Dilapidations: When a surveyor's certificate in a payment obligation decides liability

Since our real estate litigation team were successful in Grove v Cape, much has been written about payment clauses and the remedy of damages. It is commonly accepted that the Scottish Courts have affirmed that payment obligations for outstanding dilaps can and do work. It will, however, now be interesting to see what surveyors and lawyers make of the latest dilaps case to come out of the commercial court. 

The lease included some fairly vanilla drafting, relating to a landlord's option at lease expiry to either have the tenant do works or, in the alternative, pay to the landlord "the reasonable sum certified by the Landlord's surveyor as being equal to the cost of carrying out such work". The interesting feature in the case arose due to the impact of additional drafting which impacted on the judge's approach to interpretation of the payment clause. The payment clause went on to say that "if the Tenant pays to the Landlord the sum as certified together with the surveyor's reasonable fees in connection with such certificate within twenty Working Days of written demand the Landlord will accept that in full satisfaction of the Tenant's liability under this Clause". Again, nothing too remarkable there and so far so good. But the main point of distinction to take note of was the way in which the clause ran on to say; "If the Tenant does not comply with its obligations in this Clause …..then… the Tenant must pay the Landlord an amount reasonably equivalent to the Annual Rent at the rate payable immediately before the end of the Term apportioned pro rata for the period that it would reasonably take to put the Property into the condition it would have been in had the Tenant performed its obligations under this Clause (To Remove). This amount will be a debt due by the Tenant to the Landlord on demand." In essence there was a quid pro quo here. If the tenant paid the sum certified for dilaps within 20 working days, then they did not have to pay loss of rent.

Importance of following the language of the lease in notices

After the lease came to an end, and after some toing and froing between the surveyors and lawyers, the landlord's lawyers eventually served a demand under the payment clause together with a Scott Schedule. The Schedule contained, on the face of it, a certificate by the landlord's surveyors for a reasonable sum equal to the cost of carrying out the work. Although the judge thought it unfortunate that the landlord's lawyers drafting did not really follow the payment clause, the outcome of the case was a good one for the landlord. The tenant's argument was that the notice was invalid for want of following the clause closely enough and although the judge did say " The demand was clearly disconform to the pursuer’s entitlement under that clause", the end result was that the combination of the lawyer's letter and the Scott Schedule did enough to allow it to be held as valid. That was also the case notwithstanding that the judge picked up some issues with the certificate in the Scott Schedule which conflated various sums.

The contractual scope of the certification – "the quid pro quo"

Perhaps the most striking feature of the case was how the judge then went on to dispose of the case in favour of the landlord under the payment clause. It is often said in the context of dilapidations claims that, although the remedy of payment for a landlord is a better starting point than a damages claim, the importance of reasonableness acts as a brake on landlord claims. To that end, absent the more peculiar facts and circumstances of this case, even where a landlord avails themselves of a payment obligation, the tenant can often still offer to prove that certain items of cost are either overstated or do not in fact fall under a breach of the repairing obligations. Some care should be taken in attempting to draw general principles from this latest case because of (i) the drafting of the lease and (ii) the circumstances that led to the certificate being issued. But here the judge found that the certificate was akin to an expert determination, albeit a unilateral appointment by the landlord, and the sum certified was binding on the parties. In particular he attached importance to the fact that if the tenant had paid the certified amount within 20 days, the quid pro quo was that the landlord could not then claim for loss of rent. This in itself is an interesting feature of the case as loss of rent cases are often more difficult to pursue than some might think – hence again why the drafting sought to turn loss of rent into a debt payable on demand rather than damages for breach of contract. Importantly though the judge did mark this case out as one being "distinguishable from those where certification is simply part of the process for obtaining payment". Many leases do fall into that category.

Can you have your cake and eat it?

Finally, the landlord had attempted to pursue the case on two fronts – the first being the payment obligation and the second being an alternative for damages. As the landlord's barrister tried to characterise it "he was not trying to have his cake and eat it, but merely to obtain some cake in the eventuality that the landlord’s claim under the payment clause was unsuccessful". The judge didn’t like that proposition but it was, however, academic as the landlord has been successful in the payment obligation claim which led to an award for lost rent along with the principal dilaps sum as certified by the surveyor.

Conclusion

This is a slightly unusual case but it does throw up a number of issues that those advising tenants and landlords would do well to consider carefully when dealing with terminal dilaps claims under commercial leases. It takes the notion of payment obligations into territory where it is not just a question of whether it is a better remedy than damages but morphs it into a final determination. It will also be interesting to see if the tenant appeals. Interpretation cases on payment clauses in leases which could generate two potential constructions are often worthy of appeal which takes us back to where we started in mentioning Grove v Cape…….