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EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
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Lord Johnston
Lord Eassie
Lord Mackay of Drumadoon
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[2007] CSIH 35
XA103/06
OPINION OF THE COURT
delivered by LORD EASSIE
in the cause
LITTLE CUMBRAE ESTATE
LIMITED
Pursuers and Appellants;
against
ISLAND OF LITTLE CUMBRAE
LIMITED
Defenders and Respondents:
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Act: Keen, Q.C., McBrearty; Simpson & Marwick, W.S. (Pursuers and
Appellants)
Alt: Simpson; Mitchells Robertson, Glasgow (Defenders and
Respondents)
24 May 2007
[1] The pursuers
and appellants in this appeal from a decision of the Sheriff Principal of the
Sheriffdom of Glasgow and Strathkelvin are the landlords in a lease - "the
Lease" - dated 5 and 10 May 2002.
The defenders and respondents are the tenants under the Lease. The Lease granted to the defenders the
tenancy of the Island of Little Cumbrae for a period of five years from 12 January
2002. We were advised by counsel that the
superficial extent of the land let to the defenders was approximately
793 acres and that the buildings on the island included a mansion house,
five cottages, and a harbour and jetty.
The subjects of the let also included a motor vessel and a dumb barge
but their inclusion as corporeal moveables is not in any way material for the
purposes of this action.
[2] In the
Initial Writ the pursuers crave payment by the defenders of certain sums by way
of rent and the re-imbursement, in terms of the Lease, of certain insurance premia
expended by the pursuers as landlords.
The defenders answer that claim by maintaining that they are entitled to
retain the sums claimed in the Initial Writ by way of compensation, or set-off,
against money which they maintain is payable to them by the pursuers in respect
of certain expenditure which they - the tenants - have incurred in executing
repairs to buildings and harbour structures on the island for which, they
contend, the pursuers as landlords are liable to pay. The defenders also have a counterclaim for
the costs of those repairs and of repairs yet to be executed, exceeding the
amount of the pursuers' claim for rent and re-imbursement of the insurance
premia. The counterclaim also raises an issue
whether, in the past, the amounts of insurance premia reimbursed by the
defenders were overstated by the pursuers and repetition is sought of the undue
payments. However that matter was not
the subject of any decision in the proceedings so far, the action having been
processed as a commercial action in the sheriff court. The issue with which the proceedings
have hitherto been, and are now,
concerned is whether the pursuers, as landlords, are responsible for the costs
of executing the repairs in question.
[3] The repairs
are described only briefly in the pleadings.
They involve repairs to the roofs of buildings, the jetty, a sewer
outfall pipe, a storm wave break, a harbour marker post and mooring
points. However, the detail does not
matter. The significant point for
present purposes is that it is accepted that the repairs (executed or intended)
were consequent upon damage done by a storm in January 2005.
[4] The
acceptance on both sides that one is concerned with storm damage repairs leads
to the further joint acceptance that the damage in issue comes within the definition
of "Insured Risks" in Clause 1.2 of the Lease, which includes in that
category loss or damage from "... storm or tempest ...".
[5] Clause 5(1)
of the Lease contains provisions relating to insurance against the Insured
Risks. It is in these terms:
"The Landlord HEREBY UNDERTAKES to
insure and keep insured the Premises in the name of the Landlord with the
Tenant's interest endorsed thereon at all times during the Period of the Lease
(unless such insurance shall be vitiated by any act, neglect default or omission
of the Tenant) against the Insured Risks with the Insurers in the Reinstatement
Value thereof and for the Loss or Rent ... and in case of damage by any of the
Insured Risks with all reasonable speed to cause all moneys received in respect
of such insurance (other than in respect of Loss of Rent) to be forthwith laid
out in reinstating the Premises."
In terms of Clause 3(2) of the Lease the tenant is
required to reimburse the premia.
[6] Clause 5(2)
deals with abatement of rent in the event of damage or destruction. It states:
"If the Premises shall at any time
during the Period of Lease be so damaged or destroyed as to render the Premises
unfit for occupation and use in whole or in part in accordance with the terms
and provisions of the Lease, then the rents herein provided for or a fair
proportion thereof according to the nature and extent of the damage sustained
shall be suspended (but if such destruction or damage is attributable to an
Insured Risk to the extent only that the Insurers meet the Landlord's claim
under the policy for the Loss of Rent) until the premises shall again be
rendered fit for occupation and use, or if such destruction or damage is
attributable to an Insured Risk until the Loss of Rent insurance effected by
the Landlord shall be exhausted, if earlier.
