Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION

[2015] CSOH 154

CA40/15

OPINION OF LORD DOHERTY

In the cause

DEM-MASTER DEMOLITION LIMITED

Pursuers;

against

HEALTHCARE ENVIRONMENTAL SERVICES LIMITED

Defenders:

Pursuers:  Logan;  Campbell Smith LLP

Defenders:  Brown;  Lindsays

13 November 2015

Introduction

[1]        The pursuers are the assignees of the landlords’ interest in a lease of industrial subjects at Unit 3, Centrelink 5, Calderhead Road, Shotts (“the Premises”).  The defenders are the tenants.  The principal issue discussed at this debate on the commercial roll was the incidence and extent of the repairing obligations under the lease.  Other matters canvassed were a motion by the pursuers for summary decree pronouncing declarator in terms of the fourth and fifth conclusions of the summons; and the relevancy of the pursuers’ averments of entitlement to violent profits.

[2]        Conclusions 1, 2 and 3 of the summons seek declarators that the lease was terminated by notices of irritancy served upon the defenders dated 23 February 2015 and 14 April 2015.  Conclusions 7 to 9 are pecuniary conclusions.  It is unnecessary to discuss those aspects of the action in any detail because the present debate was restricted to consideration of the matters focussed in the fourth, fifth and sixth conclusions. 

[3]        In terms of the fourth conclusion the pursuers seek declarator that the lease was terminated by a notice of irritancy served upon the defenders on 22 April 2015 in respect of a failure to respond to a notice dated 22 January 2015 requiring the Premises to be made clean and tidy.  In terms of the fifth conclusion the pursuers seek declarator that the lease was terminated by a notice of irritancy served upon the defenders on 15 June 2015 in respect of a failure to respond to a notice and schedule of dilapidations served on them dated 12 March 2015.  In terms of the sixth conclusion the pursuers seek (a) declarator that from the dates of each termination the defenders’ occupation of the premises was precarious, and (b) payment of violent profits in respect of that unlawful occupation.      

The lease

[4]        By a lease dated 27 and 28 December 2009 and 8 January 2010 CNC Investments Limited let the Premises to the defenders.  The Premises comprise part of Centrelink 5 (“the Estate”).  The Estate has been subdivided into the Premises and four further units.  In terms of the lease the date of entry was 1 January 2010.  The duration of the lease was five years from the date of entry (“the Duration”) with an option for either party to break after three years.  Neither party exercised the break option.  The rent was £82,000 per annum exclusive of VAT.  In terms of Clause 4 of the lease the defenders undertook not to use or permit the use of the Premises or any part thereof otherwise than for storage and distribution and ancillary office space in accordance with their business of waste management services save with the prior written consent of the landlords.  Clause 6 provides:

“The Tenants accept the Premises as being in such condition as shown on the attached Photographic Schedule and in all respects fit for the Tenants’ purposes and shall at their sole expense and, to the reasonable satisfaction of the Landlords, repair and maintain and renew (and, if necessary for the purposes of maintenance and repair, to replace and rebuild) and decorate and keep the Premises and all permitted additions and new buildings, if any, in like condition as is evidenced on the said Photographic Schedule and in a clean and tidy condition, clear of all rubbish, for the Duration, declaring always that the Tenants’ liability under this Clause 6 shall not apply where any works of repair, maintenance and renewal arise directly or indirectly as a result of (a) any latent and/or inherent defects in the design and construction of the Premises and/or the Estate; (b) any act, omission or default of the Landlords or those for whom they are responsible at law; and (c) the occurrence of any of the Insured Risks, save to the extent that the insurance monies are rendered irrecoverable in consequence of some act, omission or default of the tenants or those for whom they are responsible at law.”

Clause 8 provides that the landlords and their agents should have access to the Premises inter alia to carry out any repairs or alterations or improvements which the landlords acting reasonably may deem necessary.  The clause continues:

“…Without prejudice to the foregoing generality the Tenants shall permit the Landlords … to enter, examine and record the condition of the Premises and upon one month’s written notice being served by the Landlords, the Tenants shall execute all repairs, renewals, replacements, removals and other works as may be required in order to comply with their obligations in terms of this Licence within three months (or sooner if requisite) from the date of such notice and that to the reasonable satisfaction of the Landlords.  In the case of default by the Tenants, the Landlords … shall be entitled to enter the Premises to execute all such works as aforesaid and the whole costs, charges and expenses properly and reasonably incurred by the Landlords in so doing shall, within fourteen days of written demand therefor, be due and payable by the Tenants to the Landlords.”

