Scottish Court of Session Decisions

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URL: http://www.bailii.org/scot/cases/ScotCS/2019/2019_CSOH_94.html
Cite as: [2019] ScotCS CSOH_94, 2020 SLT 265, 2019 GWD 38-620, [2019] CSOH 94

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OUTER HOUSE, COURT OF SESSION

[2019] CSOH 94

CA75/19

OPINION OF LORD ERICHT

In the cause

DRUM INCOME PLUS LIMITED

against

LS BUCHANAN LIMITED

Pursuer

Defender

Pursuer: Thomson QC; Brodies LLP

Defender: Richardson QC; CMS Cameron McKenna, Nabarro and Olswang

26 November 2019

Introduction

[1] On the termination of a lease of office premises the landlord raised an action against

the tenant for payment of the costs of the work of cleaning the premises and leaving the

premises in such repair and condition as required by the lease. Neither the tenant nor the

landlord had carried out the work. There was no averment that the landlord intended to do

so.

[2] The case called before me for a debate on two issues:

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(1) Whether on a proper construction of the lease the landlord was entitled to

payment of a sum equal to the fair cost of the work regardless of whether the

landlord had carried out, or intended to carry out, such work.

(2) Whether the landlord had waived the right to payment of such sum.

The lease structure

[3] The pursuer was the landlord and the defender the tenant of the Fifth and Sixth Floor

of office premises at Monteith House, 11 George Square, Glasgow. There was a separate

lease in respect of each floor. Each lease was dated 13 February and 4 March 2015. I refer to

these leases as respectively the “Fifth Floor Lease” and the “Sixth Floor Lease” (together “the

Leases”). Both Leases were substantively in the same terms, and so for simplicity I shall

follow the example of parties in debate and focus in this opinion on the Fifth Floor Lease.

However it should be understood that what I say about the Fifth Floor Lease applies equally

to the Sixth Floor Lease.

[4] The defender in turn granted licences to occupy each of these floors to Abellio

Scotrail Limited (“Abellio”). This was taken into account in the lease structure.

Clause 5.22.1 specifically provided that the defender was entitled to grant a personal licence

to a Nominated Company. Nominated Company was defined in clause 1.1 so as to mean

members of the Scotrail or Abellio groups of companies or the holder of the Scotrail

franchise, and therefore included Abellio.

[5] The original term of each of the Leases and licenses was extended by agreement from

18 January 2018 to 18 January 2019. Notices to quit in respect of each of the Leases and

licences were served dated 4 October 2018. Accordingly, each Lease and licence was

terminated on 18 January 2019.

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[6] It would appear that Abellio adapted the premises to suit their requirements. I was

referred to a schedule of dilapidations prepared by chartered surveyors on behalf of the

pursuer. The schedule refers to numerous items (such as solid partition systems forming

various offices) which would require to be removed to reinstate the premises to their

original open plan layout. Each of the Leases made provision for the defender leaving the

premises cleaned and in such repair and condition required by the Lease, which would

require reinstatement to the original layout.

[7] Thus far the situation has been straightforward. The structure of

landlord-tenant-licensee created by the Leases and licenses came to an end when the Leases

and licenses came to an end on 18 January 2019. When the Leases came to an end on

18 January 2019 the subjects were to be returned in their original condition: for example the

internal partitionings installed for the benefit of Abellio would require to be removed.

[8] However the complicating factor, which has given rise to the issues in this case, is

that at the end of the Leases the landlord did not resume possession of the premises. Instead

by a licence for each floor dated 18 January 2019 the pursuer entered into a fresh licence

direct with Abellio. Accordingly, the structure of landlord-tenant-licensee was replaced

with a structure of landlord-licensee. In effect, the pursuer has cut out the defender and

entered into a direct relationship with Abellio. Abellio continue to use the premises. The

premises having been adapted internally to suit the requirements of Abellio, Abellio

continue to use the premises in the adapted form.

The terms of the Leases

[9] The relevant clauses of the Fifth Floor Lease are as follows.

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“3. Grant of Lease, Entry, Period, Initial Rent etc

3.4 The Tenant shall also pay to the Landlord from time to time during the Period of

this Lease:

3.4.1 within fourteen days of written demand the Service Charge Percentage

of the premiums and all other normal costs which the Landlord properly

incurs from time to time for keeping in force the Building Insurance;

3.4.2 within fourteen days of written demand therefor the Service Charge

Percentage of the premiums for keeping in force the Loss of Rent Insurance;

and

3.4.3 at the times specified in Part 4 of the Schedule the Service Charge as the

same

shall be ascertained from time to time in terms of Part 4 of the Schedule.

