INTRODUCTION

@sipp Pension Trustees v Insight Travel Services Limited [2015] CSIH 91 is a decision of the Inner House of the Court of Session (the Scottish equivalent of the Court of Appeal) from 11 December 2015. The original first instance decision in @sipp was one of a trilogy of Scottish lease dilapidation cases from the last year or two which have caused landlords and their advisers some consternation.  They all held, one way or another, that an express provision that the landlord could, at termination of the lease, require the tenant to pay the landlord the whole cost of carrying out the dilapidation works rather than actually carrying out the works, was ineffective. 

(Note that s18 of the Landlord and Tenant Act 1927 - which limits the amount of damages a landlord may recover for breach of repairing covenants to the amount by which the value of the reversion is diminished by the breach, and excludes damages altogether if it is shown that the premises would be demolished, does not apply in Scotland.  But Scots common law does, unlike English common law, allow tenants to produce evidence that the start point for assessing the level of damages – the cost of doing the works – might not be appropriate in a particular case.  So the end result, while not exactly identical, is not hugely dissimilar in practice north and south of the border, albeit the legal route taken to get there is quite different.)

Many commentators were critical of the cases on the ground that they seemed completely to rewrite the express provisions of the leases, apparently as the court perceived that the tenants had entered into “bad bargains”.  To that extent, the cases form the high water mark of the judicial trend over the last 50 years or so away from literal interpretation of contracts to so-called purposive interpretation – a trend recently abruptly halted by the decision of the Supreme Court in Arnold v Britton [2015] UKSC 36.

The landlord in @sipp, having lost at first instance, appealed. There were two points at issue: first, whether the full repairing obligations in the lease required the tenant to put the premises into “good and substantial repair” if they were not in such repair at the outset, as opposed to merely keeping them in the condition they were in at the outset; and second, if the tenant did not do so, did the “pay the whole cost” clause work?

FIRST POINT

At first instance the court had held that, despite a torrent of drafting requiring the tenant not only “to repair [the Premises] and keep [them] in good and substantial repair and maintained…to the satisfaction of the Landlord” but also “to replace or renew or rebuild [the Premises] whenever necessary…in at least as good condition as they are accepted by the Tenant all to the satisfaction of the Landlord and that regardless of the age or state of dilapidation of the [Premises]”, the tenant did not have to put the premises into good and substantial repair. The judge at first instance reached that conclusion by construing the words “in at least as good condition as they are accepted by the Tenant” as being, in effect, a cap on the tenant’s liability, so that the tenant did not have to improve them beyond that standard.

The Inner House placed great weight on Arnold v Britton, which had not been decided when the @sippcase was heard at first instance.  In particular they quoted from the judgment of Lord Neuberger to the effect that, “whilst poor drafting makes it easier to depart from the natural meaning and clear drafting makes it more difficult to do so, the court is not thereby justified in embarking on an exercise of searching for or constructing drafting infelicities so as to facilitate such departure”: they held that the approach of the judge in the lower court “involved a forensic analysis of the type that may be appropriate to statutory construction but [was] redolent of the sort of search for infelicities warned against by Lord Neuberger. Whatever drafting deficiencies there may be in [the repairing] clause…they are not, in our view, such as to entitle the court readily to depart form the natural meaning of the clause” - which, given the torrent of other repairing obligations, meant that the tenant did after all have a put obligation.

In addition, the Inner House noted that, as well as the reference to “at least as good a condition as they are accepted” the lease also contained references to “good and substantial condition”, “all to the satisfaction of the landlord” (twice), “regardless of the age or state of dilapidation” (all of which would be redundant if the tenant’s view were correct) and the fact that there was no schedule of condition attached to the lease. And, on top of that, it noted that the weight of case law “supports the conclusion that an obligation to keep subjects in good and substantial repair carries an obligation to put them into that state of repair”.

For all those reasons, the court held that the tenant had a “put” obligation as well as a “keep” obligation and that the reference to “at least as good a condition as they are accepted” was merely a “minimum baseline”.  The lower court’s conclusion did not accord with commercial commonsense, not only for the above reasons, but also “because the clause bears all the hallmarks of a full repairing lease and [the judge’s] construction would involve such a departure from that, that parties could have been expected to make it quite clear that that was what was intended”.

SECOND POINT

The lease provided that, at termination, the tenant had to yield up the premises in accordance with its repairing obligations but that the landlord had the option to call upon the tenant “to pay to the Landlord at the determination date…a sum equal to the amount required to put the leased subjects into good and substantial repair and in good decorative condition in accordance with the obligations and conditions on the part of the Tenant herein contained in lieu of requiring the Tenant himself to carry out the work”.

Despite that apparently clear wording the judge at first instance – apparently influenced by the fact that there was no evidence that the landlord had any intention of actually doing the works, but rather wanted to sell, so was in line for a cash windfall – seized upon the words “in lieu of requiring the Tenant himself to carry out the work” as meaning that the payment obligation was activated only if the landlord actually intended to carry out the work.

The Inner House were particularly scathing of that approach. Parties had agreed (as they had to given the words used) that the clause was a payment clause, not a damages clause.  The appeal court judges went further.  They held that the landlord’s construction was “the only natural and ordinary meaning to be given to the terms of the clause” and that to do otherwise “would do such violence to the clause as to produce an incomprehensible result” which would “fly in the face of commonsense”.  They pointed out that the landlord had served a schedule of dilapidations several months before the termination date but that the tenant had not carried out the work. After termination the landlord could not force the tenant to carry out the work, so it was logical to provide for a contractual payment mechanism.

Witheringly, the court added “We would add that we detect, in the [tenant’s] approach, the application of a retrospectoscope once it became apparent…that the landlord might sell rather than repair. However it is parties’ intentions at the time of contracting that matters, not what happens later.” They went on to distinguish one of the other cases (Grove Investments Limited v Cape Building Products Limited[2014] CSIH 43) on linguistic grounds and, while not completely disapproving it, noted that Grove did not mean that a court could correct a bad bargain “or even an unfair one”, and that Grove predatedArnold v Britton so must be treated with caution – which is about as close to disapproval as it’s possible to get without actually doing so.

CONCLUSION

@sipp is, following the lead set by the Supreme Court in Arnold v Britton, a welcome rowing back from the somewhat worrying recent judicial trend of rewriting commercial contracts freely entered into on the seeming ground that they represented a bad bargain for one party. The move over the last half century away from literal interpretation to purposive interpretation (in all contracts other than, it seems, those dealing with tenants’ lease break clauses!)  is still to be welcomed, but the pendulum had, arguably, swung too far. Now it appears to be settling down.

Whether tenants should accept a payment clause such as in @sipp is another matter: the English common law position, that the only measure of damages is the cost of carrying out repairs, was widely perceived to have been unfair, and led to s18 of the 1927 Act being enacted.  (Note that an @sippclause seems highly likely, on the authority of Jervis v Harris [1996] Ch 195, to be enforceable in England as well as in Scotland, as it is a payment clause, not a damages clause.) And, as explained above, Scots common law reaches a similar (but not identical) result as s18. But if professionally advised tenants freely enter into such leases there is no reason that the courts should not enforce them.