Clause 12 provides:

“On the expiry or earlier termination of the Lease the Tenants shall remove from the Premises without any warning away or process of law to that effect leaving the Premises cleared and redd and in such state and condition as shall be in accordance with the obligations undertaken by the tenants herein and that to the Landlords’ reasonable satisfaction…”

Surrounding circumstances at the time the lease was entered into   

[5]        Unfortunately there is only limited agreement between the parties as to surrounding circumstances at the time the lease was entered into.  Mr Logan indicated that because the pursuers are the assignees of the landlords’ interest under the lease they are unclear as to several of the matters which the defenders aver. 

[6]        In Answer 9 of the defences the defenders aver:

“… Explained and averred that the leased subjects form one of five units created from the former Cummins Engine Company factory.  The larger factory building extends to about 540,000 sq ft.  The leased subjects extend to about 80,000 sq ft and are the smallest of the sub-divided units.  The factory was occupied by the Cummins Engine Company (“Cummins”) from about 1956 onwards, and at that time took over the site of an existing textile mill.  Between 1975 and 1983 it was substantially rebuilt and extended.  Cummins manufactured diesel engines in the factory.  Production ceased and the factory closed in 1996.  It has been substantially empty ever since.  So far as known to the defender it has never been fully occupied since Cummins vacated.  It was “A” listed in 2004.  It is considered to be one of the most significant large industrial buildings of the later 20^th century, and the major work in the United Kingdom of the architects Ahrends Burton & Koralek.  Clause 6 of the lease …[p]roperly construed…obliges the defender only to maintain the subjects in the condition specified in the Photographic Schedule said to be appended to the lease.  No such schedule is appended to the defender’s copy of the lease.  Nor has the pursuer exhibited any such schedule.  The date of entry under the present lease was 1^st January 2010.  As at that date the subjects were badly dilapidated.  They were not wind and water tight and had not been for some years previously.  All of the wants of repair asserted by the pursuer were present at the commencement of the lease.  The subjects are located in an area of the factory which was formerly the engine testing workshop when Cummins were in occupation.  The floor is heavily oil stained.  It has been like that since Cummins were in occupation and Cummins’ activity is the cause of the staining.  The defender does not handle and has never handled engine oil.  Separatim, and in any event, according to its true construction the clause does not render the defender liable for repairs which would be extraordinary repairs at common law.  Many of the alleged wants of repair specified in the schedule would be extraordinary repairs at common law.” (emphasis added)

[7]        In Cond 5 and Cond 9 of the summons the pursuers aver:

“5.  …The obligations of the defenders… are set out in clause 6 of the lease… The pursuers were not provided with a copy of the photographic schedule when they purchased the subjects of which the leased subjects formed part at auction.  The defenders have stipulated that they do not have such a schedule and have completed a response to a specification of documents to that effect.  Inquiries with the heritable creditors of the previous proprietors have proved fruitless.  On this basis it is believed and averred that no such Photographic Schedule ever existed.  The maintenance and repair obligations are only qualified to the extent shown by that Photographic Schedule and latency.  The defects identified by the pursuers are not latent…

9.  … With reference to the defenders’ averments in answer it is admitted that the subjects form one of five units created from the former Cummins Engine Company factory.  The exact dimensions of the defenders’ unit and the larger structure are not known under explanation that these figures are approximately correct.  It is admitted that the building is “A” listed and has been since 2004.  It is admitted that the building is thought to be of architectural significance….  It is admitted that the date of entry under the present lease was 1^st January 2010.  The state of the premises at that date is not known and not admitted.  The history of the site prior to the Cummins factory is not known and not admitted.  The date when the factory closed is not known and not admitted.  The state of the floor at the date of commencement of the lease is not known and not admitted.  Quoad ultra denied…”

[8]        While not material to the matters which the court has to decide, it is interesting to note Historic Scotland’s reasons for listing the building: 

“The building is considered to be one of the most significant examples of large industrial buildings in later 20^th century Britain and is ABK’s principal work of the 1970s in the United Kingdom.  The former Cummins plant is a notable example of the emphasis of design in industry during this period, revitalising the concept of the usual industrial shed.  It is recognised as a model of Rationalist/Functionalist modern architecture…The building was designed in the collaborative spirit of contemporary industrial building projects…but is wholly unique in form and specific to the production of diesel engines, embodying the earlier disparate forms of the existing buildings into a new unified whole…”  (http://portal.historic-scotland.gov.uk/designation/LB50013)

