A number of recent Scottish cases have considered the enforcement of ‘payment’ or ‘debt provision’ clauses in circumstances where a tenant has failed to comply with its obligations to repair and maintain as an alternative to the normal approach of pursuing damages for breach of contract.
In earlier cases, notably Grove Investments Limited v Cape Building Products Limited  CSIH 43, and Mapeley Acquisition Co (3) Limited (In Receivership) v City of Edinburgh Council  CSOH 29, the court took the view that these clauses were not enforceable as payment clauses - they had to be interpreted in the context of the common law remedy of damages and the parties couldn’t have intended that payment should be made by the tenant even where the landlord did not intend to carry out the works required to remedy the breach. The Inner House decision in @SIPP Pension Trustees v Insight Travel Services Limited,  CSIH 91 (@SIPP) broke that trend and allowed the landlord to recover payment of the costs of works without evidencing an intention to carry them out.
Another decision of the Court of Session has just been issued, Tonsley (Strathclyde) Limited and Tonsley (Strathclyde no.2) Limited v Scottish Enterprise. This follows the approach of the Inner House in @SIPP, and the guidance on contractual interpretation in the Supreme Court decision of Arnold v Britton 2015 UKSC 36.
The clause in question stated:
“….Provided always that (a) if at such expiration or sooner determination 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 the sum certified by the Landlord as being equal to the cost of carrying out such work and if the Tenant shall pay to the Landlord the sum as certified together with any surveyor’s fees incurred by the Landlord in connection with such Certificate within fourteen days of demand the Landlord shall accept the same in full satisfaction of the Tenant’s liability under this sub-clause quoad the work referred to in this proviso and (b) ….”
Following expiry of the lease Tonsley’s agents issued a costed schedule of dilapidations certified by its appointed surveyor and sought payment of the sum identified. It subsequently raised proceedings for payment in terms of the clause, with an alternative claim for damages to cover the event that the court decided the payment clause was unenforceable..
Scottish Enterprise argued that it wasn’t a payment or liquidated damages clause. Relying upon the earlier cases of Grove and Mapeley, which it stressed had not been disapproved by @SIPP nor undermined in Arnold v Britten, it submitted that properly construed the clause provided only that the tenant was required to make payment of the loss actually suffered due to the tenant’s failure to implement its repair and maintenance obligation.
Tonsley argued that on a proper construction the clause operated as a “payment clause” and gave the landlord the option of obtaining payment of a certified sum in place of other remedies such as damages.
Lord Doherty noted that the terms of the clause were very similar to those that had been before the courts in Mapeley and @SIPP. That being the case the court was bound to apply the reasoning in @SIPP together with the guidance provided in Arnold v Britton. The court therefore considered the ordinary and natural meaning of the clause. On that basis the court was not persuaded that the construction favoured by Scottish Enterprise was a possible. While the inclusion of the clause could be explained if it was to remove the uncertainty faced by the parties after the termination of a lease if a common law claim for damages had to be pursued, there would be no reason to include the clause if all it did was confirm that existing common law right to pursue damages for breach of contract. The court also found that, even if Scottish Enterprise’s construction was possible, it was plain that Tonsley’s was the ordinary and natural meaning of the clause.
Groves was distinguished on the basis that while the court in that case had found the clause in question ambiguous, no such ambiguity was found in this case. Lord Doherty had made the earlier decision in Mapeley but said that if the guidance from the later cases had been available at that time he would have been less inclined to accept the tenant’s construction was possible and it was likely he would have upheld the landlord’s construction in that case.
Lord Doherty therefore held that the clause did provide the landlord with the option of certifying a sum equal to the costs of the works necessary to put the property into the condition which it ought to have been at lease end if the tenant had performed its duties under the lease rather than being bound to pursue a claim for damages for breach of contract.
The decision is a welcome addition to the developing body of law - and is a timely reminder of the importance of drafting such clauses.