Inner House allows part of appeal in dispute over repairs to flood-damaged Glasgow restaurant

About this case:

• Citation:
  [2024] CSIH 38
• Judgment:
  External link
• Court:
  Court of Session Inner House
• Judge:
  Lord Carloway

Pursuers Forthwell Ltd, which held the tenant’s interest in a lease of the Rogano restaurant in Glasgow, sued their landlord Pontegadea UK Ltd to obtain specific implement ordaining them to carry out repairs to the restaurant, and additional damages arising from the defenders’ failure to keep the restaurant in good repair. The defenders argued that the insurance contract was to the parties’ mutual benefit, and they should not have to pay additional damages as the losses had been suffered by a third party.

The appeal was heard by the Lord President, Lord Carloway, together with Lord Malcolm and Lord Pentland. Borland KC and D Ford, solicitor advocate, appeared for the pursuers and respondents and the Dean of Faculty, Dunlop KC, and G Reid, advocate, for the defenders and reclaimers.

Legal black hole

In December 2020 and January 2021, while the Rogano was closed due to Covid-19 restrictions, the premises were damaged due to flooding and an electrical fire that broke out after the first flood. No repairs had been carried out by the time of the action, rendering it impossible to reopen the restaurant. While the pursuers held the tenant’s interest in the property, the restaurant was operated by their subsidiary Lynnet Leisure (Rogano) ltd, who occupied the premises under a licence to occupy.

Under the terms of the current lease, first entered into in 1996 with the tenancy assigned to the pursuers in 2013, the defenders were required to maintain insurance for the premises in their name. The lease also required the defenders to rebuild any part of the premises destroyed or damaged by any insured risk, including flooding, inclusive of the lesser obligation to repair.

While the defenders did not dispute that in principle the pursuers could seek specific implement, they sought dismissal of the additional damages claim on the basis that, where a landlord and tenant had agreed to effect insurance for their mutual benefit, the insurance was the only means of recourse which the parties would have in respect of insured losses. They further contended that in any event they were not obliged to pay compensation to the pursuers for losses suffered by a third party, their subsidiary.

The commercial judge rejected the defenders’ arguments, holding that the insurance was not intended to be a joint policy. On the transferred loss argument, he held that the general thrust of Scottish authority was that a party could sue for loss suffered by a third party if the loss would otherwise fall into an unrecoverable “legal black hole”.

Counsel for the defenders submitted that the judge erred in finding that the insurance was not for the benefit of both parties. In respect of transferred loss, there was a difference between losses which fell into a legal black hole, and losses irrecoverable under a contract. There could be no legitimate complaint when the party suffered loss as a result of a breach of contract by someone with whom he had not chosen to contract.

Of their own creation

In his opinion, with which Lord Pentland agreed and Lord Malcolm agreed in part, Lord Carloway began by dealing with the mutual insurance point: “The insurance was expressly to be in the sole name of the defenders. They alone could make a claim upon the fund. In that situation there is nothing in the lease to suggest that the pursuers were to be prevented from pursuing the defenders in respect of their obligation to rebuild, where damage had been caused by an insured risk. The defenders’ contention on mutual insurance therefore fails.”

Turning to the issue of transferred loss, the Lord President observed: “Had the pursuers sub-let the premises, with the appropriate consent, there would, no doubt, have been a rent payable with a reciprocal condition that the premises remained fit for occupation. If the sub-lease rental were lost for a period, that would be the measure of the pursuers’ additional damage. There was no sub-lease, but a licence to occupy. There was no rent or an equivalent licence fee (other than £1). There was no obligation on the pursuers to keep the premises in good repair.”

He continued: “Had there been one, the subsidiary would have been able to claim damages from the pursuers, and the pursuers would in turn have been able to claim the equivalent from the defenders, at least if the defenders were aware of the arrangement. Not only was none of this contracted for, it was specifically agreed that, in the absence of negligence etc on the part of the licensor, the licensor would have no liability to the subsidiary for any loss due to deficiencies in the premises. That was the manner in which the parties elected to arrange their affairs. If the subsidiary’s losses disappeared into a black hole, it was one of their own creation.”

Lord Carloway concluded: “Here, the third party (the subsidiary) has expressly disavowed in his licence any right of recovery against the pursuers; thus potentially creating the so-called black hole. It would be baffling if the subsidiary could then sue the licensors’ landlords, who were not even aware of the subsidiary’s existence.”

The court therefore allowed the reclaiming motion on the transferred loss point only and recalled the Lord Ordinary’s interlocutor insofar as related to the defenders’ relevant plea-in-law.