[9]        During the course of his submissions Mr Brown sought to expand upon the defenders’ averments about the circumstances prior to and around the execution of the lease.  Part of the premises (about 20,000 sq ft) had been occupied by the defenders informally on the basis of a verbal licence since about November 2003.  Thereafter the parties had executed a licence (7/25 of process) for that part with a duration of one year.  Clause 6 of that licence had been in identical terms to clause 6 of the lease.  As with the lease, no Photographic Schedule had been attached to the licence.  The licence seemed to have governed the occupation until the execution of the lease - though the area let was increased: and during 2008 there were unsuccessful attempts to agree a lease of 10 years duration (7/25, 7/26 and 7/27 of process).  Mr Brown recognised, however, that these matters were not the subject of averment, and that his narration of the history was not an agreed one.  If the court concluded that matters which were not admitted by the pursuers - and in particular the condition of the premises at the date of entry - could have a bearing on the proper construction of clause 6, then the relevant facts would need to be ascertained to assist the court in construing the disputed provisions of the lease.

The notices

[10]      The pursuers gave the defenders written notice dated 12 March 2015 (6/17 of process) of their intention to irritate the lease on the ground of the defenders’ failure to comply with their repairing obligations under clause 6.  The notice intimated that the defenders were required to remedy the breach within three months failing which the lease might be terminated in terms of clause 16.  In relation to that notice the pursuers aver (stat 6):

“6.  …The basis of said proposed irritancy was numerous extensive and substantial failings to maintain the subjects of let as required by clause 6 of the lease all as set out in the schedule of dilapidations prepared by DTZ and served upon them…”

The DTZ terminal schedule of dilapidations (6/2 of process) includes items such as replacement of the asbestos roof at an estimated cost of £509,307; providing a new screed to the floor at an estimated cost of £191,250; replacing busbar installation at an estimated cost of £146,000; replacing electrical switchboards at an estimated cost of £94,000; replacing gas heaters and fans at an estimated cost of £100,000; replacing lighting at an estimated cost of £74,320; resurfacing the yard area at an estimated cost of £69,188; and replacing the lift installation at an estimated cost of £38,000.  By notice of irritancy dated 15 June 2015 (6/16 of process) the pursuers purported to exercise their option to irritate the lease on the grounds of the defenders’ failure to comply with the repairing obligation.  The pursuers further aver (Stat.  9):

“…[DTZ] discovered that the defenders have caused massive damage to the Unit.  Reference is made to the Schedule of Dilapidations prepared by DTZ… It became apparent that the steam and effluents produced by the defenders’ equipment  has (sic) penetrated the asbestos in the roof and are causing flakes and larger chunks of this to fall away.  The chemicals released by the machinery of the defender has (sic) damaged the structural integrity of the steel columns of the subjects.  On the basis of the information provided by DTZ it is anticipated that the costs of restoring the subjects to the standard required by the lease will be £2,081,350.74.  In addition it is reasonably estimated that the said works will take at least 12 months to complete …”

Those averments are denied by the defenders. 

[11]      The pursuers gave the defenders written notice dated 22 January 2015 (6/4 of process) of their intention to irritate the lease on the ground of the defenders’ failure to comply with their obligation under clause 6 to keep the Premises in a clean and tidy condition.  The notice intimated that the defenders were required to remedy the breach within one month failing which the lease might be terminated in terms of clause 16.  By notice of irritancy dated 22 April 2015 (6/12 of process) the pursuers exercised their option to irritate the lease on the grounds of the defenders’ failure to keep the Premises in a clean and tidy condition.