…

4 Tenant’s Obligations: Rent and other annual or recurring sums income

4.1 The Tenant HEREBY UNDERTAKES to the Landlord and binds and obliges itself

throughout the Period of this Lease to pay the rent and all other sums payable to the

Landlord pursuant to this Lease and that at the times and in the manner herein

specified and in each case except as otherwise provided in this Lease clear of all

deductions whatsoever and agrees that except as otherwise provided in this Lease or

required to be made by law it shall have no right of set-off or retention for any reason

against the Landlord in respect thereof.

4.2 Without prejudice to any other right remedy or power herein contained or

otherwise available to the Landlord if any sum due in terms of this Lease (including

without prejudice to the foregoing generality rent) shall not be paid on the due date

by the Tenant and shall remain unpaid for fourteen days thereafter the Tenant

undertakes to pay on demand to the Landlord interest on such sum at the Prescribed

Rate from the date when the same became due as aforesaid until payment thereof

including any period after any decree or judgement.

…

5 Tenant’s Obligations: Maintenance and repair etc

The Tenant HEREBY UNDERTAKES to the Landlord: not in Lease

5.1 To repair and renew

At all times throughout the Period of this Lease at the Tenant’s expense to keep the

Premises in good and substantial condition and without prejudice to the foregoing

generality well and substantially to uphold, repair, maintain, and where necessary

for such repair and maintenance renew, rebuild, and reinstate the Premises and

every part thereof regardless of the age or state of dilapidation of the Premises and

irrespective of the cause or extent of the damage or other want of repair, and

including any such as maybe rendered necessary by any latent or inherent defect in

the Premises and in addition to carry out all necessary regular maintenance and

cleansing in respect of the Premises; …

5.7 To keep the Premises clean and tidy

At all times during the Period of this Lease to keep the Premises in a clean and tidy

condition, to clear away waste, and to clean at least once every month the inside of

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the windows and window frames of the Premises and all the glass (if any) in the

entrance doors thereto.

…

5.9 To comply with Landlord's notices

Subject.to the terms of Clauses 5.1, 5.4 and 5.6 to make good all wants of repair and

decoration for which the Tenant is responsible in terms of this Lease and to comply

with any other matters which the Tenant is liable to make good and to comply with,

and as are specified in a notice in writing given to the Tenant by the Landlord or the

Managing Agent, and that within such reasonable period as shall in the

circumstances taking into account the wants of repair and decoration in question as

.may be stated in such notice (the Landlord being bound to act reasonably); and if the

Tenant fails to comply with any such notice, the Landlord shall be entitled at its

option (without prejudice to any other right or remedy available to the Landlord

pursuant to this Lease) to enter upon the Premises with workmen and to

make good all wants of repair and decoration and to carry out any other works

specified in such notice and the costs properly and reasonably incurred by the

Landlord in pursuance thereof shall be repaid by the Tenant to the Landlord within

fourteen days of written demand(and provided that the Tenant is giving along with

such demand a statement of costs incurred for the same) together with all Managing

Agents and Solicitors' charges and other expenses which may be properly and

reasonably incurred by the Landlord in connection therewith together with interest

thereon at the Prescribed Rate in each case from the date 7 days after written demand

by the Landlord. PROVIDED ALWAYS that any such notices of alleged wants

of repair and decoration must be served at least 1 week before the expiry of the

Period of this Lease.

5.24 Costs of enforcing Tenant’s obligations

To pay to the Landlord all reasonably and properly incurred fees, costs, charges,

expenses and disbursements, incurred to the Managing Agent and where applicable

any Solicitors, Counsel, Architects, Surveyors, Messengers at Arms or Sheriff Officers

or any other persons properly engaged or employed by or on behalf of the Landlord,

plus VAT except in so far as recoverable by the Landlord on all such fees and costs of

an in connection with procuring the performance of the Tenant’s obligations under

this Lease and including without prejudice to the foregoing generality costs incurred

in relation to the preparation and service of any schedule of dilapidations or other

notice relating to wants of repair or requiring the Tenant to remedy any breach of

any of the obligations of this Lease and that whether the same are served during or

up to the date of expiry or sooner determination of the Period of this Lease;

