Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION

[2016] CSOH 99

CA60/16

OPINION OF LORD TYRE

In the cause

AWG BUSINESS CENTRES LIMITED

Pursuer;

against

REGUS CALEDONIA LIMITED and OTHERS

Defenders:

Pursuer:  Turner;  Eversheds LLP

First Defender:  Manson; Shoosmiths LLP

Second Defender:  MacColl;  Morton Fraser LLP

13 July 2016

Introduction

[1]        The parties are, respectively, the tenant, sub-tenant and former head landlord of levels 3, 4 and 5 of an office building known as Riverside House, Riverside Drive, Aberdeen.  The head leases of each level are, mutatis mutandis, in identical terms, as are the sub-leases.  The subjects upon which the office building is erected include a car park with an upper deck at ground level and a lower deck at basement level.  Defects in the concrete decking in the car park started to become apparent in about 2009.  Remedial works were carried out in 2012.  The principal issue in the present action is whether the cost of those works falls to be borne by the first defender as sub-tenant or by the second defender as the then head landlord.  That issue falls to be determined by interpretation of the relevant provisions of the head lease of each level of the office building.  In this opinion I shall refer to the provisions of the head lease and sub-lease of level 3 as representative of all three.

The terms of the head lease

[2]        The head lease, to which the parties were inter alia Morrison Properties Limited and Gainsborough AWG Limited, was dated 8 and 29 April and 21 May 2002.  The duration is the 25-year period from 18 January 2002 until 17 January 2027.  It is necessary to begin by setting out some definitions contained in clause 1.2 under reference to a schedule annexed to the head lease:

• “the Building” means… “ALL and WHOLE the office building comprising Levels 1 to 5 inclusive, known as Riverside House, Riverside Drive, Aberdeen… together with the solum thereof and ground attached extending in total to 0.553 hectares or thereby and shown delineated in red on the Layout Plan forming part of the Plans…”

I pause to note that the area delineated in red on the relevant plan includes inter alia the Car Park.

• “the Premises” means… “ALL and WHOLE those premises at Level 3 of the Building…”

and excludes any part of the Building comprised in the Common Parts.

• “the Common Parts” means “those parts and portions of the Building not let or intended or designed to be let by the Landlord to any occupational tenant…”
• “the Car Park” means “the decked car park on two levels, designated for the parking and circulation of motor vehicles and bicycles and including the vehicular entrances thereto…”

The Car Park is included in the Common Parts.

[3]        Clause 4 contains the Landlord’s Obligations.  These include (clause 4.5) obligations to manage the Building in accordance with the principles of good estate management and to carry out or procure the carrying out of the Landlord’s Services.  Part V of the schedule to the head lease lists the Landlord’s Services, which include

“To maintain in good and substantial repair and to rebuild, renew and reinstate the Common Parts as necessary, irrespective of the cause of any damage or destruction…”

[4]        Clause 3 contains the Tenant’s Obligations.  These include (clause 3.1.2) to pay the Service Charge to the Landlord; (clause 3.1.3) to pay the applicable proportion of premiums properly incurred by the Landlord in insuring the Premises and the Common Parts; and (clause 3.6)

“…to repair, maintain, decorate, cleanse, glaze, point, and where necessary renew, rebuild and reinstate and generally in all respects keep in good and substantial repair and condition the Premises… with all necessary maintenance, cleansing and rebuilding and renewal works and amendments whatsoever (…irrespective of the cause or extent of the damage causing such repair, maintenance, renewal, rebuilding or others and including any which may be rendered necessary by any latent or inherent defects in the Premises);…”

The head lease, in short, corresponds to the description of a full repairing and insuring lease.

[5]        The Service Charge payable by the Tenant to the Landlord is defined in clause 1.2 as the aggregate of the Main Service Charge and the Car Park Service Charge.  The Car Park Service Charge is in turn defined as 20% of the Service Expenditure incurred in respect of the Car Park Common Parts.  (The Main Service Charge has a similar definition.)  The Service Expenditure means the expenditure incurred by the Landlord in the provision of the Landlord’s Services pursuant to clause 4.5.  This definition is, however, subject to five exceptions one of which, exception (c), is central to the issue in the present case.  The exception in question is for

“any expenditure incurred in respect of or pertaining to the initial construction of the Building or the Service Systems or any part thereof by the Landlord”.