For the avoidance of doubt the Lease shall continue regardless of the
nature or extent of any damage or destruction and the principle of rei interitus
shall not apply."
[7] As respects
express obligations of repair, maintenance or renewal, the obligations of the tenant
(set out in Part II of the Schedule to the Lease) include Clause 3,
in these terms:
"At all times throughout the Period
of the Lease at the Tenant's expense well and substantially to repair and
maintain or renew the Premises except where the damage necessitating such
repair, maintenance or renewal is caused by any of the Insured Risks and the
insurance monies have not nor shall become irrecoverable through any act or
default of the Tenant."
Clause 5 of Part II of the Schedule makes provision
whereby, in the event of the tenant failing to carry out repairs which the
tenant is liable under the Lease, the landlord may execute the repairs and
recover the costs from the tenant.
[8] Counsel for
the pursuers and appellants also brought to our notice that the tenant's
obligations in Part II of the Schedule are subject to and with the benefit
of the Redevelopment Proviso which is defined in Clause 1 of the Lease as
meaning
"the right hereby granted to the
Tenant, regardless of any other provisions hereof, conditional upon first
obtaining all necessary statutory consents, to carry out such operations,
construction, improvement, redevelopment, refurbishment to or on the Premises
as the Tenant sees fit without the requirement to seek the approval or consent
of the Landlord, declaring that such right shall not include the carrying out
of any demolition works of whatever nature without the prior written consent of
the Landlord which consent shall not be unreasonably withheld."
[9] It should
also be noted that it is not suggested by the defenders that the pursuers
failed to insure, or adequately insure the Premises; nor that they have failed to pass to the
defenders all sums paid out by the insurers in respect of claims for the storm
damage presented to them. One is
concerned with a shortfall, for whatever reason, between the repair costs
averred by the defenders to have been incurred by them, or to be contemplated
by them, in repairing the storm damage and the sums passed by the insurers'
loss adjusters.
[10] The action
came before the sheriff for debate. Put
very shortly, the first contention of counsel then appearing for the defenders
was that Clause 3 of Part II of the Schedule to the Lease was to be
construed as expressly imposing an obligation on the landlord to repair damage
caused by an Insured Risk. The sheriff
rejected that contention and it was not further advanced either before the
Sheriff Principal or before us. The
alternative submission for the defenders advanced to the sheriff was that there
was to be implied into the Lease a provision that repairs to damage arising
from the occurrence of one of the Insured Risks required to be carried out by
the landlord. That contention was advanced
on the basis, again put shortly, that such repairs were excepted from the
tenant's repairing obligations in Clause 3 of Part II of the
Schedule; someone would need to carry
out the repairs, ergo the landlord
must be that someone; that view was
consistent with the requirement that the landlord was to lay out the insurance
money on repairs; and such an
implication was required by "business efficacy". That contention found favour with the
sheriff.
[11] The pursuers
appealed to the Sheriff Principal, who refused the appeal. His ultimate endorsation of the sheriff's
reasoning on implication from the terms of the Lease of a term obliging the
pursuers to execute the repairs in question was however preceded by the
following passage in the Note appended to his interlocutor:
"In my opinion Clause 3 of
Part II imposes an obligation upon the tenant to repair, maintain and
renew the premises. This obligation
however is subject to an exception. That
exception occurs when there is damage caused by an insured risk and the tenants
have done nothing to cause the sum claimed from the insurers to be
irrecoverable. It was admitted that
there had been damage caused by an insured risk. It was also admitted that there was a shortfall
in the sum recovered from the insurance company. There was no offer by the landlord to prove
that the shortfall was in any way attributable to the act or the fault of the
tenant. Thus in my opinion the exception
to the general obligation upon the tenant to repair, maintain and renew applies. The tenant is therefore in my opinion
relieved of its obligation to effect repairs by virtue of the exception in
Clause 3 of Part II of the lease.
It may be thought that one did not
require to go much further to decide the case.
If the obligation to repair is not the tenant's obligation then it must
be the landlord's obligation. At common
law the obligation to repair would fall upon the landlord. Thus in order to avoid that obligation the
landlord needs to make provision in the lease to transfer the obligation to the
tenant. I have held that the lease does
not achieve that."
[12] In his
submission in support of the appeal counsel for the pursuers submitted to us
that this passage, particularly the second paragraph thereof, disclosed
important errors on the part of the Sheriff Principal.
