Dispute Resolution

If you are a tenant, you don’t necessarily have to pay the cost of the works listed in the landlord’s terminal schedule of dilapidations if the better measure of loss is the diminution in capital value to the premises caused by the dilapidations.

What’s the law?

We don’t have section 18 of the Landlord and Tenant Act 1927 in Scotland. However, we do have cases such as Duke of Portland, Prudential Assurance, Grove v Cape and Moor Row, all of which confirm that this is the correct approach to dilapidations in Scotland.

Of course, most of the time the cost of the works listed in a terminal schedule will be the same as the diminution in value.

However, where there are works in the terminal schedule that you do not think the landlord will carry out because no reasonable landlord would, why should the landlord be able to recover those costs?

Actual loss

The common answer to that is because the landlord is in fact going to carry out those works and therefore suffer the loss. That becomes something the landlord will have to prove. If it is an incredibly unlikely expenditure – something that is very uncommercial such as reinstating a traditional bar fit out in an area that is now a busy retail street – then although the landlord may say in negotiations that he intends to carry out the works, he may not be that convincing in court.

Reasonable loss

Even if he was, it is still arguable that a landlord is only entitled to recover his reasonable loss. If it could be shown that the cost of a repair in a schedule of dilapidations is dramatically more than the benefit it will create – using the example above, the reinstatement cost of the bar would be substantial and actually make it harder to let the premises – then the tenant should not be liable for that loss if the landlord decides to incur it.

That was certainly what happened in Ruxley Electronics & Constructions Ltd v Forsyth.  The court did not allow the owner of a swimming pool to recover the cost of rebuilding the pool from the contractor because it was 13 inches too shallow. The court decided that the owner of the swimming pool had not been affected at all by the loss of 13 inches and so it was unreasonable to demand the contractor to pay to essentially rebuild the pool even though he intended to spend the money doing it.

It remains to be seen if that approach would be applied by the courts to a terminal dilapidations claim.

Matthew Farrell

Partner at Brodies LLP
Matthew deals with complex and high value real estate disputes for a wide variety of clients, from property funds and corporate occupiers to developers and public bodies. He is especially well known for top end dilapidations disputes.
Matthew Farrell