Mapeley Acquisition Co (3) Limited (In Receivership) v City of Edinburgh Council [2015] CSOH 29

On 25 March 2015 the Scottish Court of Session held that a landlord was not entitled to recover over £8m from a tenant following the tenant’s failure to comply with its repairing obligation under a lease. The parties disputed the nature and extent of the tenant’s obligations and in particular, whether the landlord was entitled to payment of the cost of putting the premises into the relevant state of repair, regardless of whether it had done or intended to carry out the works. The relevant provision stated,

“…if at expiration… or determination [of the lease] the Premises shall not be in such good and substantial repair and condition then at the option of the Landlord either (i) the Tenant shall carry out at its entire cost the works necessary to put the Premises into such repair and condition or (ii) the Tenant shall pay to the Landlord such reasonable sum as shall be certified by the Landlord’s Surveyors as being equal to the cost of carrying out such work…”

The tenant maintained that this clause did not entitle the landlord to payment if the works had not been done and the landlord did not intend to carry out the repairs. The landlord maintained there was no such qualification, that this was a claim for a contractual debt and it did not need to show it had incurred an actual loss. In other words, its intentions were irrelevant.

The court accepted that the landlord’s construction was “perhaps, the more natural reading of the provision” but took the view that the provision was nevertheless ambiguous. It considered that the tenant’s interpretation – that the landlord was only entitled to be paid the cost of works carried out or to be carried out – was more in keeping with commercial common sense and less likely to produce a result which was “objectively excessive or disproportionate”. It was clearly keen to avoid the landlord obtaining a level of recovery which was “not related” to any loss it had sustained. The Tenant’s construction “provides full compensation to the landlord”.

For landlords looking to protect their position in the event of a tenant’s breach of a repairing clause this will be an unwelcome result. It follows a similar decision in 2014 (Grove Investments Limited v Cape Building Products Limited [2014] CSIH 43) in which a provision which included wording “that the landlords shall be free to expend all moneys recovered as dilapidations as they think fit” was held to entitle the landlord only to recover repair costs actually incurred. In that case the amount claimed by the landlord was over £10m; in Mapeley it was over £8m. Whether the outcome would have been different in either case had a smaller sum been sought is not certain but these decisions are bound to strengthen the resolve of any tenant faced with a large repairs bill on lease termination.

This is a Scottish case and section 18 of the Landlord and Tenant Act 1927 does not apply in Scotland; in England and Wales, the effect of section 18 is to restrict the landlord to recovering its actual loss in line with the result in this case, and attempts to provide for liquidated damages or some other predetermined payment instead are generally considered to be unenforceable.