Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION

[2016] CSOH 74

CA17/15

OPINION OF LORD WOOLMAN

In the cause

DOLBY MEDICAL HOME RESPIRATORY CARE LTD

Pursuer;

against

MORTARA DOLBY UK

Defender:

Pursuer:  Thomson;  Burness Paull LLP

Defender:  Paterson;  Morton Fraser LLP

27 May 2016

Introduction
[1]        Arthur Dolby formerly owned Monitor House, Kerse Road, Stirling (“the subjects”).  In 1978 he incorporated a company called R L Dolby & Co Ltd (“RLD”).  Its business comprised three divisions:  (i) home oxygen services;  (ii) sales and service;  and (iii) dental decontamination.  All of them operated from the subjects.

[2]        In 2007 Mr Dolby granted a 10 year lease of the subjects to RLD (“the lease”).  Around the same time, he took steps to divest himself of his interests in RLD.  He assigned the lease to two individuals (“the landlords”).  He sold the entire shareholding to three individuals (“the investors”).

[3]        RLD changed its name twice.  In 2008 it became Dolby Medical Ltd.  In 2010 it became Dolby Medical Home Respiratory Care Ltd (“DML”).  The same year the investors restructured the business.  They formed a new company, Mortara Dolby UK Limited (“Mortara”).  It took over the ownership of the sales and service and dental decontamination division.  DML retained ownership of the home oxygen services division.  It also continued as the tenant under the lease.

[4]        DML altered the subjects so that all three divisions could continue in occupation as before.  It granted a licence to Mortara to occupy the larger part (“the premises”), as it had done for many years.  The licence contains several clauses that set out Mortara’s obligations in respect of repairs to the premises and the common parts.

[5]        In terms of the lease the tenant could serve notice to terminate half way through its term.  DML exercised the break provision.  In consequence both the lease and the licence came to an end on 12 December 2012.

[6]        On receipt of the notice of termination, the landlords served a schedule of dilapidations on DML (“the schedule”).  It showed a total figure of £641,171.37 for carrying out the repair works.

[7]        DML accepted that it was in breach of its repairing obligations under the lease.  It contested, however, the extent and cost of repairs.

[8]        There followed a familiar dance: the landlords raised an action to recover the repair costs, DML lodged defences and the court fixed dates for a proof.  The proof diet did not, however, proceed because the parties reached an extrajudicial settlement.  DML paid £275,000 to the landlords to satisfy the claim.  It was a global settlement with no apportionment to individual elements in the schedule.

[9]        In compromising the action, DML acted on the advice of its solicitors and surveyors.  It invited Mortara to participate in the settlement negotiations and to contribute toward the cost of repairs to the common parts.  Mortara declined the invitation.  It has consistently maintained that it has no liability to pay a share of those costs.  That is the principal issue for decision.  It turns on the proper construction of the licence.

The Licence
[10]      The licence refers to the subjects as the whole of Monitor House let to DML under the lease.  It distinguishes them from the premises, which is that part of the subjects occupied by Mortara for the operation of its business “extending to no more than 75% of the floor area”.

[11]      Several clauses have a bearing upon liability for repairs.  I summarise them as follows:

8.         Mortara had to pay 75 per cent of “the cost of maintaining and repairing the common parts” of the subjects.

10.1     Mortara accepted the premises including the common parts “as being in a good tenantable condition and a thorough state of repair and decoration”.  It bound itself “to maintain same in the like condition and state of repair during the currency of this Licence”.

10.2     “The Licensee shall not be entitled to remove any of the works, fixtures, fittings or others carried out or installed by the Licensor or Licensee.”

14.       Mortara agreed to pay a proportion of the cost of any works to the common parts that were required by statute or local regulation.

15.       Mortara would indemnify DML in respect of all liability “properly and reasonably incurred” as a result of any breach of the licence by Mortara.

17.       At the termination of the licence, Mortara had to leave the premises “in a good state of repair and in a neat and tidy condition”.  DML could require Mortara to restore the premises “to the condition in which they were at the date of entry” free of expense to DML.

18.       “Except insofar as inconsistent with the other provisions” of the licence, Mortara had to “observe, comply with and perform the whole obligations” imposed upon DML under the lease “so far as they relate to the Premises” and indemnify DML “on a full indemnity basis, against any failure or omission so to do.”

Submissions
[12]      Mr Paterson contended that Mortara’s obligations under the licence only applied during its currency, not at termination.  As it had maintained the premises while in occupation, it had discharged its duties.  Any breach of the repairing obligations under the lease was the responsibility of DML.  It could not relay any part of that liability to Mortara.

[13]      Mr Thomson tacked in the opposite direction.  He argued that in determining whether Mortara had discharged its obligations under the licence, the parties had framed a simple test.  Were the premises in a good tenantable condition and a thorough state of repair?  That question was as pertinent at the end of the lease as during its currency.