[13] Among the
errors was the statement by the Sheriff Principal that at common law the
obligation to repair would fall upon the landlord. The law distinguished between urban and rural
leases, the rule being that in the former class the landlord was liable for
repairs whereas in the latter class the tenant bore that liability. Buildings erected on a rural tenement were
not treated as being urban. The Lease
being a lease of an island or some 793 acres was plainly a rural
lease; and accordingly the obligation to
maintain and repair lay, at common law, with the tenant. Reference was made to Bell's Principles (10th ed.) para.1272; Rankine
on Leases (3rd ed.) p.174; Paton & Cameron on Landlord and Tenant, p.70; McAllister,
The Scots Law of Leases, paras.1.12, 3.25 and 3.35.
[14] However, it
was also submitted by counsel that, more importantly, the Sheriff Principal had
failed to appreciate that the common law rules on the attribution of
responsibility for repairs, whether ascribing that responsibility to the tenant
in rural tenancies or to the landlord in urban lets, were in each case subject
to an exception in the case of repairs necessitated by damnum fatale. Counsel
referred to the definition of damnum
fatale to be found in Bell's Law
Dictionary (7the ed.) -
"A loss arising from inevitable
accident, such as no human prudence can prevent; - such, for example, as the losses occasioned
by storms or tempests, lightning, floods, over-blowing with sand, or, in
general, by any calamity falling within the legal description of an act of
God."
The repairs in issue in these proceedings were accepted as
being storm damage repairs and were thus damnum
fatale for the purposes of the common law rules on repairing obligations in
contracts of lease. As respects damnum fatale, neither party was under
any obligation, owed to the other, to repair;
though either might find it in his interests to repair. The tenant's obligation to repair in a rural
tenement was subject to exclusion of damnum
fatale. Likewise the landlord's
obligation in urban lets. In support of
these propositions counsel for the pursuers referred to Paton & Cameron, pp.131-2, 142;
Rankine, pp.242, 251; Bell's
Principles para.1253; and, in
particular the decision of the House of Lords in Bayne v Walker (1815) 3
Dow 233. Accordingly, submitted counsel,
the Sheriff Principal was wrong to hold, or to assume, that if the tenant were
excepted from his express contractual repairing obligation by virtue of the
Insured Risks exception in Clause 3 of Part II of the Schedule to the
Lease, liability for the storm damage repairs must, ex lege, fall on the
landlord.
[15] For his part
counsel for the defenders did not quarrel his opponent's exposition of the
authorities on the common law rules on repairing obligations, including the rules
relating to damnum fatale. He also did not dispute that the damage in
issue was damage caused by storm or tempest and that, as such, it constituted damnum fatale. That notwithstanding, he submitted, in what
appeared to be an overarching premise, that it could not be right that neither
party to the present Lease could be under an obligation to repair the storm
damage. If that were so, the subjects
would deteriorate. It was evident from
Clause 3 of Part II of the Schedule and the landlord's powers under
Clause 5 of the Lease that the parties intended that the premises should
be kept maintained and repaired; and
since the tenant's obligation under Clause 3 of Part II of the Schedule
was subject to an exception as respects the Insured Risks it must, said
counsel, follow that the landlord was obliged to carry out those repairs. Business efficacy required the implication of
such a term. The tests for implying
terms necessary to give business efficacy were set out in what was quoted in McBride on Contract (2nd ed.) at para.9-67
and they did not include any requirement that the term sought to be implied should
not conflict with or contradict common law rules.
[16] In our opinion
the position adopted by the defenders is misconceived. As already mentioned, it is accepted that the
repairs with which this action is concerned are repairs resulting from storm
damage and hence are damnum fatale. The decision of the House of Lords in Bayne v Walker settled that in the case of accidental destruction or damage
for which no-one was at fault neither landlord nor tenant was under any
obligation to re-build or repair, though each might have an interest to do
so. The civilian law rule expressed in
the maxim res suo perit domino meant
that the subject perished to each of the parties according to his interest in
it. The speeches of Lord Redesdale and
the Lord Chancellor (Lord Eldon) discuss the practical and commercial
considerations justifying a rule (in a modern parlance, a default rule) that
the loss should rest where it fell, each according to his own interests in the
case of property subject to a tenancy.
Thus, to take the example of the destruction of a farmhouse occurring
shortly before the ish, it would be unreasonable to impose on the tenant the
obligation to rebuild or repair when his occupation was about to cease; and equally the landlord might prefer to have
a different farmhouse in a different location with a view to the future letting
of the holding. The later authorities to
which we were referred by counsel for the pursuers make clear that, at least
since Bayne, the common law position
in both urban and rural tenancies has been that in the event of damage or
destruction constituting damnum fatale
neither party is under any obligation, owed to the other, to repair or
re-build. Each may have an interest to
do so; the tenant to resume enjoyment; the landlord to recover his rental income,
since otherwise the rent is subject to whole or partial abatement.
