Gatsby Retail Limited v The Edinburgh Woollen Mill Limited

This recent decision from the Court of Session highlights that landlords' subsequent dealings with dilapidated property is relevant to measuring the level of loss caused to them by an outgoing tenant. It also serves as a useful reminder to landlords that, when negotiating terms with a new tenant, they should take care to avoid inadvertently prejudicing their dilapidation claim against a former tenant.

Facts

EWM was a former tenant of Gatsby's commercial premises on Princes Street, Edinburgh. When EWM vacated the premises, Gatsby served a schedule of dilapidations identifying that works valued at around £170,000 were required to bring the premises in line with EWM's repairing obligations.

Before matters were resolved between Gatsby and EWM, Gatsby granted a lease of the premises to Café Nero ("Nero"). As part of the new lease arrangements, Gatsby paid Nero £110,000 as a contribution towards the costs of the "Tenants Works". "Tenants Works" were defined in the lease as "the fitting out works to the property".

Gatsby then sued EWM in the Court of Session seeking recovery of damages in the amount of £110,000. Gatsby's rationale was that, as a consequence of the terms of the new lease with Nero, it would now not be required to spend £170,000 on repairs but it had been required to spend £110,000 as a consequence of EWM's failures - the lower sum was therefore its true loss.

EWM's position

EWM argued that the case against it ought to be dismissed.

Under the new lease, Nero had accepted the premises "in their present condition and state of repair". According to EWM, the description of the £110,000 payment as being for "fitting out" works demonstrated that Gatsby did not make the payment to remedy repairs flowing from EWM's breach. Fitting out works were, in EWM's view, "paradigmatically not works that were the product" of any loss that it may have caused.

EWM relied on the entire agreement clause in the Nero lease, arguing that it meant the missives of lease between Gatsby and Nero were conclusive in respect of the nature of the £110,000 payment - the payment was a contribution to fitting out works and Gatsby could not now claim it was to cover dilapidation works.

Decision

The court held that the entire agreement clause did not have the effect claimed by EWM. A standard entire agreement clause precludes contracting parties from seeking to invoke extraneous matters in order to argue additional (or different) contractual terms. The court did not consider that to be what Gatsby was trying to do and, in any event, this was not an issue between the two parties to the lease.

Conclusion

It has been long recognised that the appropriate measure of loss to a landlord in dilapidation claims is fact specific. If the landlord can re-let the subjects without any diminution in rent and without having to offer its new tenant some other commercial sweetener, it may not suffer a loss at all. Gatsby's position in this case is consistent with that approach - it essentially seeks to prove that its true loss is the payment it made to its new tenant as a consequence of the dilapidated state of the premises.

This case also shows the importance of considering the wider commercial context when drafting and negotiating new lease documents. Whilst ultimately unsuccessful, EWM saw an opportunity to use the terms of the new lease to challenge the entire basis of Gatsby's action. Agents acting on behalf of outgoing tenants will be on the lookout for technical arguments with a view to improving their client's bargaining power. Landlords and their agents should be careful not to leave themselves exposed unnecessarily by accurately recording the basis upon which sweeteners to new tenants were made.