5.25 Landlord's Costs

To pay within fourteen days of proper written demand to the Landlord all

reasonably and properly incurred fees and outlays (a) incurred by the Landlord in

connection with the negotiation, preparation and completion of any deed of

assignation, transfer, mortgage, subtenancy or other deed of transmission permitted

by the Landlord together with any stamp duty land tax payable in respect thereof

and the costs of registration in the Books of Council and

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Session and of obtaining three Extracts (two of which will be for the Landlord's

purposes) and

(b) of the Landlord's Surveyor or the Managing Agent and the Landlord's Solicitors,

all as maybe applicable in connection with any application for consent or approval

(whether or not consent or approval is properly refused in accordance with this

Lease or the application withdrawn and if consent or approval is given in connection

with or incidental to the preparation of any licence or other document used to record

such consent or approval)-

[…]

5.34 To remove

Immediately prior to the expiration or sooner determination of the Period of

this Lease at the cost of the Tenant:-

(a) to renew and replace any of the Landlord’s fixtures and fittings which

shall be missing, broken, damaged or destroyed with others of a similar

character, condition and quality;

(b) to remove every moulding, sign, writing or painting of the name or

business of the Tenant from the Premises and from any other part of the

Building and to remove any alterations or additions, other than those to

which the Landlord has given its consent, and do not constitute Tenant’s

trade fixture and/or fittings and all Tenant’s fixtures and fittings, furniture

and effects from the Premises making good to the reasonable satisfaction of

the Landlord all damage caused by such removal; and

thereto and if and to the extent so required as notified to the Tenant within

three months prior to the expiry of the Lease by the Landlord to remove and

make good alterations or additions made to the Premises and to reinstate the

Premises in such condition so as to comply with the obligations of the Tenant

under the Lease.

5.35 At the expiration or sooner determination of the Period of this Lease without

any warning away or process of removal to that effect to remove from and leave the

Premises empty and cleaned and in such repair and condition as shall be in

accordance with the obligations of the Tenant under this Lease together with all

fixtures and fittings (excepting Tenant’s fixtures and fittings) and improvements and

additions in the Premises save such as the Tenant has been required to remove

pursuant to Clause 5.34(c); Provided that if at such expiration or sooner

determination the Premises shall not be empty and cleaned and in such repair then at

its sole option the Landlord shall be entitled to require that either (a) the Tenant

carries out at its cost the works necessary to put the Premises into such condition or

(b) the Tenant pays to the Landlord such sum being equal to the fair cost of carrying

out such work and if the Tenant shall pay to the Landlord the sum within fourteen

days of demand the Landlord shall accept the same in full satisfaction of the Tenant’s

liability under this sub-clause quoad the work referred to in this proviso.”

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First Issue: obligation to pay regardless of whether works carried out

Submissions for the defender

[10] Counsel for the defender invited me to uphold his plea to the relevancy and dismiss

the action.

[11] He submitted that the pursuer did not offer to prove that it had carried out or had

any intention of carrying out the works, and it was reasonable to infer that it had no such

intention. The construction of clause 5.35 was an exercise of contractual interpretation to be

carried out in accordance with well recognised principles (@SIPP Pension Trustees v Insight

Travel Services 2015 SC 243 at [17] and [36], Grove Investments Limited v Cape Building Products

Limited [2014] CSIH 43 at [9] to [13], Wood v Capita Insurance Services Limited [2017] AC 1173

at [10] to [15]). Approaching clause 5.35 on this basis, the pursuer’s entitlement to payment

in terms of the proviso was limited to costs of works which had been or were going to be

carried out by the pursuer. That was in accord with the structure of the clause. It

recognised that payment was an alternative to leaving the premises in the proper condition,

as opposed to being a free standing right to payment. Counsel contrasted clause 5.35 with

clauses 3.4, 5.9 and 5.25 which provided for a right to payment. He drew attention to the

reference to “the fair cost of carrying out such work” and submitted that the parties

intended that pursuer’s entitlement required to be evaluated against notions of fairness

which would include whether the work has been or will be carried out. Under the

defender’s construction, the pursuer’s entitlement was to compensation for a breach by the

defender of its obligations, which was consistent with other clauses such as clause 5.24.