The terms of the sub-lease

[6]        The position with regard to the sub-lease is more straightforward.  In terms of clause 5.2, the Sub-Tenant is obliged to pay to the pursuer (designed therein as the “Landlords”)

“all sums of money properly payable by the Landlords to the Head Landlords or others in terms of or arising from the Head Lease including, without prejudice, liabilities arising in relation to service charge, common charges and insurance premiums…”

Any sum properly paid by the Tenant (the pursuer) to the Landlord (the second defender) by way of Service Charge is therefore recoverable from the Sub-Tenant (the first defender).

The question for determination

[7]        The question for determination by the court is whether the terms of exception (c) in the definition of Service Expenditure in the head lease preclude the landlord from recovering from the tenant the costs of the remedial work to the car park.  If that question is answered in the negative, then the pursuer is entitled to recover from the first defender as sub-tenant the sums that it has paid to the landlord in respect of such costs.  If the question is answered in the affirmative, then neither the pursuer nor the first defender has any liability for the costs, and the pursuer is entitled to recover from the second defender sums that it has paid to the landlord in error.

[8]        The pursuer’s pleadings in relation to the cause of the defects in the Car Park top deck are not precise.  This may be attributable partly to its complaint that it has not been given sight of the structural engineering report on the basis of which the remedial works proceeded, and partly to the fact that its position is that, regardless of the outcome, it is entitled to recover the sums that it has paid from someone, whether it be the sub-tenant or the landlord.  In so far as the pursuer founds upon an earlier structural engineering report  obtained by the then landlord in 2009, it appears that the defects were regarded as resulting from certain defects in the design and construction of the concrete slab.  The first defender avers more directly that the defects resulted from inadequacies in the design and construction of the Car Park.  For its part, the landlord does not dispute that the works were carried out to remedy latent defects arising out of the design and construction of the Car Park, and I proceed on that factual basis.

Arguments for the pursuer (tenant)

[9]        On behalf of the tenant, two separate arguments were presented.  The first was that in the context of construction of the definition of Service Expenditure, references to the Building did not include the Car Park.  Reference was made to certain definitions in which the Building was referred to separately from the Common Parts or the Car Park Common Parts.  It was submitted that the natural meaning of “the Building” was the office building itself and the solum and ground attaching thereto.  If the term “Building” had been intended to include other structures on the site, including the Car Park, it would have been simple for the head lease to have said so.  On this interpretation, the exclusions from Service Expenditure did not include any reference to the Car Park.  Costs of repair of the Car Park were accordingly not excluded from the definition of Service Expenditure and were recoverable by the tenant from the sub-tenant.

[10]      In any event, it was contended that the ordinary and natural meaning of the phrase “in respect of or pertaining to the initial construction of the Building” extended only to works carried out during the construction phase and any related snagging.  Any other interpretation would be inconsistent with the ordinary concept of a full repairing and insuring lease and would be contrary to commercial common sense.  If the cost of remedying latent defects were to be excluded from recoverable Service Expenditure, that would have been made clear: cf @SIPP Pension Trustees v Insight Travel Services Ltd 2016 SLT 131.  It would moreover be anomalous to construe the head lease as entitling the landlord to recover costs of latent defects in relation to exclusively occupied parts of the premises (under clause 3.6) but not in relation to the Common Parts. 

Argument for the second defender (landlord)

[11]      Counsel for the second defender adopted the second but not the first of the pursuer’s arguments above.  Emphasis was placed upon the scope of the Landlord’s Services (see above), the cost of which was passed on to the tenant and which extended to repair and rebuilding of the Common Parts “irrespective of the cause of any damage”.  If, contrary to the second defender’s primary position, the language of the definition was capable of more than one interpretation, the landlord’s was the one which made better commercial sense.

Argument for the first defender (sub-tenant)

[12]      On behalf of the first defender it was submitted that the pursuer’s first argument was not sustainable, having regard to the definition of the Building in the head lease under reference to an area on a plan which clearly included the Car Park.  As regards the second argument, it was important to give content to the phrase “or pertaining to” in exception (c).  Those words made clear that the exception required to be construed broadly and covered not only the initial construction cost but also matters which “pertained to” the initial construction.  Costs incurred to remedy latent defects in design or construction pertained to the initial construction.  Reference to the scope of the Landlord’s Services did not assist: the lease obliged the landlord to provide those services but precluded it from recovering the cost.  Clause 3.6 specifically covered latent defects in the Premises; there was no such express provision in relation to the Common Parts including the Car Park.  As the building had only recently been constructed, it may be presumed that the original parties to the head lease were alive to the possibility of the existence of latent defects, yet no provision was made for any collateral remedy for the tenant in the event that it was liable for remedial costs.  In all the circumstances it would offend against commercial common sense to construe the lease as imposing such liability on the tenant.