[17] As was
recognised by the Lord Chancellor in his speech, it is, of course, open to the
parties to a lease to modify, or depart from, the common law rule by clear
express provision. Since the rule
applies in respect of loss or damage which is now more readily capable of being
covered by insurance, its consequences in modern practice are usually addressed
through that means. That is indeed what
has been done in the present case, there being agreement on insurance; the ultimate responsibility for the meeting
of the premia; and an obligation on the
landlord to lay out the insurance monies on repairs. But in so far as the insurance arranged
against damnum fatale should prove
lacking, the common law rule will apply to the uninsured damnum fatale. In that
respect we note in particular the passage in the practitioners' handbook by Ross
& McKiechan "Drafting &
Negotiating Commercial Leases in Scotland" at para.10.6 where, having
discussed insurance by the landlord, the authors then address the type of
question arising in the present case in these terms:
"The question then arises as to the
position if the insurance monies proved insufficient to meet the cost of
rebuilding or reinstatement. Where the
obligation is to 'lay out all monies received in received in respect of such
insurance' in reinstatement (as opposed simply to 'reinstate') it would seem
that the landlord would not have to complete the work at his own expense - he
would have complied with his obligation by laying out all the insurance monies
received. Thus the tenant should call
for a specific obligation from the landlord to make up any shortfall. Clearly the tenant needs this protection to
prevent a situation in which the landlord refused to complete the work of rebuilding. This would be of particular concern if the
underlying common-law rule in Scotland (providing for termination of the lease
in the event of total destruction and abatement of rent in the event of partial
destruction) had been displaced and if the abatement of rent proviso which had
been substituted was expressed to operate for a limited period, because on the
expiry of such period the tenant would become liable for rent. The tenant should argue most strongly for the
inclusion of an obligation compelling the landlord to re-instate".
We would add that, in our view, the Lease appears to have
been drafted against a proper understanding of the common law on damnum fatale in leases. Thus the provisions in Clause 5 of
Part II of the Schedule exhibit awareness of the common law rule on
termination and abatement of rent in the event of damnum fatale and seek to restrict it to a limited extent. But the further provision in favour of the
tenant suggested by the authors of this handbook is not to be found.
[18] The argument
advanced by counsel for the defenders appeared to us be an argument on implied
terms isolated from the existence of rules or terms implied at common law in nominate
contracts such as contracts of lease. Counsel
for the defenders founded upon the passage in McBryde at para.9-67 to advance that insulated argument on the view
that the passage quoted by the author in that paragraph made no reference to
conflict or contradiction with common law rules. However, that paragraph has to be read in
context. In particular it has to be read
in the context that in the previous parts of the chapter (Chapter 9)
Professor McBryde has discussed implication of terms as a matter of general law
and has explained that in the case of nominate contracts, subject to implied
common law rules, exclusion of the liabilities resulting from the application
of the common law rules requires to be effected by clear express
provision. We refer inter alia to what is said in para.9-09 (cf. Mars Pension Trustees Ltd v County
Properties and Developments Ltd 1999 S.C. 267).
[19] In so far as
the express terms of a lease do not cover, or replace, the provisions implied
at common law in such contracts, those provisions will apply. Contracts of lease must be drafted against
the existence of common law default rules.
In our view it is clear that the common law default rule relating to
liability - or perhaps more accurately the absence of liability - for damnum fatale, while partially displaced
in Clause 5(2) of the Lease, as respects abatement of rent and rei interitus is not displaced by any
express obligation on the landlord to carry out storm damage repairs. Where an hiatus
in the express terms of a nominate contact is filled by a term implied ex lege, one never really enters the
territory of implying terms justified on the basis of a need to give basic
"business efficacy", since that need has indeed been addressed by the term
implied at common law. To suggest that
the common law solution might be improved is not to the point.
[20] In these
circumstances we consider that the pursuers are correct in their submission
that the decisions of the sheriff and the Sheriff Principal are unsound. In our view the defenders are mistaken in
contending that the pursuers as landlords were under any legal obligation to
execute the storm damage repairs beyond their obligation to apply the insurance
monies thereto (which it is not disputed has been done).
[21] We shall
therefore allow the appeal; recall the
interlocutors of the Sheriff Principal and the sheriff; and remit to the sheriff to proceed as
accords in the light of this Opinion (there being the other issues, not
previously addressed in these proceedings, indicated in para.2 supra).