Construction of the repairing obligation in clause 6

[12]      Mr Logan submitted that the defenders had accepted the Premises as being in all respects fit for the tenants’ purposes at the date of entry.  It followed, he submitted, that they had accepted that the Premises were in a tenantable condition at that time.  While they had also accepted the Premises “as being in such condition as shown on the attached Photographic Schedule”, it appeared that no such schedule had ever been prepared or attached.  One was left therefore only with the tenants’ acceptance that the subjects had been in a tenantable condition at entry.  That was the context in which the repairing obligation in clause 6 required to be read.  Mr Logan accepted that the words “in like condition as is evidenced on the said Photographic Schedule” qualified not only the obligation to keep the Premises in that condition, but also the obligations to repair, maintain and renew, and to decorate.  However, since there had never been any such schedule each of those obligations had not in fact been subject to that qualification.  That was the ordinary meaning of the words setting out the tenants’ repairing obligation when regard was had to the fact that the parties to the lease had not executed a Photographic Schedule.  The defenders’ reading of the provision - that the tenants’ obligation was to repair and keep the subjects in the condition they were in at the date of entry - was not a possible construction of the language used (even if the defenders’ averments as to the circumstances surrounding the execution of the lease were established).  The wording of clause 6 was materially different from the lease provisions which were considered in McCall’s Entertainments (Ayr) Ltd v South Ayrshire Council (No.  2) 1998 SLT 1421 and in @Sipp (Pension Trustees) Ltd v Insight Travel Services Ltd 2014 Hous. LR 54.  In McCall’s Entertainments and @Sipp the subjects had been accepted “in their present condition” and the repairing obligation had been framed under reference to that condition.  That was not the position here.  If, contrary to the pursuers’ submissions, the defenders’ construction was a possible construction, the pursuers’ construction should be preferred because of the two constructions it was the one which was more consonant with commercial common sense.  Mr Logan recognised that in the event that the two constructions were possible constructions inquiry as to the surrounding circumstances at the time of execution of the lease would be likely to be required before the issue could be resolved.  He referred to the following authorities in relation to the proper approach to the construction of commercial contracts: Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, per Lord Clarke at paras.  14, 21 and 23; L Batley Pet Products Ltd v North Lanarkshire Council 2014 SC (UKSC) 174, per Lord Hodge at para.  18; Grove Investments Ltd v Cape Building Products Ltd 2014 Hous.  L.  R.  35; Arnold v Britton [2015] 2 WLR 1593, per Lord Neuberger at paras.  14-18, Lord Hodge at paras.  76-77; and Multi-Link Leisure Developments Ltd v North Lanarkshire Council 2011 SC (UKSC) 53.

[13]      Mr Brown submitted that the effect of the first two lines of clause 6 was that the pursuers contracted out of the landlords’ common law warranty that at the date of entry the Premises be wind and watertight, in a tenantable condition, and fit for the use for which they were let.  It was not an acceptance by the defenders that the Premises were wind and watertight or otherwise in a good state of repair.  Quite the reverse - the Premises were accepted as they stood.  The defenders’ use of the Premises did not require them to be wind and watertight and in a good state of repair, and they had been neither of those things at the date of entry.  On a proper construction of clause 6 the tenants’ obligation was to maintain the Premises in the condition they were in at the date of entry.  The non-existence of a Photographic Schedule had consequences so far as proof of that condition was concerned.  However, it did not have the result which the pursuers contended.  Reasonable persons in the position of the parties, and with their background knowledge, would understand the agreement to have been that the pursuers should maintain the Premises in the condition they were in at the date of entry.  That was the objectively ascertainable intention of the parties.  Use of a Photographic Schedule had been the intended method of recording the Premises’ condition.  It would be extraordinary if the omission of the parties to append a Schedule should have the consequence that the defenders assumed a more onerous repairing obligation than the parties had intended.  It would be equally extraordinary, given the dilapidated state of the Premises at the date of the lease and the lease’s short duration, for the defenders to have agreed to assume such an onerous repairing obligation.  That would have made no commercial sense at all so far as the defenders were concerned.  In the whole circumstances the words “in such condition” and “in like condition” should be construed as meaning the condition of the Premises at the date of entry.  Mr Brown made reference to Grove Investments, McCall's Entertainments, @Sipp Pension Trustees, Arnold v Britton, and Bishop v 3i Investments [2015] CSIH 66. 

[14]      In my opinion I am not currently in a position to determine the proper construction of the repairing provision in clause 6.  That exercise cannot be conducted in a vacuum, without knowledge of all the material circumstances surrounding the execution of the lease.  There is only very limited agreement in relation to those matters.  Perhaps most significantly, there is dispute as to the state of the Premises at the date of entry.  The state of the Premises might be a very material circumstance.  Without inquiry as to the relevant factual matrix I do not think I am able as a matter of relevancy to uphold one of the suggested constructions and reject the other; nor without that assistance do I think that I can safely conclude that one or other of the constructions is not a possible construction of the provision.  Both counsel accepted that were I to reach that view some form of inquiry into the surrounding facts would be necessary.

The clean and tidy obligation

[15]      Clause 6 obliges the tenants “to keep the Premises … in a clean and tidy condition, clear of all rubbish”.  It is plain from the parties’ averments that there is a dispute as to whether the tenants have complied with this obligation. 

[16]      While this obligation does not appear to be tied to the Photographic Schedule, the age and condition of the premises at entry may have a bearing upon what reasonable persons at the date of entry would have understood the obligation to keep clean to have entailed.  It is also possible that some degree of transient uncleanliness and/or untidiness, and the transitory presence of some rubbish, may be unavoidable with use of the premises for the purposes authorised in clause 4. 

