The recent decision in the Scottish case of Co-operative Insurance Society Limited v Fife Council [2011] CSOH 76 has called into question the ability of Landlords to contract out of extraordinary repairs in FRI (tenant's full repairing and insuring) commercial leases.

Commercial leases and the common law

The Scottish common law of landlord and tenant obliges the landlord to provide its tenant with premises which are reasonably fit for the purpose for which they are let , and to keep the premises in a tenantable and habitable condition throughout the lease term. This generally includes an obligation on the landlord to keep the premises wind and watertight.

As a general rule, FRI commercial leases seek to contract out of the common law and to place all (or most) of the repairing obligations for the premises onto the tenant. The decision of the Outer House of the Court of Session in Co-operative Insurance Society Limited v Fife Council considers the issue of a tenant's liability to carry out repairs to premises, which can be classed as "extraordinary repairs", as opposed to ordinary repairs in the context of an FRI commercial lease and considers what would constitute an extraordinary repair.

Tenants' repairing obligation

Co-operative Insurance Society Limited (CIS) were the landlords of commercial premises known as Unicorn House, The Kingdom Centre, Glenrothes, which were let to Fife Council (the tenants) for 25 years, extended for a further 10 year period to November 2006. CIS complained that the Council were in breach of their repairing and maintenance obligations under the lease and that at the end of the lease term, they failed to return the premises in a state and condition commensurate with their repairing obligations under the lease. Damages in excess of £1.3 million were being sought as a result.

Clause (SIXTH) of the lease imposed the following repairing obligation on the Tenants:

"at their own cost and expense to repair and keep in good and substantial repair and maintained, renewed and cleansed in every respect all to the satisfaction of the Landlords the premises and all additions thereto and all sanitary, water and mechanical and electrical apparatus, and equipment therein or thereon…".

The Council disputed liability on the grounds that they were not liable for "extraordinary repairs" at common law, and that the parties to the lease at the start of the lease term would have been aware that the reasonably expected lifespan of various elements of the building was not materially longer than the term of the lease. They argued that a lease would require very clear wording if there were to be an obligation on the tenants to renew a building where such renewal was purely required as a result of the age of the building.

CIS argued the common law liability for extraordinary repairs was only relevant to the extent that the terms of the lease did not themselves deal with liability for such repairs. They suggested that the inclusion of the word "renewal" in the repairing clause, and references to repairs in other clauses of the lease (such as the statutory compliance clause) clearly transferred liability for extraordinary repairs to the tenants.

What constitutes an "extraordinary repair"?

Lord Glennie considered the common law authorities on this point (including West Castle Properties Ltd v Scottish Ministers 2004 SCLR 899 and Westbury Estates Ltd v The Royal Bank of Scotland plc 2006 SLT1143) and noted that the decided cases did not provide a precise method of distinguishing between "ordinary" and "extraordinary" repairs. He found however that the case law did identify three factors to be considered in such cases:

The origin of the damage

If damage is caused by an event which was unanticipated and outwith the control of either party, then this would be a pointer to a repair being an extraordinary repair for which the tenant would not be liable (provided that the damage did not result from the tenant's neglect in not carrying out ordinary repairs).

The extent of the damage

The extent or the seriousness of the damage and the likely cost of repairs must be considered. An example would be that if a wall or roof collapses, this may point to the repair being an extraordinary repair for which the landlord is liable (provided again that the damage did not result from the tenant's neglect in not carrying out ordinary repairs).

The nature of the damage

For example, does the repair amount to total reconstruction of the premises?

Limitations on the tenants' obligations

Lord Glennie decided that the previous judgements placed a limitation on the repairing obligations of a tenant, even where those obligations go further than they would at common law and include an obligation to renew.

The reference to "renew" in the repairing clause of the lease in question did not therefore equate to the tenants being responsible for extraordinary repairs. If such a result had been intended, Lord Glennie would have expected the lease to have dealt with the question of liability for extraordinary repairs by reference to the extent of the repair necessary, and also to the cause of the damage necessitating the repair.

Implications of the decision

This decision is likely to be considered by some as surprising and will be of particular concern to landlords of commercial FRI long leases which are reaching the end of their term, and which contain similar obligations on the tenant to renew (particularly where, as in this case, the parties appeared to have contracted out of the common law).

It is possible that tenants will now seek to dispute the extent of their repairing obligations in cases where, prior to this decision, the parties to the lease would most likely have decided any dilapidations claim with reference purely to the terms of the lease, without any consideration being given to the common law. The current trend towards short term leases however means that it is less likely that repairs amounting to extraordinary repairs will occur during the lease term.

In order to avoid future dilapidations claims, the decision suggests that it will be key for landlords to expressly outline liability for extraordinary repairs in the repairing clause to ensure that the common law cannot be used to plug any gaps in the tenant's repairing obligation.

To read the decision in Co-operative Insurance Society Limited v Fife Council click here.