The case law on payment obligations for terminal dilapidations started out in favour of tenants but relatively quickly changed to being landlord friendly. Decisions such as @SIPP v Insight and Tonsley v Scottish Enterprise suggest that payment obligations are normally construed in favour of landlords.
Despite that, LS Buchanan Limited decided to have another go at them. They challenged the payment obligation largely because the landlord had granted licences to occupy the premises to the sub-tenant and had not carried out any of the dilapidations. LS Buchanan lost.
The payment obligation in this case was similar to the one in @SIPP and very similar to the one in Tonsley.
The main difference was that LS Buchanan's payment obligation referred to the "fair" cost of carrying out works. LS Buchanan argued that the use of the word "fair" enabled enquiry into the inherent fairness of demanding payment for the cost of work that would not be carried out. If the works were not going to be carried out, the full cost of those works was not "fair".
This approach to payment obligations worked in Grove v Cape when the court regarded the word "value" in the payment obligation as allowing the court to consider what the value of the schedule of dilapidations would be if the works were not going to be done. The sort of argument run by LS Buchanan is therefore not always an impossible one.
In this case, however, it was rejected by the court. The court decided that in the context in which it had been used, "fair" should be construed as the adjective qualifying the word "cost". This means the landlord can't demand payment of a sum which is extravagant or inflated (i.e. don't demand the cost of golden taps when the faulty ones are stainless steel). But, as long as the cost of the work required to put the premises into a lease compliant condition has been fairly calculated, the landlord is entitled to recovery of the sum demanded even if it does not intend on carrying out the work.
Waiver
LS Buchanan also argued that because the landlord had entered into a licence directly with the sub-tenant, it had waived its right to recover the sums demanded in the payment obligation. The judge gave this fairly short-shift on the basis that a payment obligation enables a landlord to enter into such an arrangement whilst preserving its contractual right to payment of the cost of carrying out the dilapidations. That reaffirms that a landlord with a payment obligation can enter into a new lease without jeopardising that payment obligation.
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