[17]      It follows in my view that inquiry is required (i) in order to ascertain the ambit of the obligation having regard to the surrounding circumstances at the time it was entered into; (ii) to determine whether in fact the obligation was breached by the defenders.    

The summary decree motion

[18]      Mr Logan explained that the pursuers’ summary decree motion was predicated upon the court accepting the pursuers’ construction of the clause 6 repairing obligation.  In the event that it did not, I did not understand him to suggest that the motion ought to be granted.  In any event, in my opinion both of the declarators sought in the fourth and fifth conclusions raise issues which cannot be resolved without further inquiry.  I am not satisfied that the defenders are bound to fail in their defence (Henderson v 3052775 Nova Scotia Ltd 2006 SC (HL) 85).

Violent profits

[19]      Mr Brown challenged the relevancy of the pursuers’ claim for violent profits.  He indicated that he would not have insisted on a debate to deal with this challenge had the matters already discussed not been going to debate.  

[20]      It was common ground that the defenders came into possession of the subjects lawfully.  They were tenants under the lease.  The lease had not expired at the end of the five year term.  It had been renewed for a further year by tacit relocation.  Unless it had been lawfully terminated by the pursuers on the ground of irritancy the lease remained in force at least until 31 December 2015.

[21]      There could be no liability for violent profits in respect of continued occupation during the currency of litigation which would determine whether there was a right to occupy, provided the occupier had probabilis causa litigandi (Houldsworth v Brand’s Trustees (1876) 3 R 304, per Lord Justice Clerk Moncrieff at pp.  310-312).  Such an occupier was in good faith.  It was for the person claiming violent profits to aver and prove bad faith on the part of the occupier.  The pursuers did not aver that the defenders’ occupation was in bad faith.  They did not have any proper basis for doing so.  It followed that the claim for violent profits was irrelevant.

[22]      Mr Logan accepted that if the claim for violent profits was to succeed at the end of the day the court would have to conclude that the defenders’ occupation had not been in good faith.  The defenders aver that their occupation was in good faith, but that was denied by the pursuers.  It was for the defenders to establish the defence of good faith.  It was not incumbent upon the pursuers to aver that the defenders were in bad faith.  The violent profits claim was suitable for inquiry.  It would be wrong to conclude at this stage that it could not succeed.

[23]      Both parties’ pleadings in relation to this issue are brief.  In Stat 7 the pursuers aver that in the event of decree of declarator of irritancy being granted the defenders’ occupation will have been illegal from the date of the relevant notice of irritancy.  That is denied by the defenders.  They aver that the lease has not been terminated and that it remains in force.  They also aver:

“Esto the lease has been terminated (which is denied) such termination is disputed and the defender remains in lawful occupation in good faith on responsible legal advice pending resolution of that dispute by litigation.  On either hypothesis there is no entitlement to violent profits.”

The pursuers deny the defenders’ averments in answer.

[24]      In my opinion there is some force in the defenders’ submissions on this point.  There can be no doubt that at least up until the service of the first of the notices of irritancy the defenders’ possession was lawful.  In relation to the subsequent period the defenders have raised (inter alia) the issue of bona fide possession.  In those circumstances the onus is on the pursuers to show when possession ceased to be in good faith and became mala fide (Houldsworth v Brand’s Trustees, supra, per Lord Justice Clerk Moncrieff at p 310; Paton & Cameron, The Law of Landlord and Tenant, pp 282 - 3; Gill, The Law of Agricultural Holdings in Scotland (3^rd ed.), p 242).  It is incumbent upon them to aver the circumstances in which they maintain the defenders began to possess in bad faith, and the date (on each scenario) when they say that occurred (cf.  MRS Hamilton Ltd v Baxter 1998 SLT 1075, per Lord Hamilton at p.  1080D-H; Gibson & Simpson v Pearson, 3 April 1992, Lord Cameron of Lochbroom at pp. 10-14 of his Opinion (reported on this point only at 1992 GWD 20-1183)).  However, I am conscious that this is a commercial action and that the pleadings are not as full as might have been expected had it been an ordinary action.  It is possible that the pursuers may be in a position to address the defects I have highlighted by making appropriate averments.  In that event they could seek leave to amend, and the defenders would have the opportunity to state their position in regard to that, when the case comes out by order.     

Disposal

[25]      I shall put the case out by order to discuss (i) the terms of an appropriate interlocutor to give effect to my decision; (ii) further procedure.  I reserve meantime all questions of expenses.