Dilapidations: clear words required to avoid or restrict repairing obligations
A number of recent Scottish cases have considered liability for repairs under leases. For a while, the courts expressed a willingness to re-write express provisions in leases, on the basis that the tenants had entered into “bad bargains”. The case of @sipp Pension Trustees v Insight Travel Services Limited, which we reported on in January of this year, was a welcome reversal of that trend. Another decision from the Court of Session, Dolby Medical provides further confirmation that clear words will be required to avoid or restrict a repairing obligation. The case is also of interest as it considers the position where a head landlord and tenant have settled, leaving the mid-landlord to recover from the sub-tenant. In this situation, the question of mitigation of loss comes to the fore.
“A familiar dance”
In terms of the lease, the tenant, Dolby Medical Home Respiratory Care Ltd (“DML”) could serve notice to terminate the lease half way through its term. On receipt of the notice of termination, the landlords served a schedule of dilapidations. DML accepted that it was in breach of its repairing obligations, but contested the extent and cost of repairs. In what Lord Woolman described as “a familiar dance”, the landlords raised proceedings to recover the repair costs.
As part of a business restructure, DML had granted a licence to its subsidiary, Mortara, to occupy a large part of the premises. The licence set out Mortara’s obligations in respect of repairs to the premises and common parts. DML invited Mortara to participate in the negotiations with the landlord, but it declined to do so. DML eventually reached a global settlement with the landlords, with no apportionment to individual elements in the schedule. DML pursued Mortara for a contribution towards the cost of repairs of the common parts. Mortara argued it had no liability as its obligations only applied during the currency of the licence, not at termination.
The principal issues were:
- did Mortara have a dilapidations liability?; and
- if so, was its liability limited?
The licence provided that Mortara had to pay 75% of “the cost of maintaining and repairing the common parts” of the premises. The court decided that this language was unqualified and clearly placed a dilapidations liability on Mortara. If the parties had intended to draw a distinction between currency and termination, it would have expected that to be clearly expressed. Although the licence did not define “common parts”, the court held that the term was generally understood to refer to areas from which both parties derive benefits, such as the roof. The court said that its construction of this clause squared with commercial common sense; landlords are astute to enforce repairing obligations at the end of a lease. It’s at this stage that the premises receive detailed scrutiny. It would be “highly surprising if the parties had intended Mortara to elide a share of responsibility at that point.”
Was the liability limited?
Mortara had to maintain the premises “in the like condition and state of repair”. It argued that this limited its liability; it only had to maintain the premises as they were at the date of entry. There was no duty to improve them. The court held that clear words would be required to restrict the obligation in this way. Given the absence of a schedule of condition, there would be no benchmark against which to determine whether or not Mortara had discharged its obligation.
The case is a welcome addition to the body of case law confirming that clear language is required to restrict or avoid obligations; a bad bargain is not enough to justify re-writing a contract.