Further, this construction recognised that, unlike the free standing rights to payment

contained in the Lease, the pursuer’s entitlement under the proviso to clause 5.35 made no

provision for a notice or calculation of the sum paid, which was to be contrasted with the

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pursuer’s entitlements to payments of Service Charge (in terms of clause 3.4 and part 4 of

the schedule) and Landlord’s Costs (in terms of clause 5.25). Finally he submitted that to

construe the pursuer’s entitlement in terms of the proviso to clause 5.35 as being

unrestricted by the actual losses incurred would result in potentially arbitrary and

disproportionate recovery by the pursuer and would be contrary to commercial common

sense (Grove Investments Limited at [17] to [23]). Esto the pursuer’s construction was correct,

the question of whether the work had been carried out was relevant to whether the cost was

“fair”.

Submissions for the pursuer

[12] Counsel for the pursuer submitted that on a proper construction of proviso (b) to

clause 5.35, the defender was bound to pay (as a contractual debt) the “fair cost” of the

works required to put the premises into the condition required by the Leases, whether or not

such works have been, or are to be, carried out. That construction was produced by the

application of both the established general principles of contractual construction (Midlothian

Council v Bracewell Stirling Architects 2018 SCLR 606, 615; Wood v Capita Insurance Services

Ltd [2017] 2 WLR 1095, paras [8]-[15]) and by directly relevant authority (@SIPP Pension Trs v

Insight Travel Services Ltd 2016 SC 243, 254 257; Tonsley (Strathclyde) Limited and another v

Scottish Enterprise [2016] CSOH 138, paras [20]-[25]. The wording of clause 5.35 was

materially different from wording which resulted in a different outcome in Grove Investments

Ltd v Cape Building Products Ltd. It followed from the foregoing that the defender's

averments as to the construction of proviso (b) to clause 5.35 were irrelevant and should be

excluded from probation. It also followed that the averments made by the defender (in

support of its preferred construction of proviso (b)) to the effect that no works have been, or

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will be, carried out by the pursuer, were likewise irrelevant and should be excluded from

probation.

Discussion and decision

[13] The issue is whether on a proper construction of the lease the landlord was entitled

to payment of a sum equal to the fair cost of the work regardless of whether the landlord

had carried out, or intended to carry out, such work.

[14] That issue turns on the wording of the particular lease which the court is asked to

consider in any given case. So, for example, in Grove Investments v Cape Building Products

Limited an Extra Division found that on the wording of the particular lease the tenants were

only obliged to make payment to the landlords of the loss actually suffered by them. On the

other hand, an Extra Division in @SIPP Pension Trustees found that the wording of the

particular lease in that case could readily be distinguished from that in Grove Investments

(para [42]). In @SIPP Pension Trustees the Extra Division concluded that the wording clearly

indicated that parties intended that if the subjects were not at termination in the condition

they would have been in if the tenant had complied with its repairing obligations then the

landlord was to be entitled payment of a sum equal to the cost of bringing them up to that

standard (para [38]). In Tonsley the Lord Ordinary distinguished the wording of the lease

from that in Grove Investments and followed @SIPP Pension Trustees.

[15] Guidance as to how to go about the interpretation of the wording of the Leases was

given by the Extra Division in @SIPP Pension Trustees as follows:

“17. The task for the Lord Ordinary when interpreting the lease was to have, as

his ultimate aim, the determination of what the parties meant by the language used,

doing so by ascertaining what a reasonable person with all the background

knowledge available to the parties would have understood the parties to have meant:

(Rainy Sky SA v Kookmin Bank, at para 14 per Lord Clarke of Stone ‑ cum ‑ Ebony;

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and Arnold v Britton at para 15), where the task was distilled by Lord Neuberger of

Abbotsbury as being that:

‘The meaning has to be assessed in the light of (i) the natural and ordinary

meaning of the clause, (ii) any other relevant provision of the lease, (iii) the

overall purpose of the clause and the lease, (iv) the facts and circumstances

known or assumed by the parties at the time that the document was executed,

and (v) commercial common sense, but (vi) disregarding subjective evidence

of any party’s intentions. ‘”

[16] In undertaking this task, it is helpful to compare the wording in the Leases with the

wording considered in @SIPP Pension Trustees, Grove Investments and Tonsley.

[17] The relevant clause in the current case was as follows:

“5.35 At the expiration or sooner determination of the Period of this Lease without