Inner House rules in favour of landlord’s right to calculate dilapidations claim in line with lease

The lease which was considered in the case contains an express provision that the claim is to be calculated according to the cost of the required repairs.

In the case – @SIPP (Pension Trustees) v Insight Travel Services Limited CSIH 91 (which relates to commercial premises in Port Glasgow) the court rejected the tenant’s argument that the provision could not be enforced because it was ambiguous.

The court also rejected the tenant’s argument that the landlord’s claim could be quantified according to the loss in the capital value of the landlord’s interest in the premises.

The decision is the opposite of that in a similar case heard last year, Grove Investments Ltd v Cape Building Products, where the Inner House favoured the tenant’s argument that in a similarly worded provision, the phrase, “value of the schedule of dilapidations” meant that the tenant could not be forced to pay the cost of the repairs.

Ewen Brown, head of disputes, Morisons, representing the landlords (@SIPP) welcomed the judgment saying: “The case is one of a handful of recent cases where similarly worded clauses have come under the spotlight.

“The decision should bring comfort to commercial landlords that the courts will uphold clauses in leases which make it clear that the landlord is entitled to have its claim for dilapidations quantified by reference to the cost of the repairs”.

Commercial property leases include clauses whereby the tenant is obliged, on the termination of the lease, to carry out repairs such that they are left to the standard of repair required by the lease.

Failure to do so, which is fairly common practice, entitles the landlord to hold the tenant liable for breach of contract. Traditionally, the sum sought by the landlord is usually the cost of the repairs whether or not the repairs are to be carried out.

Having regard to the commercial property market in recent years, tenants have been increasingly trying to argue that the landlord’s claim should be restricted to loss in the value of the property due to its disrepair, even if the repairs are to be carried out. The legal position in Scotland on which method (cost of repair – versus loss in value) should prevail is still not clear.

That explains why some commercial leases include provisions setting out that the loss should be quantified only by reference to the cost of repair.

In England the situation is different in that statue provides the sum of money landlords can pursue is capped at the lower of either of the cost of the repairs and the loss in the property’s capital value.

Mr Brown added: “Our clients successfully argued that their lease provides a right to payment of a sum equivalent to the cost of repairs.

“As a result, commercial landlords and tenants, along with their advisers, will have to look closely at the terms of existing leases and the terms of new leases being put in place”.