Liability
[14]      The starting point is clause 8.  Its language is unqualified.  Its meaning is clear.  In my view it clearly contemplates that Mortara has a dilapidations’ liability.  If the parties had intended to draw a distinction between currency and termination, I would have expected that to be clearly expressed.  I therefore hold that Mortara’s share amounted to 75 per cent of the cost of maintaining and repairing the common parts.

[15]      Although the licence does not define the term “common parts”, it is generally understood to refer to areas from which both parties derive benefit, such as the roof:  Marfield Properties v Secretary of State for the Environment 1996 SC 362.  Any dispute about what constitutes a common part ought in my view properly to be the subject of evidence.  DML’s surveyors, Shepherd Commercial, have produced a revised schedule that links each repair item to the relevant clauses in the lease and the licence (“the revised schedule”).

[16]      That construction of clause 8 squares with commercial common sense.  Landlords are astute to enforce repairing obligations at the end of a lease.  Usually, it is the stage when subjects of let receive detailed scrutiny.  It would be highly surprising if the parties had intended Mortara to elide a share of responsibility at that point.

[17]      Mr Paterson advanced an alternative argument.  He contended that if Mortara does have an obligation in respect of the common parts, it is a limited one.  Clause 10.1 only had to keep them in the same condition as they were at the date of entry.  In short, its obligation was to maintain the premises as they were on 31 July 2010.  It had no duty to improve them:  Napier v Ferrier (1847) 9D 1354 at p. 1360 per Lord Drummond Young.  Mr Paterson cited a number of other authorities in this connection:  Scottish Widows Services Ltd v Harmon 2010 SLT 1102 at para. 34;  @SIPP (Pension Trustees) Ltd v Insight Travel Services Ltd [2014] CSOH 137 at paras. 11– 17;  McCall’s Entertainments v South Ayrshire Council (No 2) 1998 SLT 1421, per Lord Hamilton at 1427 A-B. Mr Paterson submitted that clauses 17 and 18 support this construction, because they both refer to the premises and not to the common parts.

[18]      I do not accept this analysis.  In my view the key term in clause 10.1 is “in the like condition”.  That can only be understood as referring to the preceding words.  Accordingly, the enquiry is properly focussed in a simple question.  Are the premises and common parts in a “good and tenantable condition and a thorough state of repair and decoration”?

[19]      If the parties had intended to restrict the repairing obligation in the manner suggested by Mr Paterson, I would again have expected clear words that Mortara was to only have a restricted obligation.  It would also have been usual for the parties to agree a schedule recording the physical condition at the outset of the licence.  Otherwise there is no benchmark against which to determine whether or not Mortara had discharged its obligations.

[20]      If my construction of clause 10.1 is wrong, that is not the end of the matter.  Clause 18 can be characterised as a “sweeping up” provision.  It reinforces and puts beyond doubt the principle of shared liability for repairs that in my view underpins the contractual scheme.

[21]      Mr Paterson argued that clause 18 does not apply for two reasons.  First, the licence contains an inconsistent provision in the shape of clause 10.  I disagree.  In my view the two clauses are complementary, not inconsistent.  As Mr Thomson put it, they supplement one another.  Secondly, it is difficult to give effect to clause 18, because on a literal reading Mortara’s obligation to indemnify seems to extend to the lease and not just the licence.  In my view the parties meaning is plain for the reason I have identified above.

Can DML claim damages?
[22]      Mr Paterson contended that Mortara is only obliged to reimburse monies actually expended on repairs.  Given the extra-judicial settlement, DML’s claim for damages is therefore ill‑founded.  I reject that argument.  Under clauses 15 and 18, Mortara had (i) to comply with the lease obligations, and (ii) to provide an indemnity.  If it did not fulfil those primary obligations, it is liable in damages, which are a surrogate for performance.  Any award is designed to place the innocent party in the position in which he would have been, but for the breach.  Accordingly it is immaterial that DML paid a sum of money to the landlords in order to discharge its obligations under the lease.

Quantification of loss
[23]      Mr Paterson submits that the loss averments are irrelevant in three respects.

1. DML has failed to provide a proper explanation for the loss claimed. There is a tension between the figure in the revised schedule £99,892.82 (65.85% of £151,699) and the sum claimed £181,085.73 (65.85% of the £275,000 paid to the landlords).
2. There are certain items that should fall out of account as being extraordinary repairs, such as the warehouse floor, flat felt roofs and car park concrete hard-standing: Co‑Operative Insurance Limited v Fife Council [2011] CSOH 76, at para. 19; House of Fraser v Prudential Assurance Ltd 1994 SLT 416 at 419.
3. DML is not entitled to recover one half of the fees it has incurred to its professional advisers in connection with the revised schedule and the landlords’ action.

[24]      In my view, all three issues are properly dealt with after evidence has been led.  I accept Mr Thomson’s submission that it is reasonable for DML to apportion the global settlement sum paid to the landlords and that is reflected in the revised schedule.

[25]      Further, I see no reason to exclude from probation DML’s averments that in emails passing between the parties in September and October, they reached an agreement in principle about the percentage apportionment in respect of professional fees.

Conclusion
[26]      I shall fix a by order hearing to determine further procedure in the light of this opinion.