SHERIFFDOM OF GRAMPIAN, HIGHLAND and ISLANDS AT ABERDEEN

 

CA60/11

 

 

JUDGMENT

 

by

 

SHERIFF PRINCIPAL DEREK C W PYLE

 

in causa

 

 

GILLIAN DOROTHY McMILLAN, KEVIN CHARLES CAMERON McINTOSH and SCOTT ANTHONY BENZIE, as the whole partners of, and trustees for, the firm of The Bridge Street Partnership, all having a place of business at 18 Bridge Street, Aberdeen AB11 6JJ

Pursuers and Appellants

 

against

 

WILLIAM HILL (SCOTLAND) LIMITED, a Company having its registered office at 9-15 North Drive, Glasgow G1 4BL

Defenders and Respondents

 

 

 

Aberdeen, 1 February 2013

The Sheriff Principal, having resumed consideration of the cause, Allows the appeal; Appoints the cause to be heard By Order on a date afterwards to be fixed.

[1] This is an appeal against the sheriff's interlocutor in which she sustained the respondents' plea-in-law to the relevancy and specification of the appellants' pleadings and dismissed the action.

 

[2] The action concerns claims by the appellants as landlords against the respondents as tenants following upon the termination, in November 2010, of a commercial lease. The principal issue before the sheriff and on appeal was the proper construction of the provisions of the lease relating to the respondents' repairing obligation.

 

[3] The relevant provisions of the lease, the tenants' interest in which was later assigned to the respondents, are as follows:

(a) Clause SECOND provides:

 

"IN CONSIDERATION OF the rents and other prestations hereinafter specified the Landlord hereby Lets to the Tenant... the Premises... FOR WHICH CAUSES the Tenant accepts the Premises in their present condition..."

 

(b) Clause THIRD of the schedule to the lease provides:

"At commencement of the Lease the Tenant will render the Premises into a satisfactory tenantable state and adequate for the Tenant's purposes and thereafter subject always to the provisions of Clause Fifth of the Lease (a) at all times throughout the Period of the Lease at the Tenant's expenses well and substantially to paint, decorate, repair and maintain the Premises... at least to such satisfactory tenantable state..."

 

(c) Clause TWENTY-SECOND of the schedule provides:

"(1) Immediately prior to the Date of Expiry at the cost of the Tenant (but only if requested by the Landlord in writing):

(a) to replace any of the Landlord's fixtures and fittings which shall be missing, broken, damaged or destroyed with others of a similar character and quality;

(b)...

(c) to remove and make good all alterations or additions made to the Premises other than in pursuance of the Tenant's obligation in favour of the Landlord at any time during the Period of the Lease provided always that such removal was a condition of the grant by the Landlord of consent to such alteration or addition and well and substantially to reinstate the Premises in accordance with the obligations undertaken by the Tenant under the Lease;

(2) At the Date of Expiry to remove from and leave vacant and clear the Premises... in such good and substantial repair and condition as shall be in accordance with the obligations undertaken by the Tenant under the Lease; provided that if at the Date of Expiry the Premises shall not be in such good and substantial repair and condition the Tenant shall carry out at its expense the works necessary to put the Premises into such repair and condition and if the Tenant fails to do so, the Landlord shall be entitled to carry out such works at the reasonable expense of the Tenant."

 

 

[4] The sheriff decided that the obligation on the respondents as contained in Clause Twenty-Second (supra) was to leave the premises in a satisfactory tenantable state and adequate for the respondents' purposes qua tenants. She reached this conclusion by applying the phrase "in accordance with the obligations undertaken by the Tenant under the Lease" to the repairing obligation contained in Clause THIRD (supra). She then went on to criticise the appellants' pleadings, under reference to a schedule of dilapidations which had been produced and adopted in the appellants' pleadings, for their failure to aver the proper test of the standard of condition which applied to the premises on termination.

 

[5] Counsel for the appellants criticised the sheriff's approach. The term, "satisfactory tenantable state", is commonplace in commercial leases. (See, for example, Co-operative Insurance Society Limited v Fife Council [2011] CSOH 76) The phrase, "adequate for the tenant's purposes" was in effect an obligation upon the tenants to fit out the premises for their purposes. In any event, the "obligations undertaken by the Tenant under the Lease" are not restricted to Clause Third, but also include other clauses, such as Clauses Fourth and Fifth of the schedule which provide for the landlords during the currency of the lease to enter the premises, identify defects, and oblige the tenants to carry out repairs, failing which to permit the landlords to do them themselves. Moreover, the lease provides that the tenants' fixtures and fittings are excluded from the obligation in Clause Twenty-Second. In other words, the landlords had no interest in them.

 

[6] The interpretation favoured by the sheriff, said counsel, did not make commercial sense in that the tenant would receive a windfall, in that the test was a lower one than the traditional one of "satisfactory tenantable state". (Rainy Sky SA v Kookmin Bank [2011] UKSC 50; Multi-Link Leisure Developments Ltd v North Lanarkshire Council 2010 SC (UKSC) 53)

 

[7] The solicitor for the respondents submitted that the sheriff's interpretation of the contractual terms was correct. The test of "adequate for the tenant's purposes" did not necessarily mean a lower test - it was simply a different test.

 

[8] In my opinion, the appellants' proposed construction of the lease should be preferred. I reach that conclusion both as a matter of proper construction of the contract as a whole and as a matter of business common sense (Rainy Sky SA, para 30).

 

[9] Dealing with the latter first, the overall commercial purpose of a full repairing and insuring lease, which is of course the common form of commercial leases, is that the landlord lets the premises in return for rent and passes on to the tenant the whole responsibility for its upkeep and maintenance. It is accepted that damage to the premises by insurable risks should be an exception but the tenant will nevertheless be liable for the premium due under the insurance policy. In other words, the landlord sees the transaction as one which ensures that he receives the benefit of an agreed return on his capital investment with no risk to that return from the cost of maintaining and insuring the investment. A consequence of the underlying nature of the transaction is that the landlord wants the building to be returned to him broadly in the same condition it was in at the commencement of the lease - doubtless with the intention, if he so wishes, of entering a new lease with new tenants without incurring any cost in repairing defects. This underlying commercial purpose of the contract, from the point of view of the landlord, also means that he has little or no interest in the works which the tenant might carry out to suit his particular purposes, provided the property is returned to the landlord at the end of the lease in its original condition. (There are commonly many qualifications to that, but the general underlying commercial purpose remains the same.)

 

[10] In the instant case, it is not in dispute that, as the sheriff records, the original tenants used the premises as a shop for the retail sale of photographic equipment - indeed that is expressly set out in the lease as the permitted use (Clause Eighth of the schedule). When the lease (or, rather, part of the leased premises) came to be assigned to the respondents, the prohibition against the use of that part of the premises was varied to include use as a licensed betting office. There is nothing in either the lease or the partial assignation to suggest that the landlords, as a matter of business common sense, wished the building when it was returned to them to have a standard of repair of a retail shop for photographic equipment in one part or a licensed betting shop in the other.

 

[11] The respondents argue that the standard of "adequate for the tenant's purposes" does not necessarily mean a lower one than "satisfactory tenantable state". But as a matter of business common sense, it is difficult to see why they would have entered the contract on that understanding of its meaning if they did not anticipate that a lower standard was being applied.

 

[12] Be that as it may, I also consider that looking at the contract as a whole the appellant's construction should be preferred. In reaching that conclusion, I rely on the following terms: first, the lease provides that the tenants accept the premises "in their present condition" (Clause Second); secondly, Clause Third of the schedule repeats the term "satisfactory tenantable state" in the context of the continuing nature of the repairing obligation during the currency of the lease (rather than just at its commencement) but does not repeat the reference to the tenants' purposes; thirdly, Clause Twenty-second of the schedule requires the tenants to remove their fixtures and fittings on termination. It would make little sense if the repairing obligation was to be tested as the standard of adequacy for the tenants' purposes that all such fixtures and fittings required to be removed; fourthly, it is impossible to see how a chartered surveyor (or, indeed, the court) could apply what are ultimately two different tests to the same premises. For aught yet seen, a part of the premises might be in a satisfactory tenantable state but not be adequate for a licensed betting shop, or vice versa. Which test should the surveyor apply? The respondents' solicitor said that the tests were not necessarily higher or lower, but were simply different. That may well be right, but the logical consequence of it is that they are likely on occasion to be mutually exclusive. In other words, they only work together where they are the same - in which case, there would be no need for two tests in the first place.

 

[13] In my opinion, the purpose of the words, "adequate for the tenant's purposes" are merely to express the parties' agreement that it is for the tenants to ensure the adequacy of the premises for their purposes, not for the landlords. That is consistent with the underlying commercial purpose, from the point of view of a landlord, in a full repairing and insuring lease in the manner I have described.

 

[14] The secondary matter which was raised in this appeal was the sheriff's decision that the action was premature because the appellants do not aver that they have carried out the works as described in the schedule of dilapidations (para 5.14 of her judgment). As it transpired, the solicitor for the respondents gave only lukewarm support for the sheriff's conclusion, although it has to be said that he adopted a different position in the debate before her. In particular, when pressed by me, he did not maintain that the respondents offer to prove that the appellants have no intention at all of carrying out the works set out in the schedule. That of course would be a proper line of defence. It appears instead that at the debate - and as accepted by the sheriff - the respondents took a technical point that as Clause Twenty-Second provided that the landlords were entitled to carry out the works at the reasonable expense of the tenant the contract did not permit the landlords to claim the expense before the work was done. With the greatest respect to the sheriff, I do not understand that point. The lease does not set out a mechanism for the landlord to recover that expense. In other words, the contract does not exclude a demand for payment before the works are done. In any event, a claim for payment based upon a schedule of dilapidations is commonplace in the commercial world and, as counsel pointed out, was employed, without adverse judicial comment, in Prudential Assurance Co Ltd v James Grant & Co (West) Limited 1982 SLT 423.

[15] In the whole circumstances, the appeal is allowed. Parties were agreed that I put the case out By Order to discuss further procedure, which I have done. I have not dealt with the expenses in the interlocutor but agree with counsel that I should find the respondents liable in the expenses of the appeal and that the respondents should be held entitled to only 75% of the expenses of the debate before the sheriff, given that they did have some success on other grounds which were not the subject of this appeal. If parties can agree a position for the disposal of the appeal and the remit to the sheriff to proceed as accords, it will be unnecessary to fix a further hearing. The respective agents should correspond by e-mail with my personal secretary.