third formulation, not least of all because any such formulation has to some extent, at least, to be drafted in cryptic terms. Against that background, I turn to deal with the questions that are before me.

Question 1. What is the proper construction of Clauses FOURTH and NINETEENTH of the Lease?
[45] The parties are agreed that this question is central to the dispute between them. They are also agreed that the provisions of Clause NINETEENTH add nothing to the obligations on the defenders that are to be found within the provisions of Clause FOURTH. Accordingly it is upon the provisions of Clause FOURTH, and in particular on the phrase "keep in the like good tenantable condition and repair", that I should focus.

[46] I have already quoted the written formulations submitted by the Dean of Faculty and senior counsel for the defenders as to how that phrase should be construed. As I have indicated, I do not consider that either written formulation provides a fully acceptable analysis of the obligations that Clause FOURTH placed on the defenders.

[47] It is, as I have made clear, a matter of agreement between the parties that the premises were in "good tenantable condition and repair" at the outset of the lease. In that respect, the factual position in the present case is different from that in McColls Entertainment v South Ayrshire Council (No.2), where an issue arose as to whether the tenants had been under an obligation to improve the subjects of the lease. Likewise, it is a matter of agreement in the present case that the defenders were under an obligation to keep the premises wind and watertight.

[48] Turning to the critical part of Clause FOURTH, namely that the defenders bound themselves, at their sole expense ".... during the currency of this Lease, to keep wind and water tight, and well and substantially to repair, maintain, renew, restore, cleanse and keep in the like good tenantable condition and repair the whole premises and the said parts, pertinents thereof and the said fittings and fixtures....", it is possible to identify a number of other points of agreement. They include that these particular provisions involved the defenders doing something more than merely "repairing" the premises.

[49] More importantly, it is also a matter of agreement that neither when maintaining the premises, during the course of the Lease, nor when vacating the premises at the termination of the Lease, were the defenders under an obligation to restore the premises to a physical condition identical to that the premises had been in at the commencement of the Lease or to an equivalent 'as new' condition. Such requirements were explicitly disavowed by both junior counsel for the pursuers and the Dean of Faculty, during the course of their submissions. Those concessions, which both counsel repeatedly stressed, can, in my opinion, be reconciled with their reliance on the Judgment of Eve J. in In re London Corporation v Great Western and Metropolitan Railway. In that case, the covenant on the lessees was in similar terms to those found in Clause FOURTH. That covenant covered iron girders supporting the roof and superstructure of the premises that had been let to the defendants. Some of those girders had become corroded and weakened. They remained in a condition that would have secured the absolute safety of the superstructure. Eve J. held, however, that the lessors were entitled to require the lessees to maintain the demised premises at a standard of strength and stability corresponding with that originally fixed and not merely in such a condition as would secure the absolute safety of the superstructure. Such a ruling is explained by there having been physical defects in the premises, which could be dealt with by repair or replacement of the component parts.

[50] Counsel for the pursuers also stressed that they were not contending that the defenders had been under any obligation to alter the nature and quality of the premises. They acknowledged that, throughout the Lease, the pursuers had been required to bear the cost of any avoidable or unavoidable betterment. In my opinion, those further concessions were properly made and define certain of the limits of the obligations that Clause FOURTH placed on the defenders.

[51] What then was the full extent of the obligations, which Clause FOURTH placed on the defenders in respect of the premises? In addressing that question, I have to bear in mind that those obligations came into existence at the date of commencement of the Lease. The obligations existed throughout the Lease. The Lease was concluded on the basis that the obligations would subsist throughout the Lease, not vary, nor develop, as the Lease ran its course, let alone crystallise on the expiry of the Lease. In my opinion, the obligations placed on the defenders, in terms of Clause FOURTH, fall to be construed as having required the defenders to carry out a variety of works, as the Lease ran its course. As at the date of commencement of the Lease, the precise nature of all of those works was obviously not foreseeable. What could have been foreseen, however, was that works would require to be carried out, when and insofar as they were necessary to ensure that the premises were maintained in the condition that Clause FOURTH required. In my opinion, very helpful guidance in identifying what that required condition was is to be found in the passages from the Judgments in Proudfoot v Hart and Anstruther-Gough-Calthorpe to which I have already referred.

[52] In my opinion, the provisions of Clause FOURTH required the defenders to carry out any works which a prudent owner of the premises would have carried out, in order to maintain the premises so that they could be expected to last for their normal life. In seeking to define the extent of the obligations on the defenders in terms of Clause FOURTH, some regard also requires to be had to the requirements of the class of tenants that would be likely to occupy the premises, with those requirements being determined as at the commencement of the term of the Lease. However, as the Judgments in Anstruther-Gough-Calthorpe ( per Banks L.J at p. 728, Scrutton L.J at p. 729 and Atkin L.J. at p. 734) make clear, those requirements, whatever they may be established to be, should not be looked at in isolation.
[53] The Judgments in Anstruther-Gough-Calthorpe support the view that what the provisions of Clause FOURTH required the defenders to carry out were such works of repair, renewal and replacement as fall within the description of "necessary and needful". Works that were "needful and necessary" clearly include those works that were required to keep the premises in the condition they would have been in, had they been maintained by a reasonably-minded owner. On any view they included making good any damage that the premises had suffered and protecting the premises against the ravages of time.

[54] In my opinion, however, the provisions of Clause FOURTH required the defenders to carry out works that went beyond the 'repair', strictly so called, of individual parts of the premises. The terms in which Clause Fourth is framed presuppose that a particular part of the premises, or a component part of the premises such as the lift or a boiler, may suffer from some defect, such as deterioration or malfunctioning, to the degree and extent that repair, alteration or renewal has become reasonably necessary. That may be so even although the part in question remains usable for some further period of time. Whether a particular part of the premises, if found to be in such a condition, requires to be repaired, altered or renewed, involves questions of fact and degree, to be determined having regard to the nature and extent of the defect and the costs involved.

[55] It is clear from the guidance to be gained from Proudfoot v Hart and subsequent authorities that maintaining the premises 'in good and tenantable condition and repair' did not require the premises to be kept in perfect repair or in as new a condition as they had been in at the commencement of the Lease. Whilst the premises became older, as the Lease ran its course, the passage of time did not alter the nature of the obligations on the tenants. Nevertheless, in fulfilling those obligations, the tenants were entitled to take account of the increasing age of the building. As Lord Esher M.R indicated in Proudfoot v Hart at p. 52, "'the age of the house is very material with respect to the obligation both to keep it and leave it in tenantable repair". Accordingly, in assessing whether or not the defenders had complied with their obligations, as at the expiry of the Lease, allowance can be made for the age of the premises and the age of their various component parts. Standing the fact that I have not heard any evidence about the premises, I cannot say what practical implications Lord Esher's observation may have in respect of the condition of the premises as at the expiry of the Lease.

[56] In my opinion, however, the provisions of Clause FOURTH did not require the defenders to restore the premises to an "as new" condition at the end of the Lease, by, for example, stripping out parts of the premises, such as roofs, windows, lifts, boilers and electrical equipment, which were perfectly serviceable and had periods of useful life left, merely to ensure that those component parts (once replaced) had, as at the expiry of the Lease, the same individual life expectancies as their predecessor parts had enjoyed at the commencement of the Lease.