Decision

[13]      Parties were in agreement that this court should adopt the approach to construction of commercial contracts enunciated by the Supreme Court in Arnold v Britton [2015] AC 1619, and in particular in the opinion of Lord Neuberger PSC at paragraphs 14 to 23.  That approach was approved and adopted by the court in @SIPP Pension Trustees v Insight Travel Services Limited (above).  I need not set it out here.

[14]      In my opinion there is no merit in the pursuer’s first argument.  The Building is clearly defined in Part II of the schedule to the head lease to mean not only the office building itself but the whole of the area delineated in red on the layout plan, which area includes the Car Park.  All references in the head lease to the Building are made on that basis.  In particular, the definition of the Common Parts begins “those parts and portions of the Building”, and the Car Park Common Parts are a subset of the Common Parts.  It follows that where exception (c) refers to the initial construction of the Building, the only available interpretation is that it encompasses the initial construction of the Car Park. 

[15]    Turning to the pursuer’s second argument, in my opinion this argument is well founded.  The court in @SIPP Pension Trustees v Insight Travel Services Ltd placed emphasis on the fact that the lease in that case was a full repairing and insuring lease and it is appropriate to do so in this case too.  The imposition of liability on the tenant by clause 3.6 for the cost of repair, rebuilding etc of the Premises even where the cause was a latent or inherent defect is indicative of the common intention of the parties that the landlord should be comprehensively relieved of liability.  It would be surprising if a similar approach were not taken to the Common Parts, including the Car Park.  The combined effect of the definition of Service Expenditure in clause 1.2 and the wide scope of Landlord’s Services in part V of the schedule achieves the same result in respect of Common Parts as is achieved by clause 3.6 in respect of the Premises: liability for repairs and rebuilding, irrespective of cause, rests upon the tenant.  It may be noted that there is a further parallel between clause 3.6 and clause 1.2 with regard to the exclusion of expenditure incurred on making good damage attributable to any of the Insured Risks.  I consider that the first defender’s contention places too much weight upon the words “or pertaining to”.  These words can be given content as a reference to costs such as professional fees associated with the construction of the building but not strictly costs of construction.  To interpret them as contended for by the first defender would impose a substantial and continuing liability of uncertain extent upon the landlord in respect that it could be argued that any expense, whenever incurred, arising from a design flaw or indeed from a design decision was expenditure “pertaining to” the initial construction of the Building.  That would not be consistent with a lease such as the present one which bears the hallmarks of intending to impose a full repairing and insuring obligation upon the tenant.

[16]      Reference was made by the first defender to discussions in certain published works of the competing interests of the landlord and tenant in this connection, and of the desirability, from the point of view of the tenant, of seeking to avoid the imposition of liability for latent defects.  These discussions acknowledge that landlords may not be willing to accede to such avoidance of liability: see eg Rennie, Leases (2015), paragraph 26-39.  It would not be consistent with the Arnold v Britton approach to construe the lease on the basis of what a reasonably prudent tenant might have wished to achieve, or by attempting to assess what would have been a good or bad bargain from either point of view.  The proper approach is rather to identify the parties’ intention by reference to what a reasonable person having all the background knowledge available to the parties would have understood them to be using the language in exception (c) to mean.  When one has regard to the natural and ordinary meaning of the words in exception (c), in the context of the remainder of the definition of Service Expenditure and the other relevant provisions of the head lease, applying commercial common sense but without giving undue weight to it, I consider that the correct interpretation is that contended for by the pursuer and the second defender.

Disposal

[17]      The first defender submitted that if the issue with which this opinion is concerned were decided in favour of the pursuer, decree could not be granted without further procedure because questions remained regarding the adequacy of the specification and quantification of the pursuer’s claim.  The pursuer submitted that decree could be pronounced for payment by the first defender of a sum of around £120,000, but accepted that in respect of a further sum of £75,000 sued for there was a relevant defence pled on record.  I shall put the case out by order for discussion of the terms of the court’s interlocutor and of what